The key thing to know about small business bank loans is that you are judged on your credit history. If you are starting a new business, the only point of reference that the bank has is your personal banking history.
Even a good personal history isn’t enough to give banks an idea of how responsible you are in business.
A business plan is a must
If you have a good credit history, before you approach the bank you will need a business plan and security before the banks will consider the application. However, the chances of success in raising money from commercial banks without collateral are very low.
How to fund the purchase of a business through a commercial bank
When buying a business, the first option usually is to contact traditional banks for finance. It all depends on the type of business and whether it is a new start-up or the taking over of an existing business.
Banks need some deposit as well as collateral. The deposit will depend on the type of business and the credit worthiness of the buyer.
The deposit can be as high as 50% of the purchase price. A finance deal can also be structured – stock can be financed with an overdraft and equipment either with a lease agreement or a hire purchase agreement. Financial institutions are not keen to finance goodwill.
How Bank Financing works
Banks take the following in to account when considering the financing of a business:
- Trading history of the business such as – How long in operation, how many previous owners, products to be sold, where located, customer base, reliability of suppliers, competition and lease agreement.
- The assets – equipment belonging to the business – will be used as collateral and thus the banks, as well as the buyer, must ensure that these are in good working order. As mentioned above, if the assets are new, these can be financed with a lease or hire purchase.
- Debtors and stock may be ceded to the bank as part of the collateral and thus the bank will need at least monthly certified debtors’ schedules.
- Every cent that any financial provider lent to a borrower must be repaid, plus interest on the capital. Because of this the banks will have to ensure that the business is profitable and will be able to meet the monthly repayments as well as be able to continue to provide an income for the owner.
- As a business and the owner are closely linked, the banks will ensure that the operator has the necessary skills and knowledge to run the type of business being bought. Whenever finance is applied for, the bank will need surety for the money lent. They must ensure that, should the business not succeed, the borrower will be responsible to repay the monies lent.
What is Debt Financing?
Debt financing is money that you borrow to run your business. Debt financing is simply money that you borrow to run your business. You can think of debt financing as being divided into two categories, based on the type of loan you are seeking: long term debt financing and short term debt financing.
Long Term Debt
Financing usually applies to assets your business is purchasing, such as equipment, buildings, land, or machinery. With long term debt financing, the scheduled repayment of the loan and the estimated useful life of the assets extends over more than one year.
Short Term Debt
Financing usually applies to money needed for the day-to-day operations of the business, such as purchasing inventory, supplies, or paying the wages of employees. Short term financing is referred to as an operating loan or short term loan because scheduled repayment takes place in less than one year. A line of credit is an example of short term debt financing.
Why do banks want signed contracts before granting a loan?
Banks loan money to small businesses that have a proven track record to showing that they are a good risk. Bankers also like things that can be verified, such as reference to a commitment such as a customer contract – if they can see a signed copy of a contract and confirm it with the customer; it helps provide the security that the bank is looking for.
How to get signed contracts
Promote your child transportation business to parents through schools, day care centres and churches. Develop a flier or brochure as well as a website for parents to be able to review your information. State your qualifications, including the fact that you have screened all drivers and have safe, reliable vehicles. Use testimonials and references to gain the trust of potential customers.
Don’t give up
Even if you have been rejected by the bank, don’t give up. Look for ways to mitigate the risk. You have time before the 2011 school year to find new clients and get signed contracts. With these contracts go back to the banks and try again. Ensure that you have a business plan to show them. As the business has been in operation for two years, you will also have a track record of success, which will serve as another tool to confirm that the business is worthy of further investment.
Make sure every aspect of the business is in place
When do approach the bank or other investors, you must have completed “due diligence”. A due diligence is an information-gathering and assessment process whereby a prospective financer looks at all aspects of your business, from top to bottom and inside out.
They’ll be checking the financials, profits, tax issues, projections, shareholders, staff issues, property and location, assets, debtors and creditors, the market to determine how viable the business is and whether it is worth investing in.
Secure liability insurance to cover your vehicles, your employees, and the children you will be transporting. Check that the business complies with government regulations and requirements.
What are the factors that may cause an application for funding to be rejected by a bank?
Banks consider affordability, they also place great emphasis on a comprehensive breakdown of the financial plan and the entrepreneur’s own contribution.Conflicting information on the business plan and supporting information calls the plan into question and finally, a poor credit rating does not bode well at all.
How Spartan Has Geared Their Business To Help Fund Yours
Spartan doesn’t just fund entrepreneurial businesses, it is an entrepreneurial business. Kumaran Padayachee, CEO, Spartan reveals this is why his team understands SME financing needs and the unique challenges founder-led businesses face.
Historically speaking, entrepreneurs don’t typically have the quantity and quality of collateral needed to secure debt finance. It was this realisation that led Spartan to develop and deliver a solution that would help SMEs to grow their businesses, even though they didn’t always meet the criteria of more traditional lending institutions.
“We understand that many business owners don’t want to go the equity funding route, selling shares in their businesses in exchange for funding. Without the collateral needed to secure debt funding however, this is often the only route available to them,” says Spartan CEO, Kumaran Padayachee.
“We decided to approach things from a different angle. To service this sector, you need to be flexible. The same rules don’t apply as they do for corporates. To achieve this, we’ve assembled a team that really understands SMEs, their inner workings, the finance they need and the terms that will give them the best ROI for the funding they receive — after all, the point of funding is to help your business grow, so ultimately that’s what it needs to achieve.”
Spartan’s offers financing
At its core, Spartan finances small businesses (fast-growing companies with R5 million to R10 million annual turnovers) and medium businesses (R10 million to hundreds of million in annual turnover).
Related: Financing That Backs Entrepreneurs
Spartan finances specialised asset finance (tech, software, plant and machinery, office fit out and furniture); working capital finance (bridging finance, medium term loans); and growth finance (expansion, BEE deals, acquisitions).
Working capital in particular is a big portion of what Spartan assists its clients in. “This is project and growth-related finance, and many of the enquiries are for working capital, for which there is a huge need in the SME landscape.”
What finance suits your business?
As a debt funder, Spartan’s team carefully evaluates what the finance will be used for, and if the return is greater than the repayments — in other words, does finance make financial sense for the business?
“There are numerous ways that finance can be applied incorrectly by SMEs,” says Kumaran. “One of the first flags we look for is debtors age. If the industry norm is payment in 30 days, but a business is typically paid by its clients in 60 or 120 days, then we know there is something wrong with their internal processes.
Either the company is too shy to be assertive with clients, or it lacks the capacity or capability to invoice clients and collect cash. Either way, the result is a shortage of cash. Business owners in this situation apply for cash in order to be able to pay the bills, when they should be reviewing their business, pulling one or two levers, and improving their cash flows.”
Growing your business with alternative funding methods
On the other hand, there are many situations where working capital and bridging finance can help a business to grow beyond its own, organic abilities.
“A customer project or contract that requires a new product line or opening a new branch are both positive, expansionary situations. The problem is that there’s a lead time gap. You need to start the project, spend cash to hire people or purchase equipment, build internal capacity, deliver on the project and then the customer only pays you. Working capital and bridging finance allow the entrepreneur to do just that, and the company grows as a result.”
Bridging finance in particular is high risk and requires a large amount of flexibility, which is why more traditional funding institutions shy away from it. Spartan on the other hand offers revolving bridging loans to customers the team has worked with. “We understand this space, and our aim is to support the entrepreneurs within it,” Kumaran concludes.
Alternative finance solutions
Spartan is an Alternative Finance company that specialises in financing Small and Mid-sized businesses by providing: Growth Finance (structured finance for expansion); Specialised Asset Finance (equipment/machinery/technology/software/office fit-outs/energy/etc.) and Working Capital Finance (bridging finance & medium term loans).
Bridging Finance is available for one to three month terms and is ideal for contract or project-based businesses. It is a solution that assists businesses with solving cash flow issues due to growth-related challenges in their business and is either for a once-off need or for revolving business use.
Spartan is an Authorised Financial Services Provider 47631 and Registered Credit Provider NCRCP8669. e finance solutions.
What do I need to do in order to get a successful crowd funding campaign?
Advice on getting the gold you need for your crowd funding campaign.
I recently read through crowd funding and though this might be of benefit to me. What do I need to do in order to get a successful crowd funding campaign?
70 percent of most crowd funding campaigns never reach their funding laid out plan. If you only reach a portion of your desired pledge amount all donated funds are then returned to investors once your campaign date is up. Do your homework and make your campaign count.
To get the best out of your campaign, I would strongly advise you do the following:
- Lay out your plan way in advance
- Keep a proper and well-articulated business plan
- Create a compelling story.
- Use the social media and start a social media campaign
- Frequently promote your fundraiser, connect and interact
- Dish out rewards and incentives
- To go viral, go for educative, informative and entertaining videos
- Be more than unique and creative as more exposure will translate to more potential pledges
- Choose the right crowd funding site for you.
- Know and understand your end target audience
Where can I turn when banks are not helping?
Getting bank finance for my restaurant is almost impossible.
Getting bank finance for my restaurant is almost impossible. How else can I access the funding that I need?
Most small businesses will experience a cash flow challenge at some point during the next 12 months and raising capital from traditional banks is becoming a real challenge. Conservative lending policies and onerous application processes mean that finance applications can take up to twelve weeks or longer.
Banks require significant securities, which many business owners are unable to meet. In short, banks are making it very tough for small businesses.
The business cash advance
For businesses that accept credit or debit cards as a form of payment for their goods and services (termed merchants), the business cash advance is now available as alternative source of funding.
In simple terms, a business cash advance offers the merchant an upfront advance to buy a discounted amount of future business turnover. For example, you may be advanced R80,000 for R100,000 of future turnover, so the fees can be easily calculated as R20,000.
The payback is an agreed percentage of your turnover, paid daily until the full amount is paid across. Payback increases and drops with your business turnover and the smaller daily payments are often easier than monthly fixed instalments.
Quicker turn-around and more accessible
Comparing it to a bank loan, the business cash advance is more accessible, operates over a shorter term and requires no personal security. It is also much faster, typically available within two weeks.
The advance amount is based on historical credit and debit card sales and pay overs are daily. The costs are fully transparent and there are no penalties for late payments or extended payback. However, accessibility, flexibility and convenience come at higher cost than traditional bank lending products.
As with any financial product, it is important that the benefits gained from using the money are more than the costs, so it is important to have a good purpose for the funding and carefully consider the available options.
Over the last three years, the business cash advance has becoming more main-stream and this funding is used by business with a relatively high card turnover, such as restaurants, retailers, beauty salons, supermarkets, convenience stores etc.
What to use the advance for
The advance is typically used for a business opportunity, such as expansion, new stock, new equipment, marketing etc. Alternatively, it also offers through a difficult trading period or to cover an unexpected expense such as equipment failure when the money is needed quickly.
Small businesses are a vital part of the South African economy, contributing over 65% of South Africa’s employment and over 50% of GDP – accessing funding is imperative for these businesses to survive and grow.
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