Navigating the community scheme lending space – practical considerations

When you buy a unit in a sectional title scheme, you are also buying into the assets and liabilities of the whole scheme. Sometimes, that scheme has arrear levy debt or needs urgent funds to pay for maintenance-related issues. Further to this, the current economic climate means that levy income cash flow has also been impacted for many bodies corporate around the country. Because of these reasons, a scheme may need to take out a loan.

Historically, taking out a loan has been viewed as a risky (and even ill-advised) activity. This perception is a consequence of reoccurring unethical service providers and scammers. This, in turn, has created a cloud of doubt, bias and misinformation around sectional title scheme lending and/or funding. It is worth noting that taking out a loan in most cases can be more cost-effective and viable than trying to build up cash reserves or raise a special levy.

The Sectional Titles Schemes Management Act 8 of 2011 (STSMA) permits a body corporate to borrow money (Section 4 (e) and (f)) when finances are required to perform its functions or to exercise its powers. But before you take out a loan, you must make sure to do your homework on where to go, what process to follow as well as what to look out for.

Choosing the correct partner is crucial – any trustworthy credit provider should be registered with, and follow the directives of, the National Credit Act. It is advisable to conduct thorough research before selecting a service provider for your scheme. Luckily multiple digital platforms which serve as peer review sites can assist with your decision-making process.

Further to this, no two community schemes are the same. A funding partner should be able to offer tailor-made solutions based on the unique characteristics of the client.

After receiving a proposal from a credit provider, remember to dissect the fine print and be cognisant of the terms and conditions. The proposal should highlight the interest rate, the duration of the loan, any capital raising fees involved, and any other admin charges. Scrutinising funding proposals is not an easy task, especially if you lack a financial background. This is why we recommend that you seek independent advice to ensure that the proposal can be unpacked and any questions you have can be answered.

One of the items you might want clarity on are any hidden costs. These hidden fees in financing/funding contracts enhance the bad perception of lending within the sectional title space. Schemes feel dupped when being charged legal fees and admin fees that were previously not mentioned.

Another thing to remember is that the total cost of funding should be used and not just the offered interest rate. Some funders in the community scheme industry offer very competitive interest rates but then employ significant raising fees, admin fees and other costs which means the effective rate (cost of loan funding) is much higher than may be apparent.

At STS, we pride ourselves on having the skills required to support all your funding needs. Our ethical business practice and market-leading solutions make us the perfect partner in providing sustainable financial solutions for the future. STS specialises in facilitating loan funding to community schemes, offering various lending solutions to clients that have underlying levy debtor problems or require funding for municipal arrears, maintenance and/or capital projects, but whose unit owners cannot immediately raise the necessary upfront cash.

Our primary goal is to understand the funding requirements of your unique body corporate and provide trustees and/or managing agents with the best possible solution. Additionally, to further set ourselves apart as well as help our community during difficult economic times, we are rewarding good repayment behaviour by putting money back into our clients’ pockets with our interest rate reduction incentive.

For more information on our lending solutions or a tailor-made proposal, please reach out to us.