Updated 23.02.2023

10 Key Steps To Get Small Business Loan in South Africa

If you’re running a small or medium-sized business, there’ll probably come a time when you need extra funding to finance your activities. It may be for an expansion opportunity, a way to restock supplies ahead of a busy season, a renovation project, or a time to buy new equipment. Whatever the reason is, a small business loan is a perfect option to apply for to temporarily boost your cash flow. 

Banks are the most reliable providers of small business loans, but they have a long list of requirements and it may take weeks to months to get your application approved. Alternative lenders also provide business loans, but they often have conditions that can be unfavourable to your situation. Check out the list of best small business funding resources that are available for South African citizens. 

But before you apply for a small business loan, follow these steps and use them as a guide to ascertain if you’re ready for the debt responsibility. 

1) Determine the purpose

Before you get a small business loan, you should have valid reasons for why you should get into debt. Will you be using it to replenish your inventory, buy new equipment, make renovations, or utilize a working capital? Determining the rationale behind the move will help you decide which type of small business loan is the most suitable and which banks offer the kind of loan you need.

2) Learn the different types of business loans

Banks are the more popular lenders of small business loans. However, there are alternative lenders you can seek if you don’t qualify for bank offers. 

Many businesses get rejected in their loan requests because they’re applying for the wrong type of loan. Here are the usual business loans offered by lenders. 

  • Short-term loans

For a quick working capital to keep the business running, this type of business loan is the best option to apply for. Short-term loans usually must be repaid within 3 to 18 months, depending on the contract with the lender. 

Short-term loans are more expensive compared to other business loans because they can be obtained on shorter notice.

  • Equipment financing

If you need to purchase new furniture, vehicle, or machinery, this is the type of financing you need. When approved, you’ll be given a lump-sum payment which you can use to lease or buy the equipment. Usually, the equipment itself will serve as the collateral to secure the loan.

  • Cash advance

Cash advance can’t be counted as a loan, but it’s often categorized under this because of how it provides temporary cash flow to businesses. 

A cash advance is ideal if your business heavily depends on debit/credit transactions. Repayments will depend on your transactions, so you’ll have a breathing room if you’re having a slow month of sales.

  • Invoice financing

Slow-paying customers with pending invoices can be a pain in managing your cash flow. Invoice financing lets you free up some cash by selling pending invoices to a third-party company at a discount. Factoring companies that take on the pending invoices can provide you up to 90% of the total invoice value while waiting for payments to come through.

There are secured and unsecured types of small business loans. A secured loan will require collateral, while an unsecured one won’t need anything in exchange to get the loan approved. 

Aside from small business loans, there are also other ways to raise additional cash including crowdfunding and personal loans. These have different criteria and payment terms though, so make sure you understand these schemes before applying for them.

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

3) Look at your credit score

After determining the type of small business loan needed, the next step is to check if you pass the eligibility requirements. Your personal credit score is a major factor that banks in South Africa look into to see if you can handle the amount you’re requesting. To them, how you handle your finances will reflect on how you’ll manage the loan.

Your current debts and payment history largely influence your credit score. Ideally, you should have a good repayment history on a long-standing account. Taking too many high-risk debts will not work in favour of your small business loan application.

A credit score between 640 to 700 is great for loan applications. Having a high score means you have a low risk of not repaying debts on time.

4) Identify the goal of the loan

Upgrading the storefront, replenishing the inventory, funding a franchise, building a new product, and purchasing new equipment are the common purposes that people have for getting a small business loan. Determining what you want to achieve by borrowing money helps in making a more specific plan on how you’ll use it for different aspects of your business.

5) Have a detailed action plan

Lenders will ask how you’ll use the borrowed money. You need to have a clear and objective plan for it, so banks can ascertain that you won’t use it for leisure or personal purposes.

Vague plans will most likely be questioned by lenders and you’ll reduce your chances of getting approved. 

6) Assess how much you need to borrow

When setting a goal and a detailed plan on how you’ll use the money, including how much the estimated cost will be to achieve it is a must. Rough estimates will do because prices on goods and services change now and then.

Don’t borrow more than you can handle. Make sure you have a backup plan to repay the loan in case things don’t go your way.

ALSO LEARN: How to Get Start-up Business Loans in South Africa

7) Know how long you need the loan

Before you even apply for a small business loan, you should have a target on when to repay it. Repaying the loan past the agreed period will result in huge penalties and a negative impact on your credit score. 

The length of time you need the loan will depend on how you’ll use it. Recovering the costs of replenishing the inventory, paying the staff, or renovating the store will vary. It may take a quarter, several months, or a year to recuperate the expenses, so make sure to factor these things into your decision.

8) Write a business plan

A detailed business plan will increase your chances of getting your small business loan approved. Including past financial reports will be helpful since it will say a lot about how you handle money. 

A comprehensive business plan shows lenders that you’re organized, thus giving them the impression that you can repay the loan on time. Illustrating your roadmap for achieving targets means you’re disciplined and careful in handling things that concern your business. 

It’s easier to apply for small business loans if you’re operating an established business that’s turning a profit. You’ll be able to justify your request and have more convenient access to financial reports and other necessary documentation.

If you’re operating a business that hasn’t been running for more than a year, you may need another kind of business loan for extra funding.

9) Gather the requirements

Even small business loans will require a lot of paperwork, so call the institutions where you plan to borrow money to know more about their requirements. 

Aside from the application form, banks will usually ask for any of the following documents:

  • Annual financial statements
  • Year-to-date management accounts
  • Balance sheets
  • Income statements
  • Cash flow statements
  • Bank statements with transactions from the past 6 months
  • Detailed business plan
  • Supplier quotes
  • Purchase order

Depending on the loan amount and the type of loan you’re applying for, collateral may be required by the lender. Collateral will help improve your chances of getting approved. Equipment, vehicles, real estate, and stock shares are some of the collateral you can offer when applying for a loan.

READ ALSO: Coronavirus Crisis: 6 Ways the Government Will Aid Small Businesses

10) Submit the application

After gathering all requirements, submit them using the most convenient way available to you. You can either go to the nearest bank branch or apply online since most financial institutions offer these options to customers.

Major SA banks with a proven track record in providing small business loans include Absa, Capitec, FNB, and Standard Bank. 

In choosing a potential lender, compare them using the following criteria:

  • Loan products
  • Fees, interest rates, and early repayment charges
  • Lending limits
  • Time needed to get the application approved
  • Services offered to small businesses

The processing time for small business loans will depend on the amount you’re requesting and how comprehensive the requirements you’ve submitted are. It will usually take weeks to months to get approved.

If you get approved, you may still have to wait for several days before the borrowed money is awarded.

Don’t lose hope if your application gets rejected. You can ask the lender the reasons for not getting their approval, so you’ll have a better chance of succeeding in your next application.

There are also alternative lenders you can approach in case you get rejected. They’ll have lighter requirements, but they’ll usually charge higher rates than what banks offer. Choose them only as a last option when you’ve exhausted every other choice you have in getting a small business loan.

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