Updated 11.10.2022

How to Get a Business Loan in 7 Easy Steps in South Africa

More than a hundred lenders are offering different types of business loans to SMEs in South Africa. Annually, thousands of applications are sent to these institutions, but not all of them get approved.

Reasons for getting rejected range from incomplete documents submitted to the lack of understanding of the loan they need for business.

To guide you in getting a business loan, here are 7 easy steps to follow:

1) Understand why you need a loan

The first step to take is to determine the purpose for getting a business loan. You must have a valid reason for getting into debt. 

Will you be buying new equipment? Will you be making renovations? Are you planning for an expansion? Do you need extra cash to replenish your inventory? 

Knowing the answers to these questions will help you choose the right kind of business loan. 

Lenders will want the specifics on how much you need. You can’t just come up with a random number and apply for a loan. 

How will you be using the money you want to borrow? Presenting a detailed plan on where all the cash will go will put a smile on the face of your lenders. They’ll have the confidence to lend you money, knowing that you’re fully prepared to use it wisely.

2) Determine the type of business loan you need

Many entrepreneurs get rejected on their loan applications because they applied for the wrong type of financing. 

To avoid confusion, here are the common types of business loans you can apply for: 

  • Term loans

A term loan is a type of debt with a fixed repayment amount that’s to be accomplished for a specified period. Lenders provide short-term, mid-term, and long-term business loans, depending on the amount you plan to borrow. 

  • Debtor factoring

If you’re having cash flow problems, you may want to grab this type of business loan.

With debtor factoring, the lender finances your invoices temporarily, so you’ll have money to spend on operations. When the invoice is paid, the lender takes part of it as payment for their service.

  • Business credit line

With a credit line, you can borrow up to a certain amount so long as it’s within the defined limit. You’ll also pay interest only on the portion of the credit that you use.

So, if you have an R1 million credit line, and you use R500 000, you’ll only pay interest on the R500 000 that you borrowed. This gives you the flexibility to borrow anytime you want and repay it as you wish.

  • Bank overdraft

Bank overdrafts allow you to withdraw more than your account balance. You’ll pay interest on the excess amount in addition to overdraft fees the bank may impose.

  • Merchant cash advance

This type of business loan is designed for those in the retail and restaurant industries where credit card payment is often the means of transaction. 

The loanable amount will be based on your average monthly turnover. Repayment terms usually range from 6 to 12 months.

There are other types of business loans that lenders offer. Ask for a comprehensive list when you’re shopping around and study each one to determine which of them is the most appropriate for your situation.

3) Look into your options

Banks and similar institutions offer business loans to established enterprises. Alternative lenders, on the other hand, provide more convenience to SMEs in borrowing money.

Major banks in South Africa that offer business loans include:

  • FNB
  • Absa
  • Capitec Bank
  • Standard Bank 

 For alternative lenders, check out the following:

  • Lulalend
  • Fundrr
  • Merchant Capital
  • iKhoka

There are possibly more lenders that you can find in South Africa that offer business loans with competitive rates. Keep exploring your options to find the best fit for your needs.

To get the best rates, apply for government-backed business loans first like those offered by SEFA. You’ll need to pass through the eye of the needle for this, but the rewards are incredibly low-interest rates and business-friendly terms.

The next stop are the banks and large financial institutions. They have fair interest rates that are still generally acceptable. 

Alternative lenders must always be your last option due to their high-interest rates. They’re okay for short-term loans that last for months, but other than that, steer clear from them.

READ ALSO: How to Get a Business Loan with Bad Credit

4) Analyze the proposed loan terms

Comparing the terms provided by different institutions is the key to selecting the best business loan. 

The questions below can serve as a guide on what you should ask your lender during application:

  • Can you use the borrowed money as you wish?
  • What’s the interest rate of the loan? How can it vary in the future?
  • When are repayments done? Is it weekly, bi-weekly, or monthly?
  • How long will the loan term be? When will you be able to pay the principal and interest?
  • Are there any other fees you should know about?
  • Does the loan require collateral?
  • Can you pay more than the monthly requirement without penalties? If there are advanced payment penalties, how much would they be?
  • What are the circumstances where you can default on the loan?
  • Are there any reports you need to regularly provide to the lender?

The devil is in the details, so make it a habit to read the fine print. If you find any unclear conditions there, don’t hesitate to ask your potential lender about it.

5) Apply for the loan

You don’t necessarily have to go to a bank branch to submit your application. Many lenders are now utilizing technology and enabling online applications for convenience. This option is offered mostly to existing customers over those who don’t have an account with the institution.

So, if you have an account with one of the major banks in SA, try forwarding a business loan application to them first. They may even offer better rates, especially if you’re a long-time client.

Still, some lenders have strict in-branch application processes. They may even require the presence of the directorial board just for document signing. 

The sad reality though, is that 75% of business loan applications get rejected. Aside from passing incomplete requirements, strict qualifications are the often reason for the low approval rate. 

Banks and alternative lenders in South Africa are generally conservative. This means they prefer applicants who are more established over start-ups that are riskier to lend money to. This is also the reason why many SMMEs go to alternative lenders despite having higher interest rates and more unfavourable terms.

READ ALSO: 10 Key Steps To Get Small Business Loan in South Africa

6) Submit the requirements

Banks may have different requirements, but they’ll most likely need the same conditions from applicants:

  • A good personal credit rating. Anywhere between 640 to 700 will have a better chance of getting the business loan approved. This shows that you have what it takes to manage a large amount of money responsibly.
  • A minimum annual revenue to show that the business is profitable. This varies from lender to lender and is often combined with other factors to determine business cash flow.
  • No unpaid debts on your account. 
  • Two years of operating history, depending on the lender. Some may have business loans for start-ups that have been operating for only a year.
  • At least a year’s worth of transactional history.

Depending on the amount you plan to borrow and your financial capability, lenders may require a collateral. Properties, accounts receivables, vehicles, equipment – assets like these can be used as a security interest for the business loan.

If you satisfy the conditions mentioned, you can now gather the required financial documents for unsecured business loans:

  • A South African ID
  • Bank statement containing three to six months’ worth of business transactions
  • Year-to-date management accounts
  • Annual financial statements
  • Cash flow statements
  • Income statements
  • Balance sheets
  • Business plan
  • Notice of incorporation
  • Registration certificate
  • Shareholder certificate

Make sure you have every document required by the lender. Incomplete requirements are often the reason why businesses get declined on their business loan application.

7) Wait for the loan to be approved

You’ll be needing tons of patience for the verdict on your business loan application. With traditional banks and financial institutions, it will take an average of two months before you get your results. 

In addition to the waiting time for approval, you also must wait for several weeks before you receive the money. 

A lot can happen during the application period, which is why business loans are planned way ahead of time.

On the other hand, the approval time of alternative lenders is light-years faster than banks. Some will take only hours up to a day to decide whether your application is accepted. Once approved, the money is instantly deposited into your bank account in a matter of hours.

Final Thoughts

Business loans are designed to boost your cash flow and use it for operations or expansion. Knowing their different types will help you make a better decision on which kind of business loan to apply to. 

As with any debt product, you must ensure you have the financial capability to handle the business loan. Meticulous planning, calculated decisions, and exceptional money management will be your best friends in supervising the loan.

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