Business Loans in South Africa
The importance of finance in the business world is traced to the success of the company, this range from growth, facilitation of working capital, and other business supplies.
When running a business, the financial management team and the executive directors have an essential role in striking the right capital mix depending on the business phase and economic cycle.
Businesses go through phases of recessions and growth, and these can be traced to the shrinkage of the markets, political situations, and other unforeseen events. When events turn to be unfavorable for a company, the risk of a financial recession can be mitigated by the use of a business loan.
What are business loans?
Business loans are financial credits extended by financial institutions to corporations and sole traders for financing business activities.
Business loans have a significant variation from personal loans, short-term loans, and quick loans. Companies and business set-ups also experience financial shortages and recessions that need funding from external players. The lenders could be large investment corporations, banking institutions, or other companies that have an investment interest in the specific line of business.
Business loans are at all times more abundant than personal loans and come in the form of long-term investments that are issued at low-interest rates.
The notion which financial institutions hold for businesses is that corporates have low risk and so they have a low default as compared to individuals. In most cases, businesses are issued with loans and financial products that are secured, and the collateral is usually part of the property, plant, and equipment owned by the company.
The large size of business loans has influenced the length of terms of the loans. The business loans come in the form of a loan, debentures, tradable/convertible loan stock, and preference shares these are long term debt finance.
The instruments are primarily useful in financing the working capital element of the business. The tools include treasury bills, bankers acceptances, commercial paper, and money market mutual funds.
Why business loans?
The fathers of economics and finance have made extensive researches and designed models that illustrate the need for loan finance in a business.
Whether the business is performing well or going through financial difficulties, there is a point where a business loan will help the company to realize maximum profits.
The Markowitz Portfolio theory has made many headlines for striking a balance between the maximum debt and share capital. The company needs to maximize return at the same time, minimizing risk. This means that managers have a role of finding relevant and sufficient debt finance.
The common reasons for the utilization of business loans can be one of the following
There are two ways in which companies or business corporations can finance their growth, which is through saving business profits that accumulate as reserves or sourcing funds from external financial institutions that provide business loans.
The use of reserves can only be done when the company or business corporation is large and has managed to earn enough profits to set aside, but in events where the company is a small business, the loan can facilitate growth.
Business loans will help a corporation with the finance needed to acquire property plant and equipment, and these are the fixed assets required for the business to increase its operational capacity.
WORKING CAPITAL FUNDING
In finance, working capital is generally referred to as the blood of a business, which means without enough working capital, all companies will find it difficult to survive.
Working capital includes stocks, cash, and prepayments that the business use in its daily activities. Business loans present an undisputed opportunity for companies to rejuvenate their working capital, giving them an advantage over other companies.
Thus business loans have an important role when a company faces problems.
MAXIMIZING DEBT FINANCE OPPORTUNITIES
As mentioned earlier in the Markovits theory, there is a point where businesses need to use debt finance in its operations. This is the strike between the optimum debt capital and share capital.
The reason behind the optimum capital levels is that, when the company is making large profits, the use of debt capital can multiply the benefits. While using debt finance or business loans will increase losses when the company is performing.
If the cost of a business loan is smaller than the return on capital employed by the business, the business will enjoy a financial advantage on business loans.
Where to obtain business loans?
Unlike personal loans, business loans are accessible from only large institutions, and these might be banks, investment corporations, and active companies.
The more abundant sized nature of business loans is a significant restriction on providers of the loans, and so there is not much of foul play. Due to the reason that business loans are large-sized, a company needs to develop an interest in the borrower’s operations before they can put in their financial resources.
The National Credit Regulator’s provisions for determining the business loan providers do not play a significant role in the business loan sector. Business loans are generally issued by active companies that have business interests in the company.
When a company is a sole trader and looking to obtain a start-up loan, there is a large number of companies that can provide business loans. These companies include Cashflow Capital, TC Business, and Business Fuel.
What sizes are business loans available?
The financial requirements of a company of a business corporation are very high as compared to individuals. The purchase of property, plant, and equipment for commercial use calls for large amounts. Unlike in the personal finance area where costs are involved will be in thousands, business loans usually include millions of Rands. According to the research performed by the University of Pretoria. Business loans in the 21st century were issued on spared ranges with minimum amounts being R250 000, with more substantial corporations obtaining as large as R3 billion.
Does business loans consider responsible lending?
Yes, business loans consider the principles of responsible lending. Similar to personal loans business loans are issued to companies or sole traders that have the willingness and ability to repay the loan.
The difference in the responsible lending of business loans and personal loans is how the credit performance is done. Businesses do not base credit assessments on the information of credit bureaus. The credit analysts employed by financial institutions will perform a thorough credit assessment that includes visits to the corporate premises and analysis of corporate results.
When engaging in business loans, financial institutions perform responsible lending and credit assessment for their reason for mitigating the default risk involved with lending. Unlike personal loans where responsible lending is enforced, in business lending, inadequate credit assessment costs the lender more than it does to the borrower.
What is the cost of a business loan?
A business loan represents a significant investment that a financial institution undertakes within a corporation or sole trader.
This means that the investor (lender) will need some financial gain that works to cover the time value of money, consequently releasing a premium for the risk that the lender gets exposed to. Unlike personal loans business loans have varying costs, there are no service fees and administration fees since loaning will be the principal activity of the lender.
Initiation fees are once-off fees that investment companies charge on the initial facilitation of business loans. Initiation fees are generally in the same size for all sizes of business loans issued by the same corporation.
In addition to initiation fees, business charge interest rates, which represent the return on investment to the financial institutions. Interest rates on business loans are rarely charged from a simple interest basis. Most investment firms apply compound interest rates, which are the interest costs determined by the balance of the loan have.
Business loans also do not charge penalties as the compound interest rates accumulate additional value on the balance of the loan.
Can a business loan be used for personal funds?
No, business loans cannot be used for personal needs. The companies incriminate the use of corporate funds for personal reasons.
Directors and top officials for companies should work in line with principles of corporate governance, where they are forbidden from diverting corporate resources for personal uses.
Business loans are issued for a specific reason which is for the direct benefit of the company or related business as it will be stipulated within the loan covenants. Whenever directors and top officials of a company want to benefit from the financial resources of a company, they should apply for a loan from the company. Where interests are charged, and the board must approve the credit of directors.
What is required to obtain a business loan?
Business loans have a large number of requirements; these requirements surpass or multiply those of personal loans.
The business loan providers will be looking to reduce credit risk involved with its stakeholders, which would substantially reduce its profits. The risk management strategies are applied to calculate variances, standard deviations, and loss have given default (LGD).
The Value At Risk (VAR) concepts is used before coming to a point where the company is required to provide documentation.
The following are the standard requirements for a company to acquire business loans.
A business proposal is a statement of intent for the company. It shows what the company, sole trader, or business organization intentions to use the funding for. As business loans are generally large amounts, investment firms will not just issue these loans for any reason.
A business loan is a financial credit extended to the development of an area where the financial institution is interested in. Business proposals are mainly required when the company wants to venture into a new project or when there is a need for start-up capital.
DIRECTOR’S AND TOP OFFICER’S PROFILE
A company is a separate legal entity, but when the legal liability of the company fails to be settled with corporate resources, the responsibility rests with the top officials of the company.
If creditors (lenders) fail to recover their funds, the directors will be required to settle the balances from their funds. This is mainly because the executive directors make all the decisions relating to the investments of the company.
Due to these reasons, investors will require profiles for top officials or executive management of the company.
AUDITED FINANCIAL STATEMENTS
Many financial institutions will require audited financial statements for the business loan applicant.
These will show the assets and liabilities of the company or business. The statements are required to be audited as the lender will be looking to obtain an assurance from independent auditors.
The audited financial statements are believed to present an accurate and fair status of the business. These financial statements play a significant role in the credit rating, which will determine the amount that the firm obtains as a business loan.
HOW TO APPLY FOR BUSINESS LOANS?
Business loans can be applied online or through the paper based application, but when the applicant takes the online application, it does not outplay the need for the company or top business official to visit the financial institution.
The application of a business loan starts with making an appointment with a banker or business loan officer of the relevant financial institution. This is when the company official communicates its financial requirements to the banker or business loan officer.
After filling business loan application forms, the official will be required to provide their business proposal, audited financial statements, top officials’ profiles and identify physical assets that will be used as collateral if needed.
When these have been done, a business loan would be obtained and the business receives funds needed for growth and improvement of financial results.
Lenders offering Business Loans in South Africa
Informative books about business loans in South Africa
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