Funding Your Start-Up Business Through Property Refinancing

Updated on 10 October 2014

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Funding your start-up business through property refinancing

Entrepreneurs struggling to get funding for their business should look to their property refinancing, writes Lesiba Mooka.

If you ask any aspiring entrepreneur what their biggest challenge is, the vast majority will tell you that it is raising start-up capital. Although there are a number of funding options available, most start-up businesses are still struggling to access these funds.

The problem is not that there is no money in South Africa; the problem, however, is that the money is not easily accessible to many small business start-ups. We have institutions such as the NYDA” data-scayt-word=”<a class=” data-wpil-keyword-link=”linked”>NYDA” data-scayt-lang=”en_US”>NYDA, the Khula Enterprise Finance and the National Empowerment Fund, just to name a few. Yet accessing funds remains a major obstacle that small business owners have to overcome.

Taking out a R100 000 plus bank loan over a 24-months period will not make life any easier for the business to make it through. After settling most of the monthly repayments, the business will be left with barely nothing to survive until the next paycheck comes through.

So now, what other funding options exist which will not put a lot of strain on these barely up and running businesses?

Taking cash out from your mortgage bond

However, there is hope for small start-up businesses. Applying for refinancing with your mortgage holder can help you to access a replacement loan that exceeds the current bond balance on the property at the moment.

With the cash-out refinancing method, the current mortgage bond will be settled in full and all the extra money left over can be used for any other personal requirements.

When refinancing a property you are simply taking out money from the capital value growth of your property, tax-free, straight into your pocket.

Funding for your business

Getting a tax-free, lump-sum will help your business go an extra mile on its quest for success. By exploring this method, one not only has a much more controlled mortgage loan but a much needed cash injection into their business.

The other benefit to this method is that the money obtained from refinancing gets paid directly into the owner’s bank account within a short period of time; depending on specific institutions. Therefore, the money can be accessed easily and quickly by the entrepreneur.

Other benefits of refinancing

As a tax paying citizen, whenever you sell your property all proceeds that you make from the sale are subjected to different types of taxes, one of which is capital gains tax. This tax is payable on the capital gains, or rather profits, that are due to the property owner once the sale of the property has been concluded.

On the other hand, when you refinance your property, the money taken out will not be subjected to any taxes.

Moreover, this money can also be used as an upfront deposit to finance any future property purchases. With the banks implementing increasingly stringent measures for lenders, getting 100% funding is next to impossible. As a result, having the extra money from refinancing will be of assistance.

This method is frequently used by property investors to acquire additional properties to their portfolio.

Rental payments

Consequently, with refinancing taken out on a property, the property’s monthly bond repayments will be higher than those of the initial mortgage bond. This change can potentially have a catastrophic effect on you as a business owner.

However, by increasing your rental amount on the property annually, this issue will be counteracted and the shortfall on the bond payments reduced. This practice is very common in property rentals; whereby landlords increase monthly rental payments by at least 10% at the anniversary or renewal of every lease agreement.

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