Dealing with the finances in a Sectional Title Scheme can often be an unpredictable and daunting task with many factors to be considered in the process. Should a Sectional Title Scheme find itself in need of financial assistance, it has a handful of choices to choose from. Making the right choice for the Sectional Title Scheme can be a complicated and often difficult choice for the members of the Corporate Body and can often lead to the Body Corporate falling into a Debt Trap.
What is a Sectional Title Scheme Debt Trap and how to get out of it?
The term ‘Debt trap’ has a very negative connotation to it and rightly so. It can be a terrifying predicament for a Sectional Title Scheme to be in. But all is not lost. Let’s discuss what getting into a debt trap really means and more importantly, how to get out of it
A Sectional Title Scheme debt trap means that the Body Corporate owes a large amount of money to one or more financial institutions or service providers without an end in sight on the repayments. These repayments can feel never-ending for a Sectional Title Scheme. The reason for this is because the interest charged on the initial loan amount continues racking up which leads to the Body Corporate never actually being able to afford to repay the capital. In Sectional Title Schemes, debt traps normally start when financial institutions give loans linked to the outstanding levy debtors book and charge interest on the loan to the Sectional Title Scheme until such time that the outstanding levies are paid by the debtor or legal action has been taken to completion. This can take years. The amount borrowed by the Body Corporate can be repaid multiple times before the debt is eventually collected from your levy arrears.
The second way this happens is if the Sectional Title Scheme takes out a revolving type loan. The debt trap is exacerbated when the revolving loan is connected to the outstanding levies and the collection thereof.
Both these types of loans normally promise to give the Sectional Title Scheme their full outstanding debtors book as a loan on the condition that it is repaid by the Sectional Title Scheme with interest until the outstanding levies are collected from the defaulting owners. Body Corporates are often fooled by the idea of getting the full amount of the outstanding levies as a loan, pending the collection from the debtor for the repayment of the capital. If you consider the long-term effects, the scheme ultimately pays more in interest and legal fees than the initial capital amount that was loaned – hence the term ‘debt trap’. This interest charged monthly is paid by the compliant owners out of the administrative budget.
A Scheme should rather consider the use of a loan, only to pay for capital expenditure or repairs and maintenance of large items than to cover day-to-day expenses.
Should your Sectional Title Scheme find itself in a debt trap, there are ways to get out of it.
One way is to take out an additional loan at a fixed term and fixed interest rate and pay off the financial institution. This may seem counter-intuitive, but in reality, if you know upfront the loan period, interest rate, and total repayment, the scheme will be in a much better financial position going forward, than to be stuck in a structure where the Scheme has little to no control over the period that the loan is running.
It is almost impossible to determine how long it can take to collect a substantial amount of outstanding levies and as such, the Sectional Title Scheme has no idea how long it will be paying interest on the loan amount. The court process is unpredictable and where there is no financial incentive to push for the finality of the levy collection process, it will invariably take much longer to finalise the matter. In this way, you are caught in a debt trap and the financial institution is benefiting unduly from the predicament that the Sectional Title Scheme finds itself in.
In general, companies that provide financial solutions to Sectional Title Schemes don’t have to be registered under the National Credit Act, and these loans don’t have to comply with the statutory obligations of loans under the Credit Act. This provides an opportunity for schemes to be taken advantage of by the very people they thought were helping them.
Another alternative is to outright sell your debtor’s book. Although this option comes with the condition that the scheme accepts a discounted amount, the advantage is that there is certainty as to what the Sectional Title scheme is going to get, plus there are no monthly repayments or legal fees to burden the already fragile scheme. The discount relates to the interest, legal fees, and cost of money over the period of collection, with the advantage of our economies of scale in your favour. So what is perceived as a negative is in actual fact a huge positive.
How Stratafin assists your Sectional Title Scheme
Stratafin has pioneered this solution in South Africa specifically to ensure that your Sectional Title scheme does not get caught in the debt trap, but gets much-needed cash flow without the negatives as I mentioned.
If you have found yourself in a debt trap in your Sectional Title scheme and can’t see a way out of it, contact us. We can assess your financial situation and give you advice on your best route to financial freedom.