Requirements for Business Loans in South Africa

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

Small businesses need funding for a myriad of reasons, including, start-up 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 R 250 000. The average request for funding by SMEs was R 400 000. For very small businesses the amount is R 500 000, and for micro businesses, it is R 300 000. Small business’s average request amount is R 1 million and for a medium-sized business, it is R 3,6 million.

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 finance the supplies and resources needed to complete a contract.
• Inventory loans help businesses to buy stock and mainly benefit 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.

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.

Read more: The Basics of Registering Your Business 

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 to find out if they can help you 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.

Because finances form a major part of a loan application, make sure they are all up-to-date and readily available.

It’s also important that your business is financially fit. Assess future financial needs such as growth or inventory and cash flow needs, as well as unforeseen expenses or other financial challenges before taking on the debt.

Once you have identified the need for financing, also assess the impact of the debt on your businesses. This can be done by understanding your capital and debt requirements relative to your growth and budget forecast. Ultimately, it’s important to pick the financing option that their business can afford in the long run.

Alex Appleby, Head of Treasury and Risk at Retail Capital, advises the following regarding costs.

“Clearly understand the terms and conditions to avoid any hidden costs that may arise at a later date, including early repayment penalties etc.

“Ensure regular cash flow forecasting takes place to meet your debt requirements.”

Read more: Essentials to Secure Funding for Small 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. 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.

This will differ depending on the lender and the size of the loan requested. Most lenders will require that a business generate at least R 200 000 per annum, however, this amount may increase to R 500 000 or even R 1 million, and more. Ultimately, the stronger your business financials (as shown through your annual revenue and profits) the more likely you are to get approved for a business loan.

Each lender will have their own period for how long your business needs to have been trading in order to get approved for a business loan. Common periods are 6 months, 1 year or even two years.

Most business loans require some sort of collateral. Collateral is an asset such as equipment, real estate, vehicles or stock which can be taken and sold by a lender if you fail to make payments on your loan and recover their money.

In addition to collateral, you may be asked to provide personal guarantee/suretyship from every shareholder and/or director of the company. A personal guarantee puts your personal assets on the line.

A lack of financing readiness is one of the biggest reasons business loan applications get rejected.

Some of the challenges identified in the report, An Assessment of South Africa’s SME Landscape: Challenges, Opportunities, Risks & Next Steps’ 2018/2019 (SME Report) are insufficient operating history, inadequate cash flow, limited collateral and a bad credit score.

Other reasons business owners fail the due diligence process are:

• Inconsistent cash flow.
• Inconsistency in information provided.
• Inaccurate or outdated annual financial statements and management accounts provided.
• The inability of applicants to provide substantiating information.
• Lack of technical skills and/or business acumen by the entrepreneur.
• Unreasonable or unsubstantiated projections or budgets.

Read more: 15 Business Loan Terms Every Entrepreneur Needs to Know

Any entrepreneur who has applied for finance and has been unsuccessful has the right to inquire with the institution representatives about the reason/s as to why their application for funding was declined.

The SME Report shows that most SMEs have poor knowledge of their business’ credit record, with 61% not knowing their businesses’ credit score, yet this remains the standard way that funders access their creditworthiness.

What business owners need to know is that as part of the application process, all lenders will perform credit checks, and conduct searches on court judgements to rate your risk. To lenders, a bad credit score means there is a high risk of the loan not being paid back. It’s therefore important that business owners run a credit check with the various bureaus before approaching a lender.

But what is a credit score and how does it work in South Africa? Your credit score is an indicator of your chance of default. The higher the score the less risk your business poses to a lender. In South Africa credit scores are generally measured on a scale of 300 and 850 with 580 to 669 considered as a medium risk score.

You can get a bad credit record if you have failed to settle an account (or the account of a person for whom you have signed a suretyship) or even if you were the victim of identity theft and you now have a judgment against you.

An additional challenge that many new businesses face is that they haven’t been in operation for long enough to generate a business credit score. Unfortunately without a business credit score, traditional lenders are unlikely to lend you money or extend credit.

However, bad credit does not mean the end for business owners looking for financing. Business owners can take remedial action to clear their name which will significantly improve their chances of accessing future financing.

While your financials and the performance of your business will be the primary focus of your application, lenders will be favourable to business owners who exhibit these attributes.

• Committed business owners, both financially and through their level of involvement in the business.
• Business owners who understand their business from a technical perspective and have good levels of business acumen.
• Business owners who run their businesses with integrity and transparency.
• Business owners who clearly illustrate a passion for the business and industry.
• A business owner who understands their customer and market segment well.
• A business that employs good sustainability practises by adding real economic value, while having a positive impact on society and the environment.
• A good profitable track record for established businesses.

Read more: Why You Have Been Rejected for Financing 

Different funders have different investment mandates which prescribe the investment criteria, such as:

• Minimum and maximum funding amounts
• Industry preferences
• The level of risk the funder is willing to accept
• Minimum and maximum periods that the funding may be granted for
• Cost of finance
• Funding instruments that can be used i.e. debt, equity or quasi-equity instruments
• Funding at different stages of the lifecycle of a business

Read more: Read This if You Have Ever Been Rejected for Funding