Laws Affecting Small Business: Finance

All businesses need money to start up, trade, or expand. Existing businesses generally obtain the necessary finance from their own trading income, but new businesses, and established businesses that want to expand, often have to borrow money.

All lenders need to charge sufficient interest to cover the costs of assessing the loan application and monitoring the loan repayments, and to include a premium for the risk as well as a profit margin. But the National Credit Act prohibits a lender in a credit agreement entered into for the development of a small business from recovering more interest than a specified percentage. This statutory interest-rate ceiling, rather than assisting the poor and small businesses, has instead had the effect of drying up loan finance for these groups. There was an exemption under the Usury Act, 1968 which allowed lenders to charge an economic rate of interest on loans up to R10,000, but this fell away with the repeal of that Act by the National Credit Act.

Lenders frequently need to borrow money themselves to lend to their borrowers. However, the Banks Act states that only public companies that are registered as banks may accept deposits from the public as a regular feature of business. There are exemptions, but only for stokvels and credit unions that accept deposits from, and provide funds to, their members.

Small businesses often need to buy vehicles and other expensive equipment. Banks and other credit-grantors provide the necessary credit to small businesses, which then pay the purchase price with interest to the credit-grantor in instalments. If the equipment breaks down during this repayment period and the small business cannot afford the cost of repair, the business is often forced to cease operations, and the credit-grantor is unable to recover the money owing to it. The credit-grantor may be willing to keep the small business in operation by paying the repair costs itself, but the Credit Agreements Act prohibits a credit-grantor from recovering the cost of repair or interest on it as part of the transaction for the purchase of the vehicle. It does not pay a general bank to enter into a separate loan agreement just for repair costs. Anomalously, the National Credit Act allows lenders to recover the cost of insurance for repair costs. However, it prohibits the recovery by lenders of repair costs themselves.

• Repeal the National Credit Act’s limits on interest rates.
• If the National Credit Act’s credit ceilings are not repealed, the Act should be amended to allow for an exemption for loans up to R175,000.
• If the proposed amendment of the Act and exemption are introduced, the exemption should be adjusted annually for inflation.
• Financial intermediaries that borrow money from the public to lend to small businesses should be exempted from having to register as banks under the Banks Act.
• If the National Credit Act’s credit restrictions are not repealed, the Act should be amended so that grantors of credit to purchase movables can recover the costs of repairing the movables plus interest from the credit-receiver.