In an effort to keep taxable earnings down, many business owners will run personal expenses through their business. Travel, cars, dining out and sports club memberships may be legitimate deductions in some instances, but many business owners simply go overboard.
This behavior can lead to challenges should the owner want to exit, or raise capital to expand.
Some business owners believe putting as many personal expenses through the business will lower taxable income. However, it is a double-edged sword. Should you wish to source financing, traditional lenders will look at your financials and, in all likelihood, your spending will prejudice your ability to raise money.
Lenders will examine the company’s ability to service the loan. If the business is funding the lifestyle of the owner, the numbers will simply not stack up and the loan will not be granted.
Many a business owner has also been caught on the back foot when it comes to retirement. Since so much of their personal expenses have been taken care of by the business, they underestimate their financial requirements and find themselves having to significantly downgrade their lifestyle.
This is also the case when owners try exit the business by selling it. We have seen businesses reporting millions in turnover, but only showing a few thousand Rands in profits.
While it is common (and legal) for directors to take out loans from the business, if the loan account is on the books for more than a year, it will become taxable on their personal tax. What’s more penalties will also be applied.
Business owners who are looking to finance growth should begin preparing their company to approach financiers. Take a long, hard look at just how the company is spending its income. If necessary, they should strip out any personal loans or expenses going to the owner and directors.
If they know there is growth opportunity on the horizon, they should also consider approaching lenders in the short-term. Having a critical eye run over the balance sheet will help identify potential pitfalls.
Should the company be ready to raise growth finance, an independent financing company can help source the best deals and the best terms. They will give you an idea of the options as well as how to mix your solution to include short-term, long-term and structured debt. An independent lending company will also be in a position to mix and match your growth finance institutions and products since they have working relationships with the banks (both big and small), the credit funds, the asset managers as well as select private funders – and are not beholden to any of them.
As we enter a tighter economic cycle, far too many companies go into survival mode. There is always plenty of opportunity in the market, and there is still money available to fund great deals. The trick is to ensure that your business is “financing fit” at any given stage. Even if this means sacrificing some short-term lifestyle luxuries.
Gary Palmer is the CEO at Paragon Lending Solutions