Article written by Rencia Jansen van Vuuren (Founder ProFinance Solutions)
Many small and medium enterprises in South Africa find themselves renting commercial property due to the high upfront costs involved in purchasing, despite often being in business for many years. One of the biggest hurdles is securing the deposit, which can range from 20% to 30% of the property’s value. However, through structured finance, SMEs can leverage business and other assets and creative financing solutions to make property ownership a reality. Owning your business premises comes with a host of long-term benefits, including financial stability, control over your space, and the potential to grow equity over time.
In this article, we explore how structured finance can help SMEs overcome the deposit barrier, focusing on strategies such as refinancing assets, securing commercial property bonds, and working with expert financing partners to structure a deal that works for your business.
The benefits of owning over renting
Before diving into the financing options, it’s important to highlight why buying your business premises is often a smarter long-term strategy than renting:
- Cost stability: Unlike renting, where landlords can increase rents annually, property ownership allows you to lock in a fixed mortgage rate or manageable bond repayments. This stability helps you budget better and avoid future cost hikes.
- Building equity: When you own the property, your monthly repayments build equity over time. Instead of paying rent that benefits a landlord, you’re essentially investing in an asset that could appreciate in value.
- Customisation and control: As the owner, you have full control over how you use and modify your property without needing permission from a landlord. This can be invaluable for businesses that require custom layouts or facilities.
- Long-term asset: Owning commercial property not only secures your business space but can also become a valuable asset that strengthens your overall financial position.
The challenge: high deposits and typical loan structures
South Africans looking to purchase property often find that commercial property bonds require a significant deposit. Typically, lenders offer 70% to 80% loan-to-value (LTV) on commercial property bonds, meaning you need to cover the remaining 20% to 30% as a deposit. While 100% bonds do exist, they tend to be very expensive, with higher interest rates and fees that can place a financial strain on the business.
For example, if you’re buying a property valued at R5 million, you’ll likely need to secure at least R1 to R1.5 million as a deposit. This is where structured finance comes into play, offering creative solutions to access the capital you need without draining your business’ cash flow.
Structured finance: a tailored approach
Structured finance is not a one-size-fits-all solution; it involves designing a financing deal specifically for your business needs. By working with an experienced financing partner or originator, you can develop a tailored financial structure that maximises your borrowing capacity while managing risk and cost.
1. Refinancing existing business assets
If your business owns valuable assets such as machinery, equipment, or vehicles, refinancing them is a key strategy to unlock capital for the deposit.
- Unlocking capital: Refinancing allows you to use these assets as collateral to secure a loan. This gives you access to funds without having to sell the assets or disrupt business operations.
- Flexible terms: Asset-backed loans often come with more flexible repayment terms compared to unsecured loans, making it easier to manage cash flow.
- Contributing to the deposit: The capital generated from refinancing can be used to cover all or part of the deposit needed for your commercial property purchase.
2. Commercial property bonds: 70% to 80% LTV
While 100% bonds may sound appealing, they come with steep costs that can be financially unsustainable and more challenging to obtain. A more affordable option is the 70% to 80% loan-to-value commercial property bond, which is the most common structure in the South African market.
- Affordable financing: A bond with 70% to 80% LTV offers better interest rates than 100% bonds, making the loan more affordable in the long run.
- Long-term repayment: Most bonds are structured over a period of 10 years, providing lower monthly instalments that fit your business’ financial profile.
- Deposit solutions: While a 20% to 30% deposit may seem high, combining the bond with asset refinancing or additional structured financing solutions can help cover the deposit without crippling your cash flow.
3. Working with a financing partner or originator
Navigating the complexities of structured finance can be daunting. This is why partnering with an experienced financing partner or originator is crucial. These professionals work closely with you, your auditors, and financial institutions to design the best financing structure for your business.
- Understanding your business: A good financing partner will take the time to understand your business model, financial history, and growth potential. This allows them to present a financing solution tailored to your specific needs.
- Lender relationships: Experienced originators have established relationships with banks and lending institutions. This allows them to negotiate better terms, such as lower interest rates, and push for more favourable repayment conditions.
- Managing risk: Structured finance can involve a mix of loans, bonds, and asset-backed financing. A trusted partner will help you navigate these options, ensuring you get the capital you need without overextending your business financially.
Exploring other financing options
Beyond structured finance, South African SMEs can tap into additional financing solutions to make property ownership more attainable.
1. Development Finance Institutions (DFIs) and government support
South Africa offers various government and development finance programs aimed at supporting, particularly in growth sectors such as manufacturing, tourism, and green energy.
- IDC (Industrial Development Corporation): Provides funding for property and equipment acquisition for businesses involved in industrial sectors.
- SEFA (Small Enterprise Finance Agency): Offers loans too and can provide tailored financing solutions that contribute towards property purchases.
- NEF (National Empowerment Fund): Specialises in supporting black-owned businesses and may offer financing to help with commercial property acquisitions.
2. Rent-to-own agreements
For those struggling to raise the deposit but still wanting to own their premises, a rent-to-own agreement with the property owner can be a viable alternative. These agreements allow a portion of your rent to go towards the eventual purchase of the property.
- Deposit assistance: In some cases, the property owner may contribute to the deposit, with repayments made over time.
- Pre-negotiated purchase: You’ll have a pre-negotiated purchase price, protecting you from future market fluctuations.
Conclusion: achieving ownership through structured finance
Owning your business premises provides long-term financial stability, control over your business environment, and the potential to build a valuable asset. While high deposits can be a barrier, structured finance offers a range of solutions to make ownership possible for South Africans.
Refinancing your business assets, securing a commercial property bond with 70% to 80% LTV, and working with an experienced financing partner are all strategies that can help unlock the capital needed for the deposit. By taking a strategic approach, your SME can move from renting to owning, securing its financial future.
Key takeaways:
- Structured finance can help SMEs unlock capital for commercial property purchases.
- Refinancing business assets and accessing 70% to 80% commercial property bonds are effective strategies.
- Working with a financing partner is essential for structuring the best deal and interacting with financial institutions.
- Owning property provides long-term benefits, including cost stability, equity growth, and greater control over business operations.
If your business is ready to make the leap from renting to owning, structured finance could be the key to unlocking your future success.
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