Community Schemes with financial restraints can obtain funding for levy defaulters by way of outside funders.
Community Schemes have three options to assist them with clearing their levy defaulters. They can obtain a loan, which can be a standard loan, alternatively a revolving credit loan, whereby the Community Scheme is paid a monthly amount based on their debtor’s book. The third option is an upfront payment connected to the sale of its outstanding debtors at a previously agreed value.
The Community Scheme should always keep in mind what its unique requirements are in terms of why they need cash flow and the reasons behind its cash flow shortfall.
What about a loan?
A rule of thumb for any financial situation is that you should never use a loan or revolving credit to pay for monthly running costs. All this will do is create a further strain on the Community Scheme’s finances. If you get caught in this situation, you will continue to need credit for monthly running costs, will be unable to repay the loan, and you will quickly find yourself in a Debt Trap (click to watch Webinar).
It is imperative that a loan should only be utilised for a specific purpose, be repaid over a fixed time period, and at a fixed interest rate (you should understand and agree to the total loan amount, period, and interest rate before entering into any loan agreement). For example, an urgent elevator repair project, where there is a budget, where funding will only be collected from owners over the next five years.
On the other side of the coin, if you are in a situation where insufficient funds are coming in due to non-payment of levies, leading to a loan for the payment of monthly running costs, this will put an unnecessary cost onto the paying owners of the body corporate. In reality, the paying owners will have to pay all the monthly expenses as well as the interest on the loan just to cover the monthly expenses. In this scenario, you can see how this would put pressure on the Community Scheme and the paying owners.
In this scenario, you can see how this would put pressure on the Community Scheme and the paying owners.
If we delve deeper into these three options for dealing with the situation of non-payment of levies, we can start to see which of these options will work for different situations.
Option 1: A standard loan based on your levy defaulters
The Community Scheme receives a loan of 100% of the debtor’s book as upfront cash flow. The Community Scheme is then liable for the interest on the loan and monthly legal fees while the lender collects on the outstanding levies. Only once the outstanding levies are entirely paid up will the Community Scheme start paying back the capital loan amount. Depending on how the legal process runs, the outstanding levies may NEVER be collected. Thus the Community Scheme will be liable for the capital loan amount and the monthly interest for an indefinite period of time.
You can see in this situation that although you are receiving 100% of the debtor’s book, what is paid back to the lender is well beyond 100% of the value of the debtors.
Option 2: A revolving loan based on your levy defaulters
The Community Scheme receives a monthly loan to cover 100% of the debtor’s book. The Community Scheme is then liable for the interest on the loan and monthly legal fees while the lender collects the outstanding levies. In the meantime, the capital amount increases as the monthly levies remain unpaid, due to the revolving credit facility. Only once the outstanding levies are entirely paid up will the Community Scheme start paying back the increased capital loan amount. Depending on how the legal process runs, the outstanding levies may NEVER be collected. Thus the Community Scheme will be liable for the total capital loan amount and the monthly interest for an indefinite period of time.
You can see in this situation that although you are receiving 100% of the continuous debtor’s book, what is paid back to the lender is well beyond 100% of the value of the debtors.
Option 3: Upfront purchase of the debtors book
The Community Scheme will receive upfront payment based on a percentage of the total outstanding levies. In this way, the Community Scheme will know their loss on the outstanding levies before signing the agreement. As this is not a loan but rather an outright purchase, the Community Scheme is in no way liable to repay any amounts received. The risk and cost of collecting the outstanding levies are placed squarely on the shoulders of the purchaser. The Community Scheme will not repay any interest, capital, or legal fees and will be free to continue with the original monthly running cost amount.
You can see in this situation that, although the Community Scheme is receiving a percentage of their outstanding debtor’s book, they agree to the amount upfront and are not liable for interest repayments or unforeseen costs relating to the collection of the debtors.
At Stratafin, we only offer to outright purchase outstanding debt from Community Schemes. We do this to ensure that the Community Scheme never falls into a debt trap. The debt is recovered from the individual debtors by Stratafin and at Stratafin’s own account and risk. There is no recourse to the Body Corporate. Each individual debt is analysed, and a percentage is determined and offered for each debt.
By showcasing the different options available to Community Schemes to solve outstanding levies and non-paying owners, we are hopeful that fewer Community Schemes will fall into a debt trap in the future.
WRITTEN BY DR CARRYN DURHAM
