When applying for a business loan, it is important to understand what types of loans are available, and which loan is the perfect fit for your business and your business strategy. Remember, a business loan becomes a liability (something to pay off), so it should always be a last resort – if your business can reach a sufficient profit without it, perhaps you need to reconsider!
When should I look at getting a business loan vs when should I avoid it?
These would be some situations where you might consider getting a business loan:
● Starting a new business- start-up capital for office space, inventory, staff etc.
● Expanding already existing business. This could mean marketing to a wider audience, expanding the goods and services which you offer, or even opening new physical locations for stores or warehouses etc.
● Securing new talent, for example scouting for new staff that could add benefit for your business ad team and rewarding the already existing talent on your team in the ways of bonuses and salary increases.
● If you’re looking to the future and want to open up a new credit line this is also a good idea as to why you might consider applying for a loan. The only way to create a good credit profile is to borrow and be good on repayments.
● Expanding equipment or inventory is also one of those haveto’s where you don’t have much choice but to take out a loan to ensure the proper running of your business.
● Overall, you should always be more than 60 percent sure that if things go according to plan, you will manage the loan repayments.
Don’t take out a loan for the aesthetics of a good business opportunity, and ALWAYS do sufficient research on the numbers and what you are paying for. A business loan is a commitment which you will be liable for, and can also affects your personal credit ratings. If you get the loan too early, before you’re ready to use the money, you’ll spend more time making payments, and you’ll delay your ability to pay the loan back. If you strike prematurely, you may also have less information, and therefore will be more prone to errors in your financial projections.
If you get the loan too late, you may struggle to make ends meet when you take on your new asset or responsibility. In cases of significant company financial strain, it could pose an existential risk to the business.
If you’re maxed out of credit, and you already have other streams of credit, taking out another line of credit is probably not a good idea.
Questions to ask yourself when thinking of taking out a business loan are:
1. When do I need cash flow? At which points in the business year are you most cash stripped and need help?
2. Why do I need cash flow? Is it for startup costs? Equipment financing?
3. Which institutions offer the loans that I am interested in, and are most suitable to my financial situation?
That aside, if you have established that you need the loan then what do you need for your business to qualify for a business loan?
Credit Score
Assessing credit score is one of the most important things for anyone wanting to apply for a loan. Lenders will look at a credit history to see whether they will make a loss on their loan or if you’re trustworthy (read: credit worthy) to pay back your loan.
Credit rating indicators include but are not limited to,
● Current levels of debt
● Your payment history
Not all credit is “good-credit” however, high risk personal funding negatively impacts one’s credit rating. A quick guide to personal credit ratings (ranges will vary depending on credit bureaus):
● 700+: the best rating you can achieve. This is considered a very good to excellent rating.
● 660+: a good credit rating, where you can access a wide range of deals.
● 620 to 659: you might struggle to get finance if you are in this range but getting a business loan is still possible.
● Below 620: this is a score most lenders would see as high-risk. It might be worth rebuilding your credit score before you apply for a business loan.
Time of operating
The length of time that your business has been in operation is a consideration for banks and a critical requirement for every credit bureau. It usually excludes those who have only been in operation for only a couple of years because there may not yet be sufficient evidence that the business is stable which affects ability to pay back a loan.
Annual Business Revenue
Most business loan providers will have set minimum revenue requirements. This differs from lender to lender.
Collateral
Collateral is something required by the bank to guarantee they will recover the money if you can’t pay back a business loan. You usually use an asset as collateral. Once you put up an asset as collateral, you’re giving the lender permission to claim that asset via the courts.
Examples of physical collateral include:
● Equipment
● Real estate
● Vehicles
● Stock
If you don’t have any collateral that’s also okay. More and more funders are offering unsecured business loans. Some banks will waive the need for collateral if you have a purchase order. And most Fintechs lenders don’t require collateral.
Where can I go to obtain a business loan? What documents are required? Below is a summary of the required documents needed by banks:
FNB
Requirements:
● 12-months turnover in a business account
● No unpaid debits on your account
● Good personal credit rating
Documents:
● 6 months bank statements
● Annual financial statements
● Year-to-date management accounts
● Cash flow statements
● Income statements
● Balance sheets
● Business plan
ABSA
Requirements:
● Minimum affordability to be determined based on your financial statements.
● Additional security might be required depending on your credit assessment.
Documents:
● South African ID
● Notice of incorporation
● Registration certificate
● Shareholder certificate
● 6 months bank statements (if you’re not an ABSA client)
● All directors to be present to sign the application.
Nedbank
Requirements:
● Two years’ operating history
● Nedbank merchant for at least three months
● Business turnover of R1m and above
● One-year transactional history
Documents:
● One-year transactional history
● Pro-forma invoice demonstrating intended use of funds, up to 70% of the advance value.
Capitec
Requirements:
● Earn a monthly salary from your business.
● Sole traders not eligible
Documents:
● South African ID
● Three-months’ salary slips (only SMEs who get a salary from their business are eligible)
● Three months bank statement
Lulalend
Requirements:
● You only need one year trading history and R500 000 annual turnover.
● Once you’ve met the minimum requirements, it’s time to submit your application.
Documents:
● Only three months bank statements or management account
Remember – always lend and borrow responsibly!