Surety cover: Protecting business owners from credit risk


Jane and I worked at a dynamic, mid-sized advertising agency. She at executive-level, while I was part of the creative team. We enjoyed working together and after a few years decided to start our own agency.

Just two months after we had served our respective notice periods we opened the doors of J&S Advertising (Pty) Limited, in rented premises in Rosebank. Jane held 70% of the business and I had the remaining 30%.

Starting a business is a bit like enrolling in the “school of hard knocks”. The first two years were tough, but we survived on the savings each of us had brought to the venture. By our third year we had a handful of clients and enough cash flow for J&S to purchase its own premises.

We found a re-zoned property and financed it with a mix of cash and commercial property financing (loan) from our bank. Looking back I realise that we were swept away by the excitement of it all, signing the documents that the agent, attorney and bank placed in front of us without a second thought.

Among those documents were surety forms that held Jane and me jointly and severally liable for the loan. I wish that someone had explained the implications of signing surety, because it had severe consequences further down the line.

Soon after taking transfer of our property, Jane fell ill and tragically passed away. Aside from the inevitable dip in revenues at J&S, I was suddenly caught up in a mess of demands from banks and creditors. To make matters worse I discovered that the bank was ‘chasing’ Jane’s estate for settlement of the loan.

I managed to sort out the financial mess and refinanced the property, but in future, I will always take steps to ensure any debts my new partner and I sign surety for are protected with surety cover. Every day is a school day, even when you’re not a student anymore and are out there starting your own business.

Surety Cover

Jannie Rossouw, Head of Sanlam Business Market responds:

Financial institutions,generally, require that the owners of businesses, sign security for any debt incurred. In J&S Advertising’s case Jane & Sarah – having provided surety – could be held jointly and severally liable for the full outstanding amount of the loan.

At Jane’s death the creditor, acting in strict adherence to the  surety agreement was entitled to recover the debt  from Jane’s deceased estate.

The dire consequences of such a move become apparent when the estate of the surety (Jane) does not have sufficient liquidity, because in terms of the agreement the bank can attach both partners’ assets to recover the debt, with no concern for their respective shareholdings.

The predicament that Sarah faced could have been avoided had J&S taken out life and disability cover on each of the partner’s lives. J&S would pay the premiums and agreements would be entered into whereby the proceeds of the policy be applied to pay back the creditor.

Starting a new business can be exciting, but should not distract business owners from setting up the necessary financial structures and cover to protect both the business and their respective livelihoods.

Business owners should approach a qualified financial specialist to conduct a comprehensive liquidity analysis at regular intervals, to ensure that their businesses are structured correctly and are able to meet dynamic circumstances.

J&S Advertising’s story is the third of five business scenarios, brought to you by Sanlam Business Market.

Still to come:

•    Income Protection: protecting the income-earning ability of business owners
•    Savings and Investments: meeting the return and liquidity requirements of business owners

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