Business owners who have experienced financial difficulty and have defaulted on loans in the past often assume they will be dismissed out of hand by lenders for having a bad credit record.
The South African business psyche is not a forgiving one. Unlike the US, where failure is seen as part of the journey, South Africans are expected to sign surety and, should they fail, will struggle to secure new funding
Here are 8 tips on how individuals can bounce back, even if they have a chequered financial past.
A good credit rating is worth its weight in gold. It is a sizeable measure of your worth in the eyes of lenders and will affect your ability to sign leases, negotiate new debt and secure finance for assets. Lenders obviously see the person who has a squeaky-clean past as first prize.
However, coming in at a close second is someone who may have had some difficulty in the past, but has done whatever they can to rectify the situation.
By way of example, a business owner who runs a profitable company could help out a friend starting their own venture by standing surety for them.
Through no fault of their own, the new business may fail and the business owner might be left in a position where they’d have to honour the suretyship. If they fail to do this, they would be left with a judgement against them. Unfortunately, there are many instances like this, where responsible individuals become victims of circumstance. However, if the business owner contacted the bank and made arrangements to pay off the liability given the suretyship agreement signed, stuck to that repayment schedule and honoured their commitment, there would be no blemish on their record.
Unlike the above example, we all too frequently see people who try hide their past, often putting family and friends in as fronts of the business so as not to raise questions about their credit history.
It’s important to remember that (with a client’s consent) all lenders will perform credit checks, conduct searches on court judgements and even carry out social media checks to vet applicants. Before this process even begins, it’s vital to have a frank discussion with the lender and disclose any relevant past issues. If the lender finds anything untoward when they do their investigations, chances are they will simply walk away from any future engagement.
Lenders will also take a critical view of shareholders and board members in the business. If they are in good standing and have a solid reputation in the market, this can be a useful way to bolster how lenders rate your risk.
Some people are genuinely not aware that they may have a black mark on their credit history. It’s imperative to run a credit check with the various bureaus before approaching a lender. Dealing with your past and taking remedial action to clear your name will significantly improve your chances of accessing future funding.
Of course the best thing all round is to stay out of financial trouble. The number of people looking for loans who have been in financial trouble increases significantly during market downturns. Planning for the bad times is the best way to ensure that you don’t find yourself clawing your way back to good standing. Recession-proofing your businesses and ensuring you are cash positive can make all the difference.
If necessary, find a team of professionals who can help you stay on the right side of tax and legal requirements. They can also review your contracts and even help you re-negotiate contracts to benefit of better terms. Making sure you don’t have bloated operating expenses and that you have adequate overdraft facilities in place for the unexpected are sensible at all times, but especially important when the market tightens.
All business owners should be planning now for interest rate increases. The Reserve Bank has, until now, been hesitant to push up the repro rate, but the latest rate hike in November 2018 of 25 basis points now sees it standing at 6.75%. We can bank on a further series of small increases over the next few quarters. Reducing your risk could mean fixing rates, taking forward cover if you are an importer, or considering cap and collars that will set upper and lower limits to the interest rates charged.
The South African business psyche is not a forgiving one. Unlike the US, where failure is seen as part of the journey, South Africans are expected to sign surety and, should they fail, will struggle to secure new funding.
Fortunately, the good news is that with more banks entering the local market as well as the growth in the alternate lending space, there is now more competition for your financial business. While this won’t eliminate your chequered financial past, it will mean there are more institutions and lending partners willing to work with you as you start your journey towards credit redemption.