Entrepreneurs often bemoan the lack of finance available to them from the banks for their start-ups. “The problem in South Africa is not lack of funding,” says Marcel Klaassen, CEO of Biznetwork, a division of FNB Commercial that supports entrepreneurs. “The real issue is that many people start a new venture without really understanding how funding works.”
Klaassen says entrepreneurs need to understand the business of their investors, including their appetite for risk, where their funding comes from, the specific industries in which they operate, the application procedures, and the terms on which funding is granted. The requirements of the National Credit Act also have to be taken into account as the act prevents reckless lending.“When we look at a start-up, it’s not that we do not want to lend money to the business, it’s that the business has a much higher risk of failure than any financier would be comfortable with, simply because there is no track record,” says Simone Cooper, Standard Bank’s head of lending for small business. “We have a responsibility to protect our depositors’ and shareholders’ money, so we will scrutinise an application from a new business owner in great detail.” When banks lend money to a start-up, the chance of getting it back is small. It’s one of the reasons why all banks prefer the entrepreneur to put their own skin in the game. “We have found that many entrepreneurs expect the financier to take all the risk. It doesn’t work that way.
“If you own an asset, such as property, you should be prepared to use that as collateral. That goes a long way towards demonstrating your own belief in your venture,” says Cooper.Klaassen agrees. “The owner’s contribution demonstrates commitment, but it also shows what possible collateral is available to the bank, which thus reduces the bank’s risk.” He stresses the importance of a comprehensive business plan as part of an application for finance. “To understand the business case, we want to see that applicants know all the risk factors, including industry, management and owner skills, products and services offered, target market, suppliers, competitors and other elements that could impact on the business. “The business should be viable and future prospects going forward should look promising.”
There are many ways to secure finance from the bank other than a straightforward loan. “The entrepreneur needs to understand the different financial requirements of the business,” says Klaassen. “These include cash flow, capital expenditure, working capital and other needs. There are a number of options available.”
These options include business credit cards, raising funds against your residential property (such as a home loan), Khula-backed business loans, leverage finance loans, commercial property finance loans, vehicle finance and franchise loans. In the case of asset finance, for items like vehicles or machinery, you can secure finance through the item itself. Naturally, your ability to repay the loan for the car, truck or equipment must be demonstrable. “It’s possible to secure short-term funding such as an overdraft for working capital, or funds from your business credit card. This can give you up to three months’ worth of cash that you need to pay salaries, for example,” says Cooper.
Debtor financing is another option. If you have a book of people who owe you money, the bank will lend you a percentage of that figure, but it’s an option available to established businesses only. Apart from standard commercial lending mechanisms, many banks also offer solutions for start-ups. Nedbank has an entrepreneurial development proposition aimed at the emerging black business market (ventures that are 25,1% and more black-owned). “These entrepreneurs were finding it difficult to get finance so we developed a product that gives them another chance to secure a loan,” says Mark Rose, head, new business development, Nedbank Business Banking. “We structure highly flexible loans specifically for them, so that they do not end up with a massive debt burden. As part of the package, they receive guidance and mentoring.”
A solid track record
A good credit record gives an entrepreneur access to unfettered funding, sometimes without having to provide security for credit, Klaassen explains. “A credit record is an indication of the tenure, responsibility, behavioural patterns and trust established in a relationship. When a business has a history of operating successfully, creditability is established. Also, banks use the business owner’s behavioural data in their credit scoring models. Credit bureau ratings are a major factor in any credit decision, and a poor track record will disqualify a business from receiving funding.”
Trust is a key requirement in any relationship. Banking professionals stress that entrepreneurs must build a solid relationship with their banks, based on open and honest communication. It’s advisable to choose a bank for your business and stick with it. Developing that relationship over time plays a critical role in establishing that all-important track record.
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.
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:
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.
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.
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.
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.
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.
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.
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.
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.
(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.
- 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.
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.
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