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Bank Loan: Balance Risk with Reward

Banks will loan money if they believe entrepreneurs can service the loan.

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The Investees

Start-up 1

Pieter van der Berg,  Bloem United Motor Spares

Start-up 2

Confidence Tale, Brides with Confidence

Pieter Van Den Berg applied for a loan with a local bank to buy stock for his new business, Bloem United Motorspares but was denied due to a lack of credit history. He then approached FNB, who he had banked with for 36 years.

Pieter visited his branch and spoke to the small business development representative who informed him that he needed to submit a business plan which included a breakdown of what he needed the money for. According to Pieter he applied for a loan of R750 000, but was only given R200 000.

The bank said that its investment would grow with his business.

Confidence Tlale’s plan to start her own business by purchasing a franchise improved her chances of securing a loan from the bank. She was approved as a franchisee to buy a Scarlett Bridal and Evening Wear franchise, trading as Brides With Confidence, but while she had significant savings, it wasn’t enough.

Motivating the bank loan

In order for his business plan to be comprehensive, Pieter had to do thorough research into the amount he needed. This meant he had to find out the prices of all the stock he planned to purchase. “It’s not cheap to start a business,” he adds.

Pieter had bought the business with his own money, so the bank didn’t require a deposit for the loan. He wasn’t worried about not being able to make the monthly repayments to the bank as he knew that his business was capable of servicing the bank finance. His advice to other start-ups approaching the bank for finance is to make sure that your business is viable and able to repay the loan.

A proven concept

Confidence says she always made sure that she had a clear credit history, never missing any payments. Before she asked the bank for money she also made sure all her accounts were paid up. She believes the money she had saved was a great help in securing the loan as she didn’t have a house in her name to offer as security.

She first approached other funding institutions, but they took too long, so she approached FNB and opened a business account. She explained her business idea to the bank and learnt what was required of her to secure a loan of R300 000. Confidence paid R200 000 of her own money towards purchasing the franchise.

She had to provide a number of documents, including a marriage certificate, life cover, CV, projected figures for her business, proof of residence and a business plan. “I made sure all the information was included in my profile. I couldn’t take no for an answer and would do anything, even go to Cape Town to get one signature if necessary,” she says.

Improving your chances

To other start-ups she advises that you practice patience because if you don’t love what you do, it’s easy to give up. She also says you should make sure your documentation is correct and that you know your business well enough to answer any questions about it.

The investor

FNB

Sanjeev Orie, head of acquisitions, Business Banking at FNB, explains that the key concern for banks is risk. A bank has to uncover whether or not it is possible for the client to repay the loan.

In Pieter’s case, FNB believed he had the right skills set to make his business work. He also had some money saved and a number of properties which could be used as security. This presented a lower degree of risk for the bank. However, his financials could not be audited, so the bank wouldn’t grant the loan for the full amount he applied for.

Confidence, explains Sanjeev, was buying a franchise, which is regarded as less risky, as it presents something that can be liquidated if repayments are not honoured. A franchisee also has the support of the franchisor which prevents them from making the basic mistakes of many start-ups.

A bank will look at an entrepreneur’s personal profile as the first point of departure, checking whether or not they are paying on time. Pieter’s 36 year history with FNB made it easier for the bank to get this information and helped to convince the bank that the amount of risk was minimal. “If you do not have a financial footprint, the bank will assume the worst in terms of risk,” he adds.

Sanjeev advises that start-ups start small as there is a better chance of securing a loan between R5 000 and R10 000 than  one of R150 000. When applying for a loan from the bank he advises that you submit a well constructed business case describing the problem you have identified as well as the readily available market.

“You can’t sell if you have not researched the customers and price points. Put yourself in the shoes of someone in the branch,” he says. He also points out that you will be required to submit supporting documents to back up the information you have about your customers, the market, competitors, pricing, how much money you expect to make and the different scenarios.

First understanding, then funding

While other investors consider the return they will get when a company succeeds, Sanjeev says a bank looks at risk. He explains that FNB follows three key steps in understanding what the customer’s business is about and what the customer needs.

1. Desirability test. Does the bank  want to be associated with a particular business? It will look at the business concept and whether or not it is ethically sound.

2. Transaction approach. This involves understanding the business versus the security it requires. If the entrepreneur has a groundbreaking idea, the bank is more willing to take on the risk of providing finance with less security.

3. Risk factors. The bank will look at a number of parameters to determine the level of risk, including the business owner’s performance and the collateral that can be provided. Another important factor is the timeline for the business to become cash generative and able to service the loan.

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Bank Finance

The Ups And Downs Of Borrowing From The Bank

New businesses need access to funds, and banks are usually the first place that business owners approach.

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New businesses need access to funds, and banks are usually the first place that business owners approach. 

But getting a bank loan is not that easy as very few entrepreneurs fit the strict criteria that banks set. While some banks are trying to make it easier for SMEs to get loans, it is generally a lengthy process and will test your patience as you will be required to provide a wad of information. 

Here are the pros and cons of approaching a bank for a loan:

THE UPSIDE 

1. Familiarity

Most of us have bank accounts and we are accustomed to and comfortable with our bank as our financial institution, so it is natural that we will usually think of this option first when looking for a loan.

There is some comfort to be had in knowing you will be probably be treated fairly by a big institution.

Related: Funding Solutions That Support Business Cash Flow

2. Choice

For new business owners and entrepreneurs, the banks have a variety of good loan plans to suit various SME needs. Check carefully – banks make their money from the interest charged on these loans, so make sure you know and understand the repayment terms of the loan plan you choose. 

3. No ulterior motives

A bank loan is granted purely for the interest the bank will earn from the loan. Banks will not demand part ownership, decision-making powers, or a share of your profits, leaving you in peace to run your business. 

4. Lower interest

Bank loans often have a much lower interest rate than other options like credit cards and last-resort money lenders.

5. Tax advantages

If you get a loan from a bank, your tax charges may reduce because the percentage of profit that is used to repay the loan is exempt from tax. 

cons-of-bank-finance

THE DOWNSIDE

1. It’s Complicated

The mere volume of detail that banks require to consider extending a loan is problematic for many entrepreneurs. The process can be extremely frustrating and time-consuming. Be prepared for a lot of back-and-forth before the loan is granted! 

2. Banks prefer to lend to functional businesses

Because it is easier to calculate credit history and profitability, banks give preference to businesses that are established and running. If you are trying to fund a start-up, you are not a preferred client, so be prepared for an uphill battle. 

Related: 6 Rookie Investor Mistakes You Must Avoid For Profitable Investing

3. The arduous business of qualifying

It is not always possible to live up to the standards that the banks expect in order to qualify you for a loan. Their list of conditions is long and tedious.

Make sure your financials and other relevant documents are as comprehensive as possible. 

4. Added Risk

Usually when taking out a bank loan, you need to put up some collateral – like your house! If you do this and run into trouble later, this collateral could potentially be lost. Do not fall into the trap of being so positive about your business prospects that you think this will never happen. 

5. It takes so long

The application for a bank loan tends to be a long, drawn-out affair. Banks need to verify every detail, and this can considerably delay the application process. The more information and supporting documents you have, the better, but be prepared for delays. 

6. Only a part loan may be granted

It is not uncommon for banks to grant a loan that is just a percentage of the amount requested by the business owner. This can be quite a set-back and you need to think about whether it is worth going through the application process with more than one lender to get the full amount you need.

7. Other options

There are other options out there, including innovative funding solutions. While many small business owners start off their search for funding with their bank, it may be worthwhile to do some research into whether there are easier options which are more applicable to your business, or to your stage of business development.

But be careful – make sure your repayments are sustainable as interest or repayment rates may be higher than those of the banks.

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Bank Finance

Why Banks Should Focus On Leveraging Trust To Maintain Its Space In Finance

Remaining relevant in the digitally savvy world of cutting-edge fintech solutions is an important consideration for banks. It is also one which should be prioritised, if financial institutions want to avoid losing their place in the market.

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Banks have, arguably, built a proud legacy of trust, which has long secured its place and relevance in the world.

That could change, however, particularly if banks don’t embrace the demands of digitally savvy consumers, and contend more imaginatively with the cutting-edge alternative fintech solutions that are vying for the top spot.

The legacy of trust

Banks’ roles in managing and securely storing funds for individuals and businesses was long uncontested. Admittedly, consumers’ options may have been limited, but financial institutions excelled in what they did, and built long-lasting relationships with customers. This is evident in customer loyalty statistics.

Related: Developing Partnerships With Fintech Innovators

The advent of the Internet and online banking services has shifted how people interact with their banks. As the technology becomes more user friendly and security becomes less of a barrier, more people are willing to engage with their financial institutions in this way, managing their finances remotely.

Their willingness to do so is testament to the trust their banks inspire, and the work they have done to promote new channels of communication and transacting.

This technological shift has been beneficial to banks that have embraced it. Online and mobile banking offer vastly reduced costs incurred by banks, through limiting the number of more costly in-branch transactions. The next shift is unlikely to be quite as positive, unless financial institutions look ahead and adapt.

The rise of a new generation

Although the current trend seems to be towards alternative banking solutions growing in popularity, when it comes to storing or investing large sums of money, the trust held in the more traditional financial institutions has largely endured.

This may, however, be shifting as the younger, more tech-savvy generation becomes the driving force of the economy.

Consumer scepticism of new fintech solutions will almost certainly diminish, and no longer will slow adoption of new banking and payments platforms be a challenge. The younger generation has grown up with digital technology and applies it to all aspects of daily life, without many doubts over security or privacy.

Related: South Africa Is Becoming Africa’s Fintech Hub

As this becomes the norm, the window of opportunity for banks grows smaller. Holding on to traditional banking and outdated approaches will only result in banks stagnating; giving rise to its greatest fear – becoming obsolete.

To prevent being locked out as the window closes, financial institutions must leverage the trust that is still its trump card, by providing innovative value-added services that engage older and younger generations in all sorts of new ways, daily.

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Bank Finance

(Directory) Private Sector Funding

We always have to remind ourselves that these are profit-orientated entities with a well-structured risk management model in place. Some of the offerings are more flexible than others, but keep in mind, they are also businesses.

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ABSA Absa Logo

Offering

  • Business revolving loans (loans without re-application)
  • Working capital solutions (cash flow assistance)
  • Business overdrafts (no loan applications)
  • Term loans (term loans for purchasing assets, eg. equipment)
  • Development credit fund for those without sufficient security or collateral
  • Absa Enterprise Fund (for 100% black entrepreneurs)
  • Debtor financing.

Requirements

Each offering contains very specific requirements and documents to complete. Collateral and surety are embedded requirements, but have a look at the new Development Credit Fund.

Contact

Call: 0860 040 302

www.absa.co.za

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