Whether a business is new or looking to grow, choosing a loan that is carefully aligned with its specific requirements is crucial to its development.
Getting a customised loan is important as the needs of startups differ from industry to industry, particularly with the emergence of startups in still relatively new industries such as alternative energy and tech.
The kind of funding you receive plays an important role in how well your business succeeds or how miserably it fails, says Michael Naidoo, CEO of Specialised Finance at First National Bank (FNB) Business.
Specialised lending, though not a loan many are acquainted with, is tailor-made and structured to fit the needs of your business, says Naidoo.
“Specialised lending can be split into working capital and term lending. Working capital is for short-term needs and term lending is for long-term needs.
“If a business requires funding to increase inventories or to utilise supplier early settlement discounts, a working capital solution such as debtor finance or selective invoice discounting would be most appropriate. If a client requires funding for expansion or for acquisitions, then a term lending solution such as leveraged finance would be most appropriate,” Naidoo says.
He adds: “This mainly depends on which stage of the business lifecycle the business finds itself in and what type of challenges it is faced with. Specialised finance can offer lending solutions throughout a customer’s business lifecycle.”
SME South Africa speaks to Naidoo to find out the ins and outs of specialised finance and how it differs from other traditional lending products.
Q: Which industries or businesses often require specialised lending?
Almost all industries and businesses could utilise specialised lending products depending on their financing needs. Businesses in different stages of the business life cycle would require different specialised lending products.
Q: What are the benefits of specialised lending?
The lending provided is particularly structured to meet the specific needs of the business, providing it with the correct type of lending to match the business’ challenges and needs.
Q: How is the interest rate of specialised lending different to that of other business loans?
Certain banks follow a risk-based approach based on the financial health of the company. The interest rate offered would depend on the type and size of the lending required; its term, associated risks and the amount of collateral offered.
Q: Is the application process different compared to applying for other business loans?
The application process may differ depending on the specialised lending product. It mainly depends on the complexity and size of the loan required. For most specialised lending products, a product specialist will engage and assist an SME to understand its business’ needs and provide a suitable solution. There is a different approach followed for a general business loan.
Q: Why is it important to seek financial assistance that is structured according to the needs of your business?
It is important because it ensures alignment between the funding solution and the business’ unique needs and circumstances.
For example, if a qualifying SME is making an acquisition, [we] would structure the loan based on the amount of free cash flow the business would generate over the period of the loan.
Q: Are there important factors that entrepreneurs need to know about specialised lending considering today’s volatile economic environment?
Generally, interest rate movements are a concern to SMEs. Specialised Lending is a “through-the-cycle” lender, partnering with the client during both good and bad times. Every deal is considered on its own merits and the prevailing economic circumstances are considered.
Considering the volatile economic environment, the structure of the loan, as well as stress testing the ability of the SME to service the loan, will be regarded as important.
Q: How can small businesses overcome the hurdle of accessing finance?
SMEs need to be clear in terms of understanding their business requirements, amount of funding required and its intended use. The SME also needs to consider whether the additional funding can be serviced and would assist the business in achieving higher levels of profitability and growth in that specific industry.