SARS tax clearance and why funders ask for it

When a business applies for a loan, the first thing lenders look for is proof that it pays its taxes on time. A SARS tax clearance certificate, issued by the South African Revenue Service, confirms that a company is registered, has filed all required returns, and has settled every tax due. Funders use this document as part of their risk assessment to ensure the applicant is financially sound and compliant with regulatory obligations such as B‑BBEE and the Companies Act.

Why funders require a SARS tax clearance certificate

Funders require a SARS tax clearance certificate for several reasons. Firstly, it provides them with assurance that the business is compliant with all tax laws and regulations. This reduces the risk of the business being audited or penalized by SARS, which could negatively impact its financial stability. Secondly, a tax clearance certificate provides funders with confidence that the business is financially stable and able to repay its debts. This is particularly important for alternative lenders, who often provide funding to businesses that may not have a perfect credit history.

In South Africa, many businesses struggle with cash flow due to the common practice of 30 to 60 day payment terms. This can make it difficult for businesses to manage their finances and pay their taxes on time. However, a SARS tax clearance certificate provides funders with assurance that the business is managing its finances effectively and is able to pay its taxes. According to the Small Enterprise Finance Agency (SEFA), many small businesses in South Africa struggle to access funding due to a lack of financial management skills and poor credit history.

How to obtain a SARS tax clearance certificate

To obtain a SARS tax clearance certificate, businesses must be registered for tax and be compliant with all their tax obligations. This includes paying all taxes due, submitting all required tax returns, and being up to date with all tax payments. Businesses can apply for a tax clearance certificate online through the SARS eFiling system or by visiting a SARS branch. The application process typically takes a few days to a week, depending on the complexity of the application.

Businesses must also ensure that they are compliant with all other regulatory requirements, such as registering with the Companies and Intellectual Property Commission (CIPC) and obtaining a B-BBEE certificate. The Protection of Personal Information Act (POPIA) also requires businesses to ensure that they are protecting the personal information of their clients and employees.

A worked example of the importance of SARS tax clearance

Let’s consider an example of a business that is seeking funding from an alternative lender. The business, which we will call ABC Pty Ltd, is a small manufacturing company that is looking to expand its operations. The business has a turnover of R1 million per month and is seeking funding of R500,000 to purchase new equipment. The lender requires a SARS tax clearance certificate as part of the funding application process.

ABC Pty Ltd has been struggling to manage its finances due to the common practice of 30 to 60 day payment terms. The business has fallen behind on its tax payments and is currently owing SARS R50,000 in unpaid taxes. The business is also struggling to pay its employees on time, due to the cash flow constraints. In this scenario, the lender is unlikely to approve the funding application, as the business is not compliant with its tax obligations and is struggling to manage its finances.

However, if ABC Pty Ltd is able to obtain a SARS tax clearance certificate, the lender may be more likely to approve the funding application. This is because the tax clearance certificate provides the lender with assurance that the business is compliant with all its tax obligations and is managing its finances effectively. The lender may also be willing to provide more favorable terms, such as a lower interest rate or a longer repayment period.

How to apply for funding with a SARS tax clearance certificate

Once a business has obtained a SARS tax clearance certificate, it can apply for funding from an alternative lender. The application process typically involves submitting a funding application, which includes providing financial statements, business plans, and other supporting documentation. The lender will then review the application and assess the creditworthiness of the business.

Businesses can apply for funding online or through a financial advisor. The funding application process typically takes a few days to a week, depending on the complexity of the application. Businesses can see if their business qualifies for funding in 60 seconds by completing an online funding application.

In conclusion, obtaining a SARS tax clearance certificate is a critical step for South African businesses, particularly when seeking funding from alternative lenders. SARS tax clearance and why funders ask for it is a topic that is often misunderstood by business owners. By understanding the importance of a SARS tax clearance certificate and how to obtain one, businesses can improve their chances of securing funding and achieving their business goals.

Common mistakes to avoid when applying for a SARS tax clearance certificate

There are several common mistakes that businesses can avoid when applying for a SARS tax clearance certificate. Firstly, businesses must ensure that they are registered for tax and are compliant with all their tax obligations. This includes paying all taxes due, submitting all required tax returns, and being up to date with all tax payments.

Secondly, businesses must ensure that they have all the required documentation, including financial statements and business plans. The lender may also require additional documentation, such as a B-BBEE certificate or a letter from the business’s auditors. By avoiding these common mistakes, businesses can improve their chances of obtaining a SARS tax clearance certificate and securing funding.

Finally, businesses must also consider the impact of load-shedding on their operations and cash flow. Load-shedding can have a significant impact on businesses, particularly those that rely on electricity to operate. By having a plan in place to manage load-shedding, businesses can reduce the risk of disruption to their operations and improve their chances of securing funding.

A short checklist for obtaining a SARS tax clearance certificate

The following is a short checklist for obtaining a SARS tax clearance certificate:

• Ensure that the business is registered for tax and is compliant with all its tax obligations
• Pay all taxes due and submit all required tax returns
• Be up to date with all tax payments and have a plan in place to manage cash flow
• Obtain all required documentation, including financial statements and business plans
• Apply for a SARS tax clearance certificate online or through a SARS branch
• Consider the impact of load-shedding on operations and cash flow and have a plan in place to manage it

By following this checklist, businesses can improve their chances of obtaining a SARS tax clearance certificate and securing funding. It is also important to note that the major banks in South Africa also require a SARS tax clearance certificate as part of their funding application process.