|What is the cost of signing a surety?
I don’t mean the petty fee the bank charges you for “drafting” the documents they want you to sign when they lend you money.
I mean the other cost, you know, when your health goes because your wife has left you because you lost her home to the bank, as well as the jewellery she inherited from her grandmother.
I was thinking about this the other day because Rob Davies mentioned that 7 out of every 10 startups in SA close in their first 12 months. That’s a whole lot of pain, of shattered dreams, and of wasted money.
So, here is the beginning of some thinking on the subject. Lets say that your business borrows R100,000 (R100K) from a bank. (Overdraft, business credit card, lease, hp, etc.) Somewhere in the pile of paper that demands signatures will be a surety form. This is your promise to the bank that, in the unforeseen event that the firm cannot pay them back, you will pay them personally. It sounds eminently reasonable. You sign.
(About that “unforeseen” bit: Seven out of ten of us SA startups now close in our first year. I don’t know about you, but that is hardly “unforeseen”. )
About that R100K, lets imagine that the bank demands the money from you personally:
- What if you have the money to pay? That R100K is not a tax deductible expense. It comes out of money that you have saved, after tax. That means that it has cost you a whole lot more than you thought when you signed.
- What if you don’t have the money, but you can borrow it elsewhere? Once again, you will be paying the capital back, as well as the interest, with after tax money. A lot more than R100K, in other words.
- What if you don’t have the money, and you cannot borrow it elsewhere? Then you get a judgment which opens up a can of worms. On the basis of the judgment you lose your furniture, and/or your home, all of which are assets that your family has built up over your lifetime, from after tax money. This time, however, all your stuff is sold off at a whole lot less than you paid for it, and a whole lot less than you could get for it if it wasn’t being auctioned. Suddenly that original R100K costs you more than R1 million. And if you still owe some after you have been divested of your possessions, a garnishee order instructs your employer to pay a portion of your after-tax earnings to the bank, for what seems like the rest of your life.
And what I cannot get out of my head is this: How much pain of these “70 percenters” and their families have gone through, and are still in, because nobody told them this.