According to Luke Doig, senior manager of Credit Guarantee Insurance Corp of Africa Ltd, 9 779 companies were liquidated and 11 946 individuals and partnerships have become insolvent since 2008.

Looking at these statistics, you can understand why the banks have become extra cautious when assessing the financial statements of self-employed people.

“If you own 25% or more of your company, for the purpose of obtaining a home loan, you are considered to be self-employed and the banks will request the financial statements of your company,” says Tess Rodrigues of Property Factor.

“We specialise in procuring finance for this category of home buyer, and often come across financial statements that have either been drawn up incorrectly or are not a true reflection of the financial position of the enterprise. Entrepreneurs are the creative minds behind their organisations, but they often don’t pay attention or don’t understand their financial statements.

“Although the profitability of the company is important, it is the balance sheet that completes the picture.”

She says banks will look at the liquidity of the company by comparing the total current liabilities with the total current assets. Ideally for a company to be in a healthy liquid position, the current assets must be double that of the current liabilities. If the current assets are less that the current liabilities, the company will be considered illiquid. It will be difficult to raise finance under such circumstances.

Gearing is the measure of the degree to which the company’s activities are financed by debt (long-term liabilities) or the owner (capital employed / owner’s equity). The higher the gearing, the higher the risk, as the company will need to continue servicing its debt irrespective of a drop in turnover.

Other items in the balance sheet that will be scrutinised are:

Shareholders’ or members’ loans. Is the owner required to fund the enterprise year-on-year or is it self-sustaining?

Is there long-term tax liability outstanding?

Is stock being replenished or is it being depleted?

In the income statement, the following will be subject to scrutiny:

Turnover. Is it increasing or decreasing year-on-year. A decrease in turnover will have to be motivated.

Cost of sales as a percentage of turnover.

Depreciation

Members / directors remuneration. This must be shown separately and not included in staff salaries.

Profitability

“When procuring home loan finance for self-employed people, you need help from a professional with a thorough understanding of accounting practices. More often that not, your bond broker will have to arrange a meeting with you and your accountant to get a better understanding of the business and position the application correctly for a positive outcome.

“Gone are the days that completing an application, supported by an income letter from an accountant, would suffice.”

Call Tess Rodrigues on 0861 106 306 or email tess@propertyfactor.co.za.