Most South African bond originators, says Mike van Alphen, National Manager of the Rawson Property Group’s bond origination division, Rawson Finance, have to regularly deal with complaints from self-employed people who have experienced difficulties in obtaining bond finance for new home purchases.
To successful businessmen and professionals, the banks’ caution in preventing them from obtaining such finance often appears to be excessive and niggardly. Furthermore, when they do get a loan, it is often only for 75% or 80% of the property’s value. One hundred percent bonds are very seldom given to self-employed applicants, says van Alphen.
“The banks’ attitude in these matters,” says van Alphen, “is always a great deal more favourable to the borrower if he can give evidence that his business has sustained success over a fairly lengthy period of time, for example three years. An important aspect which needs to be evident in audited financials, is the business’ historical ability to show profits before tax, with an acceptable percentage of these profits being ploughed back into the business as retained earnings. Small business owners tend to draw out the majority of profits as shareholders/members remuneration, often for business tax reasons, and then inject sufficient capital back into the business as shareholders loans, in order to provide the necessary level of liquidity. Whilst this provides the business with the required cash flow in order to continue trading, it does not provide a capital base to the company and often does not reflect in cash reserves in the audited financials.”
The banks’ reluctance to fund the leaders of new start-ups, says van Alphen, is based on the fact that almost 80% of new businesses in South Africa do, in fact, fold within two years of being launched. Typically, he says, a new company will start with a bang, having secured one or two highly profitable contracts, which they later find they are unable to replace. Alternatively, if they do get new work, it is often at margins that are cutthroat by comparison to those of which they started.
Furthermore, says van Alphen, it is not all that unusual to find that new entrepreneurs, in the enjoyment of their jobs and spurred on by initial successes, tend to run up too high overheads on extra staff, vehicles and the like. Then, when times get tougher, they later become surprised that they cannot afford these.
“In our initial pre-qualification investigations with clients running their own businesses, it does sometimes – fortunately not too often – happen that when analysing the applicant’s business accounts we find that senior managers are, in fact, overpaying themselves, drawing off what appear to be profits, which should, in fact, be cash used in the running of the business, as mentioned earlier. Business owners need to find a balance between drawing large salaries and leaving acceptable liquid reserves in the business. Often, when large salaries are drawn and then re-injected into the business, banks will place little or no reliance on the annual/monthly earnings of the individual/s. In our experience, we are actually sometimes the first to spot these negative trends and we have then to advise applicants to adjust their business structures if they hope to qualify for a bond. Banks will always evaluate both the individual annual or monthly earnings of the business owner, along with the audited financials of the business, in order to determine whether the business is able to sustain the salaries being paid to the owner.”
Van Alphen adds that entrepreneurs should not give up wanting to become home owners.
“If they would simply apply themselves to getting through the first three years of the business and save as much as possible during that time for the deposit, the chances of getting bonds these days are good. However, I have to comment that many self-employed people appear to be very reluctant to downscale in their residential ambition. At the moment the only people doing this regularly tend to be those who are elderly and about to go on retirement or are already retired. A downscaling of ambitions, however, is always preferable to delaying the purchase until such time – which may never materialise – when the applicant feels he can afford a bigger and better house.”