At some point, every small business will require some form of credit which will be instrumental in enabling it to grow to the next level.
Valentine Jingura, Head of Pricing at FNB Business, says without knowing and understanding the different forms of loans or funding mechanisms available, SMEs won’t be able to fully leverage credit to scale-up their businesses.
“Certain loans are suited for specific uses depending on the nature of the business and its requirements,” adds Jingura, as he unpacks different forms of loans:
Alternate funding options – entrepreneurs often mistakenly assume that credit from banks is suitable for all their needs. In some instances your own equity, loans from private investors, family and friends, government funding and grants from Corporate Enterprise and Supplier Development Programmes (ESD) may be more suitable for early stage funding.
Secured – businesses are required to provide some form of collateral which financial institutions can use as security for the loan amount being provided. Security can be physical assets like property or financial instruments such as a savings account or share portfolio.
Unsecured – this form of loan requires no collateral. The loan is granted based on the business’ financial standing and ability to repay the loan in the future. For example, short-term credit for an emergency or unforeseen event.
Credit facility – allows the business the flexibility to withdraw, repay and re-use credit at its convenience. i.e. a business credit card or overdraft.
Commercial property finance – this type of loan is used to finance the building or premises where the business will operate. i.e. a small office or large warehouse.
Asset finance – is used to finance business equipment, vehicles and machinery.
When applying for credit it is essential for entrepreneurs to understand what lenders lookout for when reviewing a credit application. This can be practically achieved by answering these questions:
- How much money is needed and what for?
- Does the business have a good credit standing or collateral if required?
- Does the business understand its current vs future cashflow – and has the affordability of the loan instalments been stress tested?
- How quickly will the loan be paid back?
“Before deciding on the type of loan you need to do your research and speak to your banker or expert to ensure you are utilising the best form of credit for your business,” concludes Jingura.