This section looks at ways of using a home loan to finance a franchise. Let’s take a look at some of the options that are available, as well as the risks and tax considerations.
Here are 2 of your options:
Many South Africans invest their personal savings into buying a home so a great number of business owners use their home loans to finance their business, especially when they are starting out.
Here are some advantages of using a home loan as a source of finance compared to a traditional business loan:
It is also easier for this same reason. You just need to show that you are able to afford monthly instalments with your disposable income. If you haven't left your job yet, you can also use your salary to take out or extend a home loan in order to help with start-up business costs. It's a convenient line of credit and savings for a small business. If you are already running your business, you can now see why paying yourself a fixed salary makes a lot of sense.
It is wise to keep your business and personal assets separate, in order to protect yourself from the risks associated with your business. In reality, this doesn’t happen often because many business owners are forced to sign personal surety. If you are unsure of the implications of signing personal surety, please read the module Understanding Personal Surety.
If you have already signed personal surety, your home might already be at risk. So, it may not seem like such a big issue to use your home as a source of business finance.
At the end of the day, you need to be aware of what you are doing and why you are doing it. This means being fully aware of all the risks involved!
Are you thinking that it would be a good idea to pay off the amount of the loan you have borrowed against your home loan over a long period of time—say 30 years? The result? Astronomically expensive finance!
It is a good idea to pay slightly more than the instalment, with the aim of reducing the capital and not just the interest. It saves hundreds of thousands of Rands in the long term! There are a number of examples on the Internet that show the savings over a 20 year period if you pay just R200 more per month. Click here to read more about how to make your home loan work to your advantage and save on huge interest rates.
The interest you pay on a home mortgage is usually not tax deductible in your business. You’ll have to prove to SARS that you used the money to earn an income. Make sure your business pays you interest on the money received from the home loan. That way you can deduct the interest from your income. Bear in mind though that SARS will limit the amount that can be deducted based on the interest received from the business. Be sure to set the interest rate paid by your business to yourself, at the same level of interest that you’re charged by the bank on the home loan. You need to show proof that the money was transferred from your loan account to your business account and how it was spent. If SARS has queries, you will need to show them where the money went.
Finfind provides its services free of charge to businesses seeking finance. Our primary purpose is to link SMEs with all the relevant finance providers and finance products that match their funding needs. As a matching service we are not required to be a registered finance provider as we do not loan money directly.