Teboho Nkwanyana is a successful South African business owner who makes a significant contribution to the economy. His business, the Salad Bar, doubled turnover from one year to the next, hiring more employees as it leaps from surge after surge of growth.

But when it came to getting a business loan, none of that was enough.

When Nkwanyana approached his bank for a business loan, the application process was difficult and drawn-out.

“I applied for a business loan to my bank several times. Each time there was either no response or a decline with no reasons.”

Nkwanyana’s story reflects a struggle shared by many SMEs.

South African business owners say there’s been little improvement in access to SME finance, according to a 2018 study by the South African Banking Association.

For many SMEs, part of the problem is finding the right information.

We’ve pulled together this compact guide to cover the most common questions around applying for a business loan to South African banks and alternative funders.

Our guide covers:

  • How to select the best business loan for your SME
  • How to qualify for a business loan
  • How to apply for a business loan
  • How to pay back your business loan

If you’re in a rush, here’s a summary of the key steps in the business loan application process:

  1. Decide on what you need from a business loan
  2. Determine the minimum requirements to see if you qualify, e.g., collateral, credit score
  3. Gather all the relevant documents
  4. Study the repayment terms
  5. Apply

Decide on what you need from a business loan

So, you need a business loan. If you’re battling to find the right one, you’re not alone.

In South Africa, SMEs can choose from 146 funders offering 328 different types of business loans and funding, report this study.

You might think all that choice makes getting a business loan easy.

In truth, it’s even harder.

Too many businesses are rejected because they’re applying for the wrong type of finance, suggests research.

Figuring out your funding need is the first step in the business loan application process, explains Garth Rossiter, Lulalend’s Chief Risk Officer.

“You want to use your business loan for the right reasons: to grow your SME. Start by understanding your business’s financial needs.”

Begin with the following questions, said Rossiter.

  • When do I need cash flow?

Timing is key; for instance, if you need a business loan to cover late payments, unexpected expenses, or to service a new contract.

As Nkwanyana tells us:

“In some cases, you need an overnight facility. You’re waiting for the invoice to be released, and you only need funds for a few hours.”

Are there spikes and dips in business activity? Perhaps, your business is seasonal. Study the forces that influence when you’d need business finance.

  • Why do I need cash flow?

Let’s take a closer look at the common reasons SMEs seek business loans. Aside from startup costs, most requests are for equipment finance and business expansion, according to a FinFind study.

  • List the eligible business loan providers

Take the insights you gain during the first two steps and start listing the financial institutions who offer the business loans you need.

Each of these steps will help you clarify your goals, assess your business’s financial health, and manage any shortcomings.

How to qualify for a business loan

If you search for a business loan online, you’ll be confronted by a staggering number of results: 1.5 billion, to be exact.

And though banks still dominate as finance sources for SMEs, the International Finance Corporation (IFC) finds other business loan providers have started to appeal to business owners who are searching for fast, easy ways to access finance. (The IFC, a member of the World Bank Group, works with the private sector in developed countries to expand access to economic opportunities. They are a Lulalend investor.)

As you’ll see later in this guide, business loan requirements depend on the lender. To speed up the process, speak to the funder before you apply, recommends the South African Enterprise Development Agency (SEDA).

“Before you make an application for finance, talk to the lender about exactly what sort of information they require – so that you can get a response to your application as quickly as possible.”

We’ll go through the key requirements here.

Credit score

What’s your credit score? Understanding your business credit worthiness is a great practice in general. But it’s especially important if you’re planning to take out a business loan.

Lenders will base their decisions, in part, on your credit rating.

Once you submit your business loan application, lenders will access data about your credit history from the credit bureaus.

There are indicators that influence your credit rating, and these include:

  • Your current levels of debt
  • Your payment history

Rossiter explained how a positive payment history influenced your credit rating.

“It’s important to maintain a good repayment history on long-standing accounts”

But, not all debt was good for your credit rating.

“High-risk personal funding negatively impacts your credit rating.”

In short: credit scores matter, but they’re not the only indicators lenders use to assess risk.

Alternative lenders use several data sources to make a credit judgement.

“Because fintech uses scoring technology to make an assessment, they use several data sources to assess a business owner’s eligibility,” said Rossiter.

What’s a good credit score to get a business loan?

There’s a lot of focus on personal credit scores when it comes to business loans.

Truth is, these personal credit scores are usually only one of several factors considered when lenders determine your business credit score.

However, a poor personal credit score will work against you.

Typically, between 640 to 700 is a good personal credit score. And higher scores mean lower risk.

Here’s a quick guide to personal credit ratings (ranges will vary depending on credit bureaus):

  • 700+: the best rating you can achieve. This is considered a very good to excellent rating.
  • 660+: a good credit rating, where you can access a wide range of deals
  • 620 to 659: you might struggle to get finance if you are in this range, but getting a business loan is still possible
  • Below 620: this is a score most lenders would see as high-risk. It might be worth rebuilding your credit score before you apply for a business loan

Here’s the caveat: your personal credit score and your business credit score are not one and the same.

If you’re applying for a business loan, your personal credit score may be considered along with several other assessment criteria. Lenders are rating your business. And your personal score is just a single data point they might take into account when they model your risk.

Collateral

Has your business loan been rejected because of a lack of physical collateral?

A lack of collateral is among the most common problems facing SMEs on the hunt for a business loan, writes Marek Dubovec and Louise Gullifer in Secured Transactions Law Reform in Africa. 

Collateral is required by the bank to guarantee they will recover the money if you can’t pay back a business loan. Once you put up an asset as collateral, you’re giving the lender permission to claim that asset via the courts.

FinFind provides an overview of the legal obligations that come with collateral for business loans.

“…you CANNOT sell that asset without the written consent of the lender. Once the loan has been repaid in full, the lender no longer has a claim to the asset and you are free to sell it if you wish.”

Examples of physical collateral include:

  • Equipment
  • Real estate
  • Vehicles
  • Stock

A study into business lending in Africa found because SMEs were perceived as a higher credit risk, banks typically demanded valuable assets as collateral.

Plus, the lender will often value your assets for far less than they’re actually worth. That’s because the funder will be saddled with the costs of selling the assets, reports FinFind. These costs include:

  • Administration costs, e.g., determining which assets need to be sold and the interest fees
  • Finding a buyer, e.g., auction costs or advertising costs
  • Transfer of ownership, e.g., depending on the asset, there’s administration involved in the sale

The problem with this approach is obvious, explains Rossiter:

“Many SMEs don’t have access to physical collateral. But they have good cash flow.”

No collateral? You still have options.

More and more funders are offering unsecured business loans.

Some banks will waive the need for collateral if you have a purchase order. And most fintechs lenders don’t require collateral.

Time of operating

Nearly every type of business loan provider cites time in business as a critical requirement.

Typically, this excludes business owners who have only been operating for a few years. Fintech providers usually have less stringent requirements. If you have a trading history of one year, you’ll meet the minimum requirements.

Annual revenue

Most business loan providers will have set minimum revenue requirements. This differs from lender to lender.

Business loan minimum requirements

We contacted the banks to learn about the minimum requirements.

FNB business loan requirements

  • 12-months turnover in a business account
  • No unpaid debits on your account
  • Good personal credit rating

ABSA business loan requirements

  • Minimum affordability to be determined based on your financial statements
  • Additional security might be required depending your credit assessment

Nedbank cash advance requirements

  • Two years operating history
  • Nedbank merchant for at least three months
  • Business turnover of R1m and above
  • One-year transactional history

Capitec

  • Earn a monthly salary from your business
  • Sole traders not eligible

Lulalend

You only need one year trading history and R500 000 annual turnover.

Once you’ve met the minimum requirements, it’s time to submit your application.

Financial documents

For this next step, you need to gather the right documents.

And while this sounds like the easy part, it’s one of the biggest reasons business owners get declined.

We’ve broken down the documents you need, by a business loan provider.

Business loan types vary from bank to bank, so we focused on the loans marketed specifically to SMEs. For instance, we looked at Nedbank’s unsecured loans, which is based on your turnover.

Capitec

  • South African ID
  • Three-months salary slips (only SMEs who get a salary from their business are eligible)
  • Three months bank statement

FNB

  • 6 months bank statements
  • Annual financial statements
  • Year-to-date management accounts
  • Cash flow statements
  • Income statements
  • Balance sheets
  • Business plan

ABSA

  • South African ID
  • Notice of incorporation
  • Registration certificate
  • Shareholder certificate
  • 6 months bank statements (if you’re not an ABSA client)
  • All directors to be present to sign application

Nedbank

  • One-year transactional history
  • Pro forma invoice demonstrating intended use of funds, up to 70% of the advance value

Lulalend

  • Only three months bank statements or management accounts

Is it hard to get a business loan?

By this time, you might be thinking it’s close to impossible to obtain a business loan.

We’re going to tackle this question on two fronts:

  1. Ease of application
  2. Likelihood of approval

To start, we contacted each of the banks to assess the ease of application.

Depending on whether or not you have an existing business or personal account with the bank, you’ll have different application options.

  • ABSA

The virtual banker will send the application forms to you. Plus, a banker will help you with the application telephonically.

  • Capitec

Apply in-branch

  • FNB

Apply online if you’re an existing customer. Request a call back or apply in-branch if you have no relationship with the bank.

  • Nedbank

If you have an existing account with Nedbank, your relationship manager will help you with the application. If not, you’ll need to visit the branch.

  • Lulalend

Applications with fintechs like Lulalend take just minutes. The process is fully online and you get an instant decision.

Now, how likely is it you’ll get that business loan?

We’re going to be honest, it’s not easy.

Let’s take a look at this statistic:

75% of credit applications by SMEs are rejected, according to an estimate cited by the IFC. 

It’s why there’s a funding gap—the shortfall between SMEs request and the finance approved—

of between R86 billion to R386 billion.

SMEs battle to get business loans from traditional funders in particular, according to research gathered by the Small Enterprise Finance Agency (Sefa):

“Given their highly conservative nature, South African banks and lenders are more inclined to put resources in small businesses in their later stages of development. They are less likely to lend to start-up SMMEs…”

For Nkwanyana, accessing quick working capital was a struggle even when he was growing fast.

“Banks aren’t cut out for SME funding. They’re not looking at what your business really needs. They’re scoring you, but you don’t know much about the scorecard.”

Rossiter added:

“Traditional funders assess risk in a way that is not always designed for SMEs. It’s why approval rates are far lower. Alternative funders are meeting this gap, because their risk model is built specifically for SMEs.”

Paying back your business loan

Before you submit your application, read the terms and conditions, advises Rossiter.

Think about this question: for how long will you need the money?

If you think you might want to pay your loan quickly, prioritise funding that doesn’t come with early settlement charges.

“Ask about early settlement or prepayment costs. You need your funding to be as flexible as your business. Can you settle early? What if you only need the funding for a day or two?”

Others, like Standard Bank for instance, will require three months written notice if you want to settle early. And you’ll still have to cover the interest due.

What is the business loan interest rate in South Africa?

The current prime lending rate, as of February 2020, is 9.75%.

What this means is that the amount your pay usually fluctuates along with that interest rate. The interest rate is determined by the South African Reserve Bank’s Monetary Policy Committee.

Some business loan providers charged a fixed cost for business funding.

Applying for a business loan

It’s easy to see the business loan application process as an obstacle: a barrier between you and achieving your goals.

But, it doesn’t need to be that way.

Start by gaining insight into your business. When and why do you need cash flow? Once you’ve successfully answered those questions, you’ll be in the best position to secure a business loan that propels your SME forward.

Considering alternative finance?

At Lulalend, we’re on a mission to make it easy to get funding to grow.

Today, Nkwanyana looks forward to achieving new milestones in his business.

“Getting funding from Lulalend was straightforward. That’s the difference. They look at what your business needs.”

Get a free quote within minutes today. It’s the easiest way to access up to R1.5million in business finance.

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