Self-employed entrepreneurs can battle to get finance

South Africa, says Rob Lawrence, National Manager for Rawson Finance, has in the last decade seen a big rise in the number of self-employed people. These entrepreneurs, he says, usually operate either as sole proprietors, through registered close corporations or Pty (Ltd) companies.

“In the case of sole proprietors, they and their operation are one entity. On the other hand, where they form a cc or a company, they are in a sense independent of their operation. However whichever way they work, they will structure their accounts to make them as tax efficient as possible, i.e. to reduce the apparent income to a minimum.”

While this is usually good for the entrepreneur in many respects, in others, says Lawrence, it can be a problem - especially when it comes to obtaining bond finance.

In the old days, prior to the National Credit Act, the banks would accept a Letter of Earnings from a reputable accountant, especially a qualified CA, as sufficient proof of income for a bond application.

“Now, however, one of the things on which the National Credit Act places great emphasis is that banks must have indisputable proof of income. If they have acted without this they run the risk of being charged with reckless lending and the penalties for this are extremely severe.”

Proving income is relatively easy if the bond applicant is a salaried employee, says Lawrence. In these cases they can usually provide salary slips and bank account statements that show that the net salary reflected in their application is deposited into the bank account at regular intervals and this is positive proof that the applicant’s statements on what he earns are true.

Entrepreneurs, however, can have great difficulty in providing such proof.

In proving their income, they have to convince the bank that their businesses do, in fact, earn what they claim. For them to achieve this, the bank will want to see at least three years’ worth of financial statements and bank accounts for at least the past six months. The banks will then compare their deposits and withdrawals to verify that the figures are accurate.

Entrepreneurs, says Lawrence, often argue that, because their businesses pay for many expenses, their incomes are actually higher than the cash component they draw. In such cases, the banks will ask for an IT34 (a breakdown of income tax return) to see if this is the case.

Entrepreneurs also argue that the profit in their businesses is their income, but this is often not the case unless such profit is actually paid to them. In many cases it still belongs to the business.

Lawrence says that his advice to self-employed people who purchase a property and who are looking for a bond is to ensure that they deal with a bond originator who understands fully the lending criteria for self-employed people at each bank. If this is done the application can then be tailored and suitably motivated to the bank concerned and this will also allow for a longer than usual period to get the bond granted.

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