3. Financial Institutions: Loans and financing
A key challenge when accessing finance is the time and effort that is wasted applying for finance that you don’t qualify for, or for offerings that don’t match your funding needs.
“You need to be clear about what you actually need funding for, because there are different types of finance products and different types of lenders for each of the various funding requirements,” says Darlene Menzies CEO of Finfind.
When you get a business loan from a bank or financial institution, this is called debt financing. This can be the quickest and easiest means of a cash injection, but it does come with some downsides. You will immediately owe regular payments, this will reduce your available capital, which is crucial for start-ups.
There are various options available to you when it comes to small business financing, such as:
Overdrafts and credit cards
If you’re having small, short-term cash flow problems, then overdrafts and credit card facilities can be a good option for you. The majority of banks will provide profitable businesses with overdrafts and credit facilities, only charging interest on money used.
Contract small business finance
If your start-up is experiencing temporary cash flow problems as a result of high sales volumes, contract finance can be a good option for your business. This is when your start-up gets upfront cash for the work on an approved contract.
Financiers will also want assurance that you have the knowledge and experience to fulfil the terms of the contract.
“Contract finance can enable you to control both the finance and the contract work although in some cases the lender will insist on controlling the finance and may even want involvement in managing the project. Most contract financiers charge an interest rate linked to prime and you will also be charged for drawing up cession documents if this is relevant,” explains Menzies.
Debtor or invoice financing
This is a small business financing option where you get cash while waiting for customers to pay their invoices. Unlike contract financing, debtor finance requires that you have already completed the work and the customer has been invoiced.
“As with contract finance, the credibility and credit history of the client is key to lenders as they rely on their ability to pay your invoice,” explains Menzies.
Vehicle and asset finance
Vehicle and asset finance is the financing needed to buy equipment or vehicles for your business. There are three ways that a loan for equipment finance is structured:
- Instalment sales agreement
- Lease agreement
- Rental agreement.
Which structure you choose will depend on the type of equipment you need and whether you want to own it or just have access to it.
Requirements from Banks
Here are a few of the requirements from multiple banks that you and your business need to comply with before applying for a business loan:
- You are a South African citizen and intend to only do business within South Africa
- An active business account in good standing
- Operating for 15 months or more
- Annual turnover of R500 000+
- A well-researched business plan
- Financial information such as: personal statements of all partners, cash flow forecast, projected income and expenditure, and how you intend to use the finance
- Minimum loan requirement of R10 000 or a maximum loan of R350 000
- You can put forward a contribution that is at least 2.5% of the loan amount.