Is the average small business ready for credit agreement applications.

[Dave A]

For the first time today it really sunk in just how much the NCA has changed my business. Not once, but twice.

Story 1.
The first was a phonecall from another company wanting me to carry out some work for them. A +/-R9000.00 job, but it was repairing something they'd messed up. The bill was for their account. Could they put R2000.00 down and pay the balance at R1500.00 per month.

I'm trying to weigh up whether to say yes or not based on all the normal "can I trust you" stuff I normally apply for this sort of thing, so while chewing it over I decide to shoot for a little more detail.

Like their VAT number. The answer - they're not registered for VAT.

So I do my "Well we're not really in the banking business - how about getting an OD or loan from the bank" routine. The answer - their application has just been turned down - that's why they're asking for terms.

And that's when it struck me - in terms of the NCA it's a near dead certainty that I'm going to have to do an affordability check. Single service - payment in installments - it's a credit agreement, not incidental credit. And if the bank has just been through this and decided they can't afford it, who am I, a total amateur in assessing affordability, to go against that judgment. I became rather suddenly aware that I am way unprepared for this.

In the past, someone would call me up and ask to pay in installments like that - I wouldn't think twice. The mere fact that they called me up and asked was enough for me to trust they were going to do their best. I prefer that as opposed to someone just placing the order and then stiffing me the bill, or giving me the runaround after because they can't settle.

Ironically, if he'd have just placed the order, I billed him and he paid me off in installments like he wanted to, the whole thing would not have been a problem. I'd have to live with it and actually be thankful that I didn't have to sue him or something nasty and we'd all get on with our lives.

I tried one last gambit - could he show assets of R1million. No way. The deal as he wanted it, and ordinarily I would have seriously considered, was history.

I broke the news that what he was proposing was a credit agreement in terms of the NCA; I had to do an affordability assessment and needed to know goodness only knows what, but I'll find out and get back to him.

I could hear the jaw drop from my end of the telephone call.

Story 2.
A member of staff asks for a fair sized loan - about 50% of her monthly salary. I just love staff that come asking for loans within days of just having received their salary, but that's another story.

So fresh on the heals of story 1, I'm thinking NCA. And guess what - as far as I can tell I need to do an affordability assessment too. So out goes the request for a list of all debts and monthly installments. One really unhappy staffer. Especially as up to now we've had a policy in place that would have made the request no problem.

Blame it on the NCA, I guess.

But the day really drove home the point - I'm not ready for this and I've actually been studying the legislation. How many businesses are busy making these mistakes already without even realising it.

So here's what I need to do:

• I need to get me one of those bank credit application forms. I can't do it tomorrow because I've got a day trip to JHB, so Friday is going to have to do.
• I need to understand the do's and don'ts of an affordability assessment.
• I need to get a copy of some decent fine print for this sort of thing.

But most of all - I need to suggest to every bank manager out there that they don't wait for their business clients to get a book full of bad debt going about this all wrong - because then we all lose.

Please be proactive - send out those forms and copies of the right sort of fine print to every small business account you've got. Advise us how to do this, because all of a sudden we really need to understand more about how you go about your business than we ever intended.

Right now there's a house being eaten up by termites, possibly bonded to you, that really needs this sorted out fast - and a rather miserable staff member who is not sure she really wants her boss to understand her financial circumstances as well as it seems I need to.

[duncan drennan]

I wonder if there is scope for a new business opportunity — provide affordability checks (with all the fine print). Sure there are huge challenges with making this work as a business, but there are huge challenges in any business.

[Dave A]

It's a PITA alright. And where there's pain, there's gain.

Any guesses as to what it might be worth - what would a business pay per processed application?

[duncan drennan]

Well, you are the one who wants it right now.....what is it worth to you?

[Dave A]

Not that much - I'd rather have the COD thanks.

I think I need to look at those allowable admin fees a bit closer.

[Snoopy_inc]

Thanks Dave, This is going to help me as we have situations where clients ask for these "payoff options".

[Brett Bentley]

Incidential Credit

Dave with due respect I think both you examples could well fall under the defintion of incidential credit.

As long as you are only charging interest on overdue payments the transaction is an incidental credit agreement and the teeth of the NCA do not apply to the particular transaction.

Have a look at these posts on my blog for more details.

http://www.creditmanagement.co.za/?p=127

http://www.creditmanagement.co.za/?p=120

By the way I think you guys are doing a wonderful job here discussing and getting a better understanding on this very important act for those in the credit industry.

[Dave A]

Hi Brett and welcome. Great to have another person contributing to the NCA debate.

I am concerned that Story 1 above could be construed as an instalment agreement. A once off supply of goods or services (it certainly is not an ongoing provision of services) and payment being due in instalments. And there would be a difference in amounts if paid on completion vs payment over the term.

Story 2 might enjoy the status of an emergency loan if the cause of the need is in accordance with the Act. I'm not sure a whip around of the family to finance a family member's wedding counts.

Your comment about interest i.r.o. staff loans in your blog is interesting. I'd have thought it's not just interest at stake- it's any charge associated with the loan. Then we have interest free loan issues with SARS, but I guess that's simpler to deal with.

I'm also a little concerned over the broader objective of preventing over-indebtedness and the latitude that might be allowed around this priority. Historically, a heck of a lot of these staff loans has been for a deposit due on a financed item such as AV equipment.

[Eugene]

I wonder if there is scope for a new business opportunity — provide affordability checks (with all the fine print). Sure there are huge challenges with making this work as a business, but there are huge challenges in any business.

Duncan, you might be right: huge opportunity. As long as you do not give yourself out or operate as a "credit bereau", I think it makes sense to outsource the affordability check. Then the person offering the service would not be in a tight fix when asking these "senstive questions".