“Though not too complicated, the process of applying for a loan can seem tedious,” says Sharon Smith at Standard Bank. “When preparing to approach your bank, there are steps within steps. Going through each with patience is the key to determining if your business can afford a loan; how to increase your chance of being granted one; and the best type of loan to suit your needs.”
Step 1: Your “why”
“You need to consider your ‘why’,” Sharon Smith explains. “A weak reason, such as covering payroll for the third time won’t do much to grow your business, but will add to existing debt. Ideally, borrowed money should be used on the journey towards your SME’s ‘next’; why not use the loan for parts of the business that will ultimately generate more revenue?”
Though it’s difficult to make a firm call on the “right” or “wrong” instances to take out a loan, the bank you approach will analyse your reason, and you’ll have a better chance of securing the money if you need it for the following:
1. To buy property to expand operations:
Banks are likely to lend money to businesses that want to purchase real estate in order to expand. The rationalisation? If a business is expanding, it must be successful and, thus, in a position to repay the loan.
2. To buy equipment:
You have two choices when it comes to equipment: buy or lease. However, there are a few good reasons to take out a loan to buy, including the fact that you can use it for its “life” and then sell it for salvage value.
3. For inventory
Some SMEs only experience peak times during certain seasons, so, if they make most of their sales during the holiday season, for instance, they may need a loan prior to purchase a large amount of stock.
4. To build a good credit score
“As any growing business may need to apply for large-scale financing, it’s a good idea to start taking out small, short-term loans to build credit,” Sharon Smith advises. Just like people, fledgling SMEs often struggle to qualify for large loans. The solution is to take out smaller loans, making regular, timeous instalments to pay them off.
5. To support new talent
At first, most small businesses are reliant on the owner and just a few other people to fulfil multiple roles. But this is draining, and something could fall through the cracks – costing clients and money. Investing money into attracting skilled employees is a sure way to keep a growing start-up competitive.
Step 2: Does your business have what it takes?
Pursuing your ‘next’ is always admirable, but you need to ensure you’re adequately prepared, so you don’t put your business in jeopardy. As the bank committed to progress, Standard Bank advises that you take a critical look at your SME’s current situation by answering the following:
1. What are the chances I’ll qualify?
Many banks will let you know the minimum credit score they require, the necessary cash flow and any other qualifying factors. If you know your business can’t meet them, don’t take a chance. “Keep in mind that if you don’t get a loan you apply for, it will make it more difficult for you to borrow in future,” cautions Sharon Smith . “You’ll seem like a bad risk.”
2. How much do I really need?
Find out before you approach your bank, because an incorrect amount will reflect poorly. For example, if you ask your lender for R50 000, but a later cash-flow projection indicates needs of R100 000, you’ll appear to be a poor planner.
3. How much can I borrow based on the asset I intend to use for surety?
Many entrepreneurs think that if they purchase equipment worth R1 million, for instance, they should be able to borrow R1 million by pledging that asset as surety. Unfortunately, banks don’t always agree. “Financial institutions sometimes value assets below their original value based on age and use,” says Sharon Smith. “This means that they will only lend up to a fraction of its starting worth.”
4. Is my cash flow sufficient to repay the loan?
Your bank will ask you to provide financial projections for your business, because: “Banks want to lend to businesses that have ‘wiggle room’ should one or two clients default on payments.” So, you have to prove that your available cash flow is a few times larger than your debt-repayment needs.
5. What about my personal finances?
“Until your SME reaches a substantial size, the banks will rely on your personal financial statement and credit score to determine creditworthiness.” To get a clear picture of how well you handle your money, your lender will trawl through all your personal financial information.
6. What happens if I die?
Unfortunately, your debt doesn’t expire when you do. If you have not repaid your loan in full, the responsibility will probably fall to your family.
7. How high is my credit score?
Your business credit score will ultimately determine whether you are granted a loan. If it isn’t as high as you think it should be, make sure your vendors are reporting all your payments, or try reducing the balance on your business credit cards.
If your answers to the above indicate you have a good chance of being granted that loan – not so fast. There’s still a bit of admin required. “Besides the essential business plan, a bank needs a lot more critical documentation from you before your application can go ahead,” says Sharon Smith. Make sure the following is complete and up-to-date:
- Business plan: includes details such as the nature of your business, your product offering, the market environment and your skills.
- Financial information: the bank will need:
- A personal statement of assets and liabilities for all partners, members or directors
- Cash flow forecast
- Projected income and expenditure
- Amount and source of the business owner’s contribution to the business
- How the business will use the money
- Sales and purchases budget
- Collateral information: if you intend to use property or an asset as surety/collateral, list its details.
You may wish to supply further information once the basics are covered, such as credit bureau checks of the business and your partners, if you have any. If you have another business that has been banking with a different bank, you’ll need to provide its financial statements, three month’s bank statements, a facilities letter and details of any collateral.
Step 3: The right loan
Armed with the recipe to increase your chances of loan success, you can now confidently approach your bank. But remember, being granted a loan is only half of your journey – the other is paying it back. “If you’ve done your due diligence, you probably know that you can afford your loan – the actual amount with added interest,” says Sharon Smith. “However, you need to be clear on the payment structure details, so you don’t accidentally default while chasing your goals.”
The type of loan determines its payment structure. For businesses, there are a number of products to suit a variety of needs. Some of the most widely used are: business overdrafts, business revolving credit plans, business term loans, medium term loans, debtor finance, commercial property finance, vehicle and asset finance and guarantees. To work out the best loan to suit your business needs, speak to a Standard Bank financial advisor; they have the knowledge and experience to guide your success. Alternatively, you could visit our website to find out more.
“Applying for a business loan isn’t especially complicated, but it does take time and a little effort,” says Sharon Smith in conclusion. “This is to protect entrepreneurs and their businesses. No ethical financial institution will saddle a young SME with debt it cannot handle and, consequently, a bad credit record that may hinder the future attainment of their ‘nexts’.”
For more information, contact your nearest Standard Bank branch. Visit http://www.standardbank.co.za/