Becoming a private lender in South Africa

Becoming a private lender is not an application process. There is no register to join, no licence to hold if your capital is deployed through a registered credit provider, and no qualification to earn. What there is, is a decision with several parts, most of which are about you rather than about the arrangement.

01 — EligibilityWho may become a private lender

In South Africa, any person with legal capacity to contract may lend money, and so may a company or a trust. Three qualifications are worth stating plainly.

• Individuals must be over 18 and able to contract. Where the capital is jointly held — in a marriage in community of property, for example — both spouses are affected by the decision, and in some cases consent is a legal requirement rather than a courtesy.
• Companies act through their board within the memorandum of incorporation. Directors owe duties under the Companies Act 71 of 2008, and committing company funds to an illiquid arrangement is a decision that should be minuted.
• Trusts act through their trustees and only within the trust deed. Trustees must act jointly unless the deed says otherwise, and must be able to show the decision was in the beneficiaries’ interests. A trust deed that does not authorise lending is a hard stop, not a formality.

Whether registration as a credit provider arises at all depends first on whether the National Credit Act applies to the agreement. The National Credit Act does not apply identically to every private-lending arrangement. Its application depends on factors including the parties, whether the agreement is at arm's length, the borrower's legal form and size, and the type and amount of the agreement. Where the Act applies, the person granting credit may be required to register with the National Credit Regulator. The correct position must therefore be determined from the actual structure and documents. That distinction is set out in how private lending works, and it is worth resolving with your own legal adviser rather than by inference.

02 — SuitabilityThe decision before the mechanics

Most poor outcomes in private lending are not caused by the arrangement failing. They are caused by capital being committed that should not have been committed — money that was needed back sooner, or that was all of the money there was. Four questions, answered honestly, do more work than any amount of due diligence on the borrower.

1. When might I need this money? If there is any plausible answer involving a date, an illiquid arrangement without a maturity date is the wrong home for it.
2. What happens if it does not come back? Not as a rhetorical question. If the answer materially changes your life, the amount is too large.
3. What is this instead of? The honest comparison is against the alternative you would otherwise use — a fixed deposit, a money-market fund, paying down a bond — after tax, not against a headline number.
4. Do I have a reserve that does not depend on this? Emergency capital that is locked into a lending arrangement is not emergency capital.

03 — StructureIndividual, company or trust

The same arrangement produces different outcomes depending on who lends. The differences are mostly tax, control and succession.

Rates, thresholds and the annual interest exemption are set by legislation and change. Confirm the current figures with SARS or your accountant rather than relying on any number quoted on a website, including this one.

04 — CapitalHow much capital it takes

There is no statutory minimum to lend. Minimums come from the arrangement: a structured South African arrangement commonly sets an entry amount in the tens or low hundreds of thousands of rand, some offer monthly-contribution routes at much lower amounts, and hard-currency offshore notes typically set a minimum in the note’s own currency.

The number that matters more is the proportion. A useful discipline is to size the commitment so that a total loss, while painful, would not alter your plans — and then to ask whether the return on that size is worth the illiquidity. Frequently it is; sometimes the honest answer is that the amount you would be comfortable committing is too small to be worth the complexity, which is a perfectly good conclusion to reach.

Where a reader wants to model an illustrative scenario at current rates, ProLend — which Association’s Founding Gold Partner — publishes an indicative calculator. Modelling is arithmetic, not analysis: it shows what a stated rate produces if everything goes as described, which is the easy part of the question.

05 — TaxTax and record-keeping

Interest and note returns can have different tax consequences depending on the instrument, source, taxpayer, entity and applicable exemptions. The information provided here is general and should be confirmed with a South African tax practitioner.

Interest earned from private lending is income and is taxable as interest. Several practical consequences follow.

• It is taxed at your rate, not a flat rate. For an individual that means the marginal rate, which is why a pre-tax comparison between a lending return and any tax-advantaged alternative is not a comparison at all.
• A tax certificate may or may not be issued. Whether a payer issues one depends on its own reporting obligations, and income is declarable either way. Entities that are not deposit-taking institutions do not issue one. The income is declarable regardless, and the absence of a certificate is not the absence of an obligation.
• Provisional tax may apply. Interest income above the relevant threshold can bring an individual into the provisional-tax system, with two returns a year rather than one.
• Offshore interest is treated differently. The annual exemption applies to South African-source interest; foreign interest is generally taxable in full, and foreign tax credits may apply.
• Keep the file. The agreement, the proof of payment, the interest statements and the correspondence. If a claim ever has to be proved, it is proved from documents.

06 — DocumentsWhat you should receive and keep

1. A signed agreement naming the exact legal entity receiving the capital, with its registration number.
2. The rate, the basis on which it is calculated, and the dates interest is paid.
3. The basis on which capital is returned — a maturity date, or a description of what repayment depends on.
4. A statement of what secures the arrangement, in whose favour, and in what form.
5. The credit provider’s NCRCP number, checked by you against the NCR register.
6. Disclosure of fees and commissions: who is paid what, by whom, and out of what.
7. Proof of payment showing the capital reaching the entity named in the agreement.
8. Contact details for a human being with a name, at an address that belongs to the entity.

07 — ConsultantsWorking with a consultant

Many people reach private lending through a consultant. That is unremarkable — complex arrangements are usually explained by someone — but the role deserves to be understood precisely.

A consultant explains the arrangement, works through a scenario with you and introduces you to the platform or provider. A consultant is typically paid a commission on business placed, which should be disclosed on request. A consultant's title, Association membership or directory listing does not authorise the provision of regulated financial advice or intermediary services. If a person makes a recommendation or provides a regulated service, ask under which authorised financial services provider and mandate they act, and verify that information with the FSCA.

What to expect from a good one: they ask about your circumstances before quoting a number, they explain what can go wrong without being asked, they put answers in writing, and they are unbothered when you say you want to think about it. The verification methodology sets out what the verified status covers, and the practitioner register shows who is listed.

08 — ChecklistA pre-commitment checklist

1. I can name the legal entity that will hold my capital, and I have checked its registration.
2. I know whose name is on the credit agreement with the borrower, and that party’s NCRCP number checks out.
3. I know who the borrowers are and where the money to repay them comes from.
4. I know what secures the loan, in whose favour, and whether it is registered.
5. I know where I rank if money is short.
6. I know whether my return is fixed or prime-linked, and what it is at today’s rate.
7. I know what the return of my capital depends on — a date, or a recovery.
8. I know the fees and commissions, and who pays them.
9. I have read what happens, step by step, if a borrower does not pay.
10. I have sized this so that losing it would not change my plans.
11. I have the whole of the above in writing, and I have kept it.

If any line cannot be ticked, the answer is not to proceed and resolve it later. It is to resolve it, and then decide.

09 — QuestionsCommon questions

Do I need a licence to become a private lender in South Africa?

It depends on the structure, and on whether the National Credit Act applies to the agreement at all. Its application turns on the parties, whether the agreement is at arm's length, the borrower's legal form and size, and the type and amount of the agreement. Where the Act applies, the party granting the credit may be required to register with the National Credit Regulator. Establish the position from your own documents before committing capital, and take legal advice on them.

Can a company or a trust be a private lender?

Yes. Companies and trusts commonly provide lending capital. A trust must act within its trust deed and its trustees must act jointly unless the deed provides otherwise; a company acts through its board within its memorandum of incorporation. The choice of entity affects tax treatment, control and succession, which is why it is worth deciding deliberately rather than by default.

How much money do you need to start private lending?

There is no legal minimum; minimums are set by whatever arrangement you are entering. In practice South African structured arrangements commonly start in the tens or low hundreds of thousands of rand, and some monthly-contribution structures start far lower. The more useful question is what proportion of your capital a single illiquid arrangement should represent — which is a question about you, not about the minimum.

How is interest from private lending taxed in South Africa?

Returns from private lending are generally taxable, but the treatment is not uniform. Interest and note returns can have different tax consequences depending on the instrument, source, taxpayer, entity and applicable exemptions — an individual, a company and a trust are not in the same position, and a local arrangement and an offshore note are not either. Income is declarable whether or not a tax certificate is issued. The information here is general and should be confirmed with a South African tax practitioner.

What is the first thing to check before lending?

The identity and registration of the entity that will hold your capital, and whose name is on the credit agreement with the borrower. Both are verifiable in minutes against public registers. Everything else — the rate, the term, the projections — is worth nothing if those two answers are unsatisfactory.