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WCLawyer, Attorney
Category: South Africa Law
Satisfied Customers: 15603
Experience:  L.LB (UOVS)
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I want to lend a friend of mine a substantial amount of

Customer Question

Hi. I want to lend a friend of mine a substantial amount of money for him to start a new business venture. We have agreed that if I lend him the money interest free, then in 3 years time I can convert the loan into equity in his business. But if I don't convert the loan into equity then he will pay me back double my investment over the next 4 years (after the 3). I have a few questions:
a. do we need to consider the National Credit Act?
b. is it legal for us to agree that he pays me back double (he is happy with that and I'm happy, but not sure if it's legal with the NCA maximum regulations etc.)
c. what kind of contract will we need?
Submitted: 1 year ago.
Category: South Africa Law
Expert:  WCLawyer replied 1 year ago.

Good Morning

1. If you are going to take up the equity, then no. If you are not taking up the equity, then yes.

2. If you are going to charge interest, it cannot exceed the maximum rate of interest for unsecured loans as per the NCA, even if he agrees to it. If the interest rate is ever challenged in court, a defense (on your part) that he agreed to the higher interest rate would not be effective.

3. If you are not going to take up the equity but convert it to a loan, you would have to enter into a loan agreement that complies with the requirements of the NCA. If you are going to take up the equity, the a share sale agreement would be sufficient that allows the equity to vest in three years time against payment now. But this is really something that you should discuss with the attorney who is going to draft the agreements. Contrary to popular belief, we normally don't just take a template of the shelf and go with it.

I hope I have answered all of your questions and addressed all your concerns, but if you have follow up questions before you rate, feel free to ask them at no extra cost. If you are satisfied with the service, kindly rate it positively.

Customer: replied 1 year ago.

Hi there. Thanks! That sheds a lot of light on the problem. Will I have to register as a credit provider before I conclude an agreement with him? We have agreed that I will have an option to convert the loan to shares after 3 years so for the first 3 years it will just be a plain loan.

Expert:  WCLawyer replied 1 year ago.

IF the amount you speak of is above R 500,000.00, then yes. You would have to renew the registration for every year that the loan exists. Since it is eventually (potentially) going to incur interest, the NCA would be applicable.