Securing an unsecured loan from an institution whilst remaining in control of your company can be painless but also holds certain disadvantages – We discuss the pros and cons.
If you are looking for structured funding for companies, Small Medium and Microp-Enterprises funding (SMME) funding, private business loans, funds for small businesses, company funding, business finance loans, and business investors are sources of funds to help businesses grow. Businesses that receive a consistent flow of revenue into their bank accounts through EFT or credit card transactions are perfect examples of this type of funding. Also, companies that have contracts in place that guarantee a consistent flow of cash into their bank accounts have a better probability of loan approval if a company does require a cash injection.
However, applying for SMME financing in South Africa may be a difficult procedure. Banks are becoming more cautious regarding lending money, while other lenders are likely to want security before forwarding any cash. This presents a quandary for business people who have built a company from the ground up into a viable entity, who now have to give a degree of authority to a lender may be difficult for the current owner of the business. Unsecured business loans in South Africa may be the solution.
While start-ups must rely only on the quality of their business ideas to persuade lenders, established companies do have a few cards under their sleeves, and playing them may open the door to alternative business financing and cash advances.
Existing companies may use their property or assets as collateral, or they might sell an equity interest in their company. Many SMME company owners, however, would view this as a step backward - after all, isn't the purpose of being a sole proprietor to be able to choose the path your firm goes without requiring permission to do so?
Growth is often the impetus for seeking financing; many perfectly viable companies (based on their financial and commercial records) hit a plateau - usually after opening one or two branches. It is normal for businesses to desire to grow further, but they often cannot do it on their own, which puts them at a crossroads of deciding to borrow or not.
There may be additional reasons for requiring extra working capital, such as property renovations, new equipment to enhance capacity providing new goods and services, or buying additional stock in preparation for a busy time of year. All of these factors have to be taken into account when the decision to create additional debt in the business is taken.
An unsecured business loan does not need company assets as collateral. Instead, it can provide financial loans to small and medium-sized companies based on their trade history and prospects. The advance is returned as a set proportion of each sale, rather than via regular installments. As a result, the alternative financing model is best suited to companies that have frequent transactions and a robust, verifiable cash flow.
The payback period changes as business circumstances change since the cash loan is repaid as a percentage of each transaction. Working capital (plus interest) may be repaid more rapidly as sales rise. Vendors must also have a minimum monthly revenue as well as a minimum and maximum borrowing needs which can be agreed upon when the loan details are agreed upon. Existing companies have many alternatives, but it should be emphasized that obtaining financing for small enterprises in South Africa takes some planning.
While development and sales may seem to be the most essential responsibilities confronting small company owners, it is equally critical to ensure that both your personal and business credit scores are in good standing - proof of missed payments or defaulting on loans may be deadly to any effort to borrow.
Keeping your company and personal money separate is important – yet it may also have legal and tax implications. Self-funding enables you to have full control over your company, but it may restrict your ability to expand. After all, you don't want to incur large amounts of personal debt to finance your company. When it comes to small company financing in South Africa, angel investors are one possibility. An angel investor is a rich person (or group of individuals) who has the capital to invest in businesses that they think will be successful. They are often accomplished business people, which implies they can also coach entrepreneurs.
Some angel investors want to remain hands-off, while others prefer to be more engaged. In any case, their investment will entitle them to either an ownership share in your company or loan interest. All of these factors must be governed by a formal agreement. Otherwise, an angel investor may abruptly withdraw their support (for example, in the case of a disagreement), leaving the company susceptible to collapse.
Bank financing has the benefit of being backed by a large financial institution, but banks have grown more risk-averse, and fulfilling the criteria for obtaining bank loans (whether secured or unsecured) has become increasingly difficult.
Overdrafts or advances are becoming more onerous in terms of producing financial records, forecasts, and company strategies. The national government presently operates various programs that provide small business financing in South Africa — assuming your company qualifies. Terms are usually more liberal than those found in commercial loans, but given the government's mission to economically empower particular segments of society, you may be automatically rejected.
Crowdfunding is a modern version of angel investing that usually operates via online platforms and allows companies to collect money from various people in exchange for equity or reduced goods or services once the company is operating. Crowdfunding is more appropriate for new companies than for established ones.
Existing companies with a demonstrated turnover and financial record may also apply for alternative business financing. This allows you to maintain ownership of your company while providing the flexibility that bank financing cannot. In contrast to angel investment, you will not be giving up any stock or putting your company's assets in danger.
If you want to expand your company without getting bogged down in red tape, indebted to angel investors, or ceding control, alternative business financing from an external source may be the solution. Very few companies can achieve any sort of growth without some kind of external financing. If you've reached the stage where you require financial assistance, it's usually an indication that your company is expanding.
The issue is that conventional lending institutions, such as banks, do not see it this way. They often refuse financing to small and medium-sized enterprises since it does not fit their conventional secured lending strategy. This is because most banks disregard the company and instead seek you as an individual to secure any loan individually.
No matter how optimistic you are about your company, the value of your family's house and children's education may be more than you are willing to risk. That is where the alternative finance sector is transforming corporate finance.
A secured business loan includes something of value as collateral, which the lender may attach if the company fails to make payments. As a result of the lender's reduced risk, interest rates for secured loans are usually lower.
Secured loans, on the other hand, may take a long time to set up since the collateral must be agreed upon and officially contracted into the loan arrangement. When it comes to immovable property, such as homes, there is a rigorous legal procedure that must be followed.
When it comes to unsecured business loans, the lender looks to other sources of information to determine whether or not to provide a loan to the firm. They base their conclusions on the following data points:
Unsecured business loans are more costly than secured loans since there is no security or collateral involved in the transaction. However, most small company owners are prepared to tolerate greater financing costs since it implies they may expand their firm at a faster pace than the funding costs.
Because unsecured loans are based primarily on data obtained from your accounting records, keeping up-to-date accounting records is critical if you own a small company.
Commercial banks in South Africa (and elsewhere) are heavily regulated and have strict missions. They are not structured to react fast or to provide flexible, unsecured business loans. This is particularly true for small companies with less than two years of trade experience and a modest amount of assets.
Alternative finance businesses may use technology to speed up and simplify procedures, allowing them to provide a wider range of goods (including unsecured business loans). Offering smaller loans with shorter periods and, in general, higher interest rates enables them to service companies who may not qualify for conventional business loans or need money quickly.
Alternative lenders are less rigid than banks, but they are still regulated, so you will need all of your usual FICA paperwork. Furthermore, continuing without security implies that they will need comprehensive access to your company's trade history and projections.
Among the standard documents are:
In summary, if you have contacted your bank for business financing but feel like you're hitting a brick wall, be assured that alternatives are a distinct possibility. Finding the appropriate partners for your specific circumstances is essential for SME financing.
Other lenders will be glad to engage with small companies and would welcome the opportunity to assist a small or medium company with the potential to expand via a controlled debt structure. An unsecured loan will allow the client to maintain control whilst allowing the company to expand from fledgling to a possible giant in corporate South Africa.