The major question which every new entrepreneur asks is where and how to find finance for business purposes.

Here you will find answers to these and many other important questions.

How to Finance Your Business in South Africa

You will learn whether applying for finance is the best way to go. You will find out more about the difficulties with accessing business finance in South Africa. You will get valuable advice on making an application for finance and on maximising your chances of getting your loan approved.

You will receive tips on how to manage your business's existing finances as well. Existing business owners will find this guide useful as well.

If you already have a running business, you will learn whether borrowing could be a resolution to your existing problems.

Business Loans – Existing Business Owners

1. Reasons for Borrowing

If there are issues with the operation of your business such as inefficient production and/or too low price mark-up then a business loan will probably not help you resolve them. You will only get into more trouble.

Besides, lenders will evaluate your business when you apply for a loan and will not grant it if they see issues.

2. Long-term Growth Plan

If you want to increase the sales of your business, you have to take into account profit margins and efficiency and prepare a long-term plan for growth.

This is the only way in which you can obtain finance. Additionally, the financial institutions would like to see that you have already invested in growth yourself in order to support you.

3. Strategy & Timing

If you need cash urgently, then this is most certainly a sign that the situation has got out of hand. You will have the best chances of getting finance when your business is in a stable position with an effectively working business plan, stable revenue and profit and a considerable margin of safety. You have to know that lenders assess risk very carefully and generally have very low risk tolerance.

It usually takes 3 months for a company to obtain the funds after having applied for a loan.

Business Loans for New Business Owners

Finance amount - If you do not know exactly how much you need to borrow, you will not be able to obtain a loan. If you do not present a precise figure, this is a sign that you have not planned for borrowing and that you do not have serious intentions.

Finance use - In order to get approved for a business loan, you have to present a complete plan with precise figures. You must explain what you will spend the money for, when you will spend it, how you will use the product purchased and what returns you expect to get. When you have a proper plan, you can also consider alternatives to borrowing. If you need equipment, you may be able to share its cost or lease it.

If you require finance for purchasing raw materials, you can negotiate a flexible payment deal with the supplier.

Business Finance in South Africa

If you though that obtaining a business loan in South Africa would be easy and simple, you have to think again. The application process is typically quite slow as lenders require a large number of documents and additional clarifications.

Additionally, the banks and other companies providing business finance are traditionally risk averse. They grant funds only to businesses which have an extremely low risk of not repaying the loan.

At the same time, most of the small, micro and medium enterprises do not fall into the low-risk category. This is not to say that it is impossible to obtain finance.

You just have to be aware of the challenges which you will have to overcome.
Consider the main ones.

1. Placing Collateral

The collateral is security which the lender requires that you will repay your debt. Once you place an asset as collateral, the lender will have the right to repossess it in case you are unable to repay the loan.

All types of business assets can be used for the purpose. The list includes buildings, equipment, savings, investment portfolios or other financial instruments. It is possible to use a personal asset as security, but in this case the risk is much higher.

The value of the collateral must correspond to the level of risk which the lender assumes. Since smaller businesses carry higher risk, they will have to use an asset with greater value.

At the same time, smaller businesses typically have smaller assets with lower value.

2. Expect Delays

The microlenders in South Africa are not quick in granting business loans. The processing of an application can take up to 2 months. If you are approved, you will receive the funds in another month.

As a result, the period from applying to obtaining the loan can be up to 3 months long. By the time you get finance, it may be too late to implement your plans.

3. Credit record

Unless you have flawless credit history, you may have difficulties with obtaining finance. If you have had some debt issues in the past, you will automatically get rejected for a business loan.

You should repay past debt as soon as possible. You should also have any bad credit record fixed. You should not make attempts to hide your past delinquencies as this can have a huge negative impact on you and on your business.

The best course of action is to explain what happened and what measures you have taken to prevent such issues from occurring in the future.

12 Expert tips for getting a Business loan

  1. Do not give up

    It is hard to get business finance, but not impossible. You just have to use your talent as an entrepreneur and be creative.

  2. Consider loans from family and friends

    This is a major source of finance for businesses around the globe and South Africa is not an exception to the rule. You can use the funds for getting started and then borrow from a financial institution once your venture is stable. Generally, even if you decide to use a business loan right from the start, you may have to ask the people around you to become co-signers. There is one simple rule to keep when it comes to borrowing from family and friends; you have to do it professionally so that they can have peace of mind about their money.

  3. Make a loan application

    Even if your chances of qualifying are low, you should give it a try.

  4. Make applications to several lenders at once

    This will give you higher chances of getting a business loan and save you time as well.

  5. Use your business plan to support your application

    It has to be comprehensive, concise and well organised. You have to be able to explain every detail to the lender.

  6. Produce a precise finance requirement and back it up

    You have to explain how much you will borrow and what return the investment will generate. Generally, the smaller the requested amount is the higher your chances of getting finance will be.

  7. Be patient

    You should provide for considerable delays in the processing of your loan application.

  8. Keep building your business while waiting

    You should use all possible alternative options of finance and other support to establish your venture and stabilise its performance. You should work towards building equity as well. When your business is stronger and you have more valuable assets, you will have much higher chances of obtaining a business loan in the future.

  9. Start small

    You may have big plans for conquering the local and national market, but it is impossible to achieve this right away. That is why it pays off to down scale your plans so that they match the amount of finance which you can obtain.

  10. Arrange finance before bidding for a contract

    This is essential for ensuring the execution of the work. If you have already won a contract, but you do not have finance, you should consider alternatives such as partnering with another company including a competitor. Your profit will be smaller, but you will earn good reputation, solidify your positions and improve your chances of getting finance in the future.

  11. Negotiate with suppliers

    You should try to arrange a longer term for paying your suppliers so that you can manage your money more easily and more effectively. They will most certainly show some flexibility, especially if you have paid them timely and in full in the past. You will go a long way, if you rely on personal contacts and high business ethics.

  12. Negotiate with clients

    If you have secured a contract, you can arrange the client to pay a deposit and then to make progress payments as each part of the project is completed.

  13. Collaborate with other businesses

    You can share assets with other business owners or use their facilities for a share of the profit which you will earn.

Business Lenders in South Africa

Commercial Banks

The big four banks in the country offer business loans to small enterprises. The consider lending to small businesses highly risky, but they are required to support such ventures under the Financial Services Charter of South Africa. In addition to the higher risk which they have to assume, the big banks have to invest the same amount of resources in processing the application for a small loan as for a big loan. The higher cost makes the small business loans less profitable as well as riskier.

All of these factors bring down your chances of securing a business loan, but this does not mean that they are equal to zero. Hence, you can try applying to the big four banks.

Asset Finance Houses

These companies are actually part of the big four banks' groups. Bankfin is part of Absa while Wesbank is part of FNB. Stannic belongs to Standard Bank.

The asset finance houses are more flexible when it comes to extending loans to businesses. You stand much better chances when working with them. One of the reasons for this is that the loans are usually smaller.

More importantly, since the funds are used for the purchase of an asset, the asset is often part of the collateral.

This makes the risk for the lender lower because if you fail to repay the loan, the lender will have the right to repossess the asset.

Specialised Lenders

The lenders specialising in providing small business loans fall into two categories:

1. Direct lenders

They lend funds directly to small businesses. They provide loans to entrepreneurs who would not typically qualify for finance from a commercial bank. They are willing to provide finance to borrowers presenting higher risk and even to ones with bad credit record. They are able to accept less valuable assets such as used machines. The easier access comes at a price. These business loans are typically costlier than those offered by banks.

Some of the major lenders in this group are Business Partners, a former government company which was privatised and is now on the road to becoming a venture capital fund, Khethani Business Finance, which is a non-profit, organisation, and New Business Finance, which is a small private company.

2. Organisations facilitating the access of small businesses to loans

There are organisations which do not provide direct financing, but can guarantee a part of the bank loan which you take out. You have to guarantee the remainder of the loan with an asset of yours. Out of this group of organisations, Khula, which is a government agency, is the most prominent.

There are also organisations covering the cost which the lender incurs for processing loan applications from small businesses. They also work to reduce the risk for the lenders by assisting businesses with managing their operating and finances and repaying the loans. One such organisation is Sizanani.

It assists businesses with obtaining bank loans for up to R100 000.

Venture Capitalists

The venture capital funds do not offer loans, but invest directly in businesses for getting a return. This return is a share of the profit.

The venture capitalist typically takes a board level position in the business. They will sell their shares in the company within three to seven years. The shares can be sold to the business owner or to another investor.

Venture capitalists usually aim for getting a 30% return on their investment. This makes it difficult for most small businesses to obtain finance in this way.

The government agency for small business loans - Khula, has its own venture capital fund which has more easily accessible finance.