The South African economy is home to more than 2.5 million small and medium-sized enterprises (SMEs), however, access to funding is a major concern for many entrepreneurs. Business loans in South Africa offer a way to finance both new and existing businesses. Obtainable through several lenders, including banks and specialized loan companies, this type of loan may seem like a convenient way to start your business.
In reality, getting a loan can be difficult, let alone getting approved for one.
What is a business loan?
A business loan is the type of financing you can get to meet the urgent needs of your business. Some of these needs could be; to expand your existing business, to buy machinery, to boost production, etc.
How do I qualify for a business loan in South Africa
First, you must understand how you can qualify for a business loan before getting it. There are many types of loans, and there are also varieties of ways you can get these loans.
In South Africa, getting a business loan could be very easy for you once you prepare appropriately for it. There could be differences in what could qualify you for a business loan across all financial institutions in South Africa.
For business loans, you must meet the following requirements:
- You should have a very good credit score, at least from 650 and above
- Prepare your financial statements and management accounts
- Have a business plans
- Your financial statements
- Provide your tax records
- Your financial forecasts
- Provide a collateral
How do business loan types work in South Africa
The simplest way to understand how business loans work is to answer based on the type of loan you’re taking out. Despite the fact that business loans are constantly changing along with the industries they comprise, we’ll attempt to provide a comprehensive answer to the question, “How do business loans work in South Africa?”By looking at different types of business loans available in South Africa.
South Africa offers the following types of business loans:
1. Debtors factoring and invoice discounting
A debtor finance is a type of financing in which a financial institution purchases or lends funds against a company’s debtor book. Basically, a “debtors book” is just a collection of all your receivable invoices. Factoring, invoice financing, and invoice discounting are other names.
Businesses can use it as a tool to improve their cash flow and grow their businesses by unlocking value within their businesses. By factoring in debtors, a business can offer longer payment terms to its corporate customers, allowing it to take on more or larger projects.
Alternatively, a business can use debtors factoring to overcome cash flow issues if they are struggling to stay afloat while they wait for their customers to pay.
2. Traditional short-term business loans
Businesses in South Africa are offered a wide range of loans by the country’s major banks. Banking institutions can provide short- and long-term loans as well as specialized loans for equipment and vehicles. However, applying for a business loan through a bank can take a long time – about two months on average.
If you are wondering if you can apply online for short-term loans through your bank’s website, the answer is probably no. An application to a bank generally involves a lengthy and rigorous application process. An application must be filled out and submitted with supporting documentation and information. The majority of banks have requirements for business plans, tax records, and even financial forecasts.
Once you have submitted all your documentation, the process has just begun. In most cases, you will have to wait around two months before finding out whether your application has been approved.
In the event that your application is successful, you will have to wait for a further period of time before you receive your funding. Business owners who need a short-term loan to solve an immediate cash flow problem will find this situation unacceptable.
3. Bank overdrafts
Overdrafts allow business bank accounts to go negative up to an approved limit. Business overdraft limits are generally lower than those of other types of financing. Some banks will impose two kinds of overdraft limits: a lower “soft” overdraft limit as well as a higher “hard” overdraft limit. The soft limit can be exceeded, but you will be charged additional interest rates or incur additional charges. Hard limits on the other hand can never be exceeded.
A long track record of trading is required to qualify for a bank overdraft. An overdraft is usually granted only after you have had a history of trading for at least two years. Unlike bank loans, bank overdrafts generally do not have a fixed repayment date, and interest-only must be paid every month.
You’ll also have to pay account fees or facility fees just to keep the overdraft open, even if you don’t use it. It is important to consider the additional charges that may not be included in the advertised interest rate. Absa overdraft can be a great option for this type of credit.
4. Business lines of credit
A business line of credit is a flexible form of small business loan. This kind of flexibility is not available with a regular business loan. There is a limit to how much you can borrow with a business line of credit in South Africa. Then pay interest that applies to the certain amount you borrow. After that, you repay the funds according to your wishes and never exceed your credit limit.
The credit line of a business is subject to credit review and is renewable annually. Additionally, you can borrow funds as much as your lender permits. The payment is revolving, just like a credit card.
5. Merchant cash advance
This is a new type of lending available in South Africa for retail and restaurant businesses. Those who accept credit card payments from customers. The amount of the loan is calculated based on the average monthly turnover of the business. Repayment periods range between six and twelve months.
The repayments can, however, vary depending on the business’s monthly credit card sales. Therefore, if a business has a good month, it repays a bit more than normal, whereas, during quieter months, it pays less. Daily repayments make it difficult to keep track of and manage repaid amounts and outstanding balances.
6. Business credit cards
Consumer credit cards work similarly to business credit cards. However, the chances of approval are low. Compared to other types of business financing, credit card limits are typically the lowest. Additionally, business credit cards offer great benefits and rewards. As an example, the FNB ebucks loyalty program offers businesses points every time they shop at select stores and fuel stations
A business’s performance and credit score are critical factors in determining how much credit your business will be approved for. Credit cards are also a good way to build your business credit score and ability to get other types of financing.
Which banks offer business loans in South Africa
Fincheck
- Fincheck is a provider of a live and independent way of comparing and applying for finance from more than 30 South African banks, lenders, and insurers.
- Who they serve: Business owners seeking finance in South Africa.
- Amount: R20,000 – R72 million
Lulalend
- They offer instant funding decisions on applications based on proprietary scoring technology.
- The company serves South African businesses from all industries with annual revenue of over R500,000.
- In the range of R20,000 to R1 million
Fundrr
- The company developed an automated credit model that analyzes close to 100 data points in order to provide a complete picture of growth opportunities. This produces a Fundrr score.
- Who they serve: At least a 12-month track record, with a minimum of R1 million turnover or asset value.
- Amount: R20,000 – R500,000.
Merchant Capital
- Provides flexible repayment terms for merchant cash advances to retail businesses.
- Typical client: Retail business owner with an average of over R30,000 in credit and debit card sales and has been in business for at least one year.
- Qualification: Up to 100% of a business’s average monthly credit and debit card turnover.
Bright on Capital
- They provide affordable working capital financing to emerging small supplier businesses with sustainable growth prospects through their peer-to-peer lending platform.
- They cater to small businesses that are at least 12 months old, who supply organizations or government entities with creditworthiness, and who expect to generate R1 million or more in annual revenue.
- To execute on procurement opportunities sourced from these qualifying large entities, small businesses can access revolving working capital facilities of up to R1 million.
What credit score is needed for a business loan
There is no universal requirement for minimum credit scores for business loans. Additionally, some loans do not require a credit check. In most cases, however, lenders are going to consider your credit score when deciding whether to work with you or not.
Simply put, the higher your personal credit score, the easier it will be to get a business loan. Moreover, your credit score determines not only whether you qualify for a given business loan but also the terms that your loan will have, including the loan amount, the APR, and the repayment schedule.
What are the sources of business loans in South Africa?
1. Bank finance
Banks give business loans to businesses, although it could take some of them months to complete their processes. They will also require collateral for the business loan.
2. Government grant
The government grant is interest-free, and you don’t need to pay back the grant. Not all businesses get the government grant, this is because of their strict selection criteria. The government monitors how businesses spend the grant.
3. Venturing Capital (VC)
Venturing capital organizations invest in businesses, by so doing such businesses have the immediate cash flow to get things done. Venture capital organizations invest money in businesses in return for shares.
Most times, early-stage businesses that will sacrifice equity and control go for venture capital finance. This is because the venture capital organization would want to partake in running the business from the board level.
4. Peer to peer (P2P) lending
In this source of a business loan in South Africa, there is usually no need for any financial institution. This new form of funding just involves people who need money and other people who need to lend money. Here, some firms prefer to get funds from their peers than from any business financing company of any form.
5. Factoring
Factoring is a way of diversifying your business funding portfolio. They use this form of financing all over the world because it gives businesses finance that grows with turnover. Factoring gives businesses working capital against their outstanding invoices. The factoring company would purchase your account receivables and cater to your debtors’ ledger when you partner with them.
Many businesses choose to factor over bank loans and overdrafts because:
- You wouldn’t give up equity or control
- Customers’ creditworthiness is in focus, not your own creditworthiness
- Finance grows with turnover
How long will I wait for a Business loan
In South Africa, business loans are not granted quickly by lenders. Generally, you can expect to wait for up to two months for your application to be processed. If you are approved, you will receive the funds within another month or within the agreed-upon time frame.
Consequently, the time it takes for a business owner to obtain a loan can be up to three months, which may make it difficult for them to implement their plans. Many quick loans are available, but they won’t offer large sums of money and must be repaid quickly.
Conclusion
Businesses in South Africa usually face uphill tasks from time to time. And these tasks most times require an enormous amount of money to get things done. However, a business loan is always an option they could explore to avoid a breakdown of workflow in their business. Early-stage businesses would really need a business loan to gain aground in the competitive market. The business loans offer finance and cash flows for businesses that need them.