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Should I cash out my policies to pay my business’ debt?

The using of debt to fund a business is a useful tool if kept under control.

I currently run a pharmacy and my change of premises has not yet been approved; it got delayed just days before lockdown. 

I have an overdraft with the bank at exorbitant rates and still owe wholesalers approximately R450 000 and have overheads of approximately R40 000 per month. I cannot trade until the new license is given. 

I have investments that will cash out next year, of which the values can be up to R500 000, with another at just under R1 million. Do I take loans to settle my debts or cash out my policies? 

My retirement annuity is not much and I was hoping once it matured I would put my money into an RA as I’m three years away from 50…female.

Since I’m not trading it means no income. I have claimed on income protection which carried me through March for debits. Please advise.

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The situation you are facing, unfortunately, is not uncommon with the current economic climate and many businesses are in your situation. There will still be many businesses that weathered the initial three-week lockdown that now face additional financial burdens, especially with economic activity in many industries at a fraction of what it was a year ago.

Many lenders since March have offered clients moratorium of payments on debt instalments owed for up to a three-month period, and some have further extended the moratorium for longer depending on the circumstances of the client, and if they have been in good standing over the previous years.

Banks lending policies are risk-related, the higher interest rate an individual would pay would be a combination of credit risk, default risk, and payment history. The using of debt to fund a business is a useful tool if kept under control. The use of credit bureaus to monitor your credit score is essential to know what data is being used, to determine your interest rate on debt. Many credit bureaus offer a free credit check once a year, I would suggest everyone accesses their score annually, and work on the issues that are bringing it down. Noting that the interest rate is exorbitant at your bank, could be linked to the above factors.

The decision to use your investments to settle the debt would be based on the interest rate charged on the debt versus the net return on the investment, and then the opportunity cost of having additional cash flow on hand. Interest rates are the lowest they have been over the last 20 years and debt is cheaper than its ever been with the prime lending rate of 7.25%. I would suggest speaking to your accountant and banker about your cash flow, earnings, as well as the efficiency of the use of the capital and relook at your overheads, and possibly restructure your debt.

With regards to your retirement planning, the most tax-efficient use of a retirement annuity would be to contribute the lesser of R350 000 per annum or 27.5% of your gross income, in order to get the maximum tax deduction from Sars on your income. I would not recommend contributing more than this into a retirement annuity on an annual basis and then look at other investment vehicles that can be used to build your wealth.

The contributions and capital contributed into a retirement annuity cannot be accessed before the age of 55, and even then only one-third can be accessed in cash, subject to the tax tables at retirement and then the two-thirds will pay you a pension of between 2.5% and 17.5% (20% this year due to Covid-19). So, liquidity would be a factor to consider with running your business, and the need to access capital from time to time.

However, retirement planning should be prioritised as early as possible, and you should probably speak to an Independent CFP® to put an actual plan in place, that takes into account all income bearing assets that will assist in the possibility to retire comfortably.

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