As a business owner, there will likely come a time when you want to apply for finance – when you need working capital to help bridge cash flow gaps, additional vehicles or equipment to expand your operations, or decide to buy your own business premises.
Approaching your bank for funding
Banks will generally consider assisting in the financing of short-term requirements (e.g. overdraft facilities), medium-term requirements (e.g. asset finance) and long-term requirements (e.g. property).
In assessing your request for financing, the bank will take a number of factors into account to determine that you have the ability to repay the finance – such as your track record in dealing with your financial obligations, the historical performance of your business, your financial projections and any macro- or microeconomic factors that could impact your business.
The bank’s risk appetite is another factor. They develop this appetite based on past experience with specific industries, loan types and client segments. Banks also have predefined credit policies, such as maximum loan size, loan-to-value ratios and minimum or maximum terms.
Once the bank has covered these factors, it will then determine its requirements to mitigate the risk through some form of easily realisable security.
Short-term financing options
Short-term funding of working capital (to help meet monthly expenses) can be provided by way of overdraft facilities, credit card facilities, factoring of invoices or cash advances.
An overdraft or credit card facility can help bridge cash flow gaps. With an overdraft, you will usually be required to pay the interest monthly at a specified interest rate. With a credit card, you will be required to either pay the full amount due at month-end or a specified percentage of the outstanding amount. If you pay the full amount, you will not pay interest.
Debtor finance (or invoice discounting) will unlock your cash flow if your cash is tied up in your debtors’ book. The cost of this will depend on the creditworthiness of the business and the debtors concerned.
Medium-term financing options
Asset-based finance is a type of loan specifically used for buying assets such as cars, machinery and equipment. The maximum period for the loan is usually 72 months (six years), depending on the asset being financed. Businesses typically use this type of medium-term financing for expanding their operations.
There are generally two types of medium-term finance – an instalment sale agreement and a lease agreement. With an instalment sale agreement, the financed asset becomes your property when the outstanding finance amount is paid. With a lease agreement, the asset can be returned to the financier or purchased at the end of the term.
Long-term finance for property
Buying your own premises is one of the biggest and most exciting decisions you’ll make as a business owner. If this is a next step for you, you can consider either applying for commercial property finance from your bank or applying for an ordinary home loan in your personal capacity.
Approaching other providers for funding
Banks are less enthusiastic about funding new, unproven concepts and ventures or speculative transactions. In these instances, you might want to explore other financing options such as crowd funding or private investors (venture capital funds and angel investors). This funding is regarded as having a higher risk, so the cost is likely to be higher than the lending rates of commercial banks.
You can also approach government agencies such as Business Partners, Small Enterprise Finance Agency (SOC) Ltd (Sefa) or the Industrial Development Corporation (IDC).
Family and friends may be another avenue, but you need to consider how this might impact these relationships.
For more information, see Applying for finance, page 32-37, The Nedbank Essential Guide for Small Business Owners