Access to funding is perhaps the biggest obstacle that both new and experienced business owners face starting and growing a business. This is of concern as we know access to sufficient funds at the right time can mean the difference between the survival and closure of a business.
The good news is there are now more financing options available to entrepreneurs beyond traditional banks and government funding and grants. We have seen an increase in the number of fintech companies that offer alternative finance products to entrepreneurs.
Despite this, many business owners still find it difficult to get approved for loans for various reasons, including finding the application process confusing or failing to meet strict lender requirements.
Why Business Owners Need Funding
Businesses need funding for a myriad of reasons, including, startup capital, buying equipment, business expansion and working capital.
With regards to funding amounts, statistics released by Finfind in the SA SMME Access to Finance Report, show that nearly half (44%) of funding requests are for amounts less than R250,000. The average request for funding by SMEs was R400,000. For very small businesses the amount is R500,000 and for micro businesses R300,000. Small business’s average request amount is R1 million and for a medium size business it is R3.6 million.
Types Of Alternative Financing For Businesses
There are many types of funding and financing that business owners can apply for, depending on the needs of their business. The following are alternative financing products available to SMEs.
- Bridging finance, also known as a bridge loan, is a short-term loan used by a business to finance its working capital, such as stock and/or operating overheads.
- Purchase order finance is used by a business to complete an order and finances the supplies and resources needed to complete a contract.
- Inventory loans helps businesses to buy stock and mainly benefits product-based businesses.
- Working capital finance increases working capital in a business and provides a much needed boost to cash flow.
- Merchant cash advance extends funds to businesses that accept payment via a card terminal. The loan amount and repayment terms are based on the monthly revenue of the business.
- Credit cards can be used to cover day-to-day business expenses.
Business Loan Requirements
It’s important that business owners don’t plan for a business loan at the time they need it and instead plan ahead.
The first step is to make sure that your business is compliant with all the relevant regulatory and statutory requirements.
The most basic requirement for businesses looking for financing is having a registered business. You can register your company online on the Companies and Intellectual Property Commission (CIPC) website, or on the Bizportal.gov.za website, a platform created by the CIPC that offers company registration and related services.
Other requirements include that your business be registered for tax.
The process of ensuring your business is compliant can be strenuous for many business owners. To help, business owners are advised to secure the services of experienced business advisors and small business accountants Find out if they can help you to compile the documents you need, and properly position and package your application to ensure success.
There are many factors that will determine if your application is successful and the type of business loan you can get such as time in business, financial health, credit score, and available collateral.
Documentation Needed For Taking A Loan For Businesses
Entrepreneurs must maintain their records in order to help lenders assess their bankability and affordability.
Up-to-date management accounts, financial statements and tax clearance certificates are among the most common documents that you will be required to provide.
Depending on the funder you approach, you will be requested to provide some, or all of, the following supporting documents.
- Financial documents – Basic business plan; cash flow projections; outstanding debtors (i.e. customers who owe you money); up-to-date management accounts (i.e. income statement, balance sheet and cash flow statement); latest annual financial statements; latest VAT statement; last three/six months’ bank statements, tax clearance certificate”
- Personal documents – ID documents of owners; marriage certificates of owners (where applicable)
- Business documents – Company registration documents; office lease or mortgage agreement; shareholder agreements; share register; proof of business address; relevant business licenses; accreditations or registrations
- Application forms – Prepare your application pack to ensure your funding application is aligned with the type of funding opportunities the funders are looking for.
Some traditional lenders might even want to see a solid business plan detailing the purpose of the loan. And how you expect it to increase profits. Your business plan should include current and projected financials. Clearly demonstrate that your business will have enough cash flow to cover ongoing business expenses and new loan payments. This can give the lender more confidence in your business, increasing your chances of loan approval.
How To Get A Business Loan In South Africa
Business owners can apply online to qualify for a business loan in South Africa. The minimum criteria for the business loan can include that your business has been trading for 12 months. A lack of financing readiness is one of the biggest reasons business loans applications get rejected.
