Business owners in South Africa often struggle to obtain finance and many mistakenly believe the banks are the only place from which to get a loan.
In fact, there are many other organisations and institutions that are willing to assist with building your business.
Borrowing from microlenders
Microlenders are a viable option for entrepreneurs, and if you choose to explore this avenue, keep the following in mind:
- Entrepreneurs should never borrow from friends and family. That can damage relationships.
- Using one’s home loan should always be the first option as this is usually the most cost effective credit. However, even bond extensions have become harder to access.
- For ongoing needs, loans are better for those businesses with cash flow as they allow affordable repayment schedules, as well as those businesses that can obtain loans without jeopardising personal assets (such as with asset backed financing).The attraction of going outside the traditional banking sector, is that microlenders are less hampered by the liquidity rules of Basel III – though be warned their rates are often far higher.
- That leaves personal loans, also known as unsecured loans. While credit providers can charge as much as 31% interest, many charge far less.
- How can this fit into a business plan? Remember, this is a loan in your personal capacity rather than your business, and you have to keep a good lending track record with your bank. But the beauty of a personal loan is you can go wider than just your bank.
- There has been considerable concern expressed over the past year concerning double digit increases in the unsecured lending books of banks and microlenders, but this should be no concern provided entrepreneurs are fully aware of the difference between ‘good’ and ‘bad’ debt.Borrow for an education and it’s the wisest investment you could ever make. The same can apply to a business investment: for the person who has a sound business idea generating sufficient cash flow, and provided they are disciplined about repayments, a personal loan is definitely an option.
- Debt consolidation is a useful way to free up capital but only if the interest rate and fees of the new single loan are more favorable than the rates and fees of the individual loans before consolidation. Say you have five or six different accounts, with different terms and rates – consolidate them into a single account, with single payment and single rate.
It typically frees up capital, reduces the total monthly instalment, though of course the quantum of debt does not go away. This can be risky for the consumer, but wise for the businessman.
Advantage of a personal loan
It maintains ownership. When you borrow from the bank or another lender, you are obligated to make the agreed-upon payments on time.
But that is the end of your obligation to the lender.
A potential tax disadvantage
Tax is typically a huge advantage to a business loan – the cost of credit (interest and fees paid) is allowed as a tax deduction when calculating taxable income. However, with a personal loan you forgo that advantage.