Get out your bank statements and cash flow projections. It’s time to review the business loan requirements needed to get a business loan in South Africa.
Getting a loan in South Africa is notoriously hard. And it’s a problem any business owner with an SME sooner or later runs into.
But why is that? And what is required to get a small business loan?
High interest rates and stringent business loan requirements result in SMEs having a hard time securing business loans in South Africa, the OECD has reported. So much so that news outlet Zawya speaks of an SME funding gap that threatens the South African economy.
That’s because, while SMEs make up 98% of registered companies nationwide, they only account for a small share of the nation’s outstanding business loans.
SME loans represent just a fraction of the total outstanding loans in South Africa
Source: OECD
With business finance inaccessible, 35% of South African SME owners rely on personal loans. However, personal credit often comes with even higher interest rates and inflexible repayment terms that can snuff out the flame of even the most promising business plan.
In short, don’t rely on credit cards and dodgy loan sharks. This article aims to help you understand and meet all criteria for business funding – so that your SME can get funded and thrive.
And for those here to circumvent those stringent business loan requirements, we provide an alternative path to flexible financing. Here’s what we cover about how to get a business loan in South Africa:
- The challenges of getting a business loan
- The 3 must-haves before applying for a business loan in SA
- The essential documents you need for a business loan
- Costs associated with SME business loans
- Alternative funding for SMEs
Read on to find out how to get business funding in South Africa.
[The credit gap counts only for SME owners looking in the wrong direction. Get in touch with Lula today to find out how you can get flexible financing of up to R5m in as fast as 2 hours.]
The challenges of getting a business loan in SA
Only 34% of South African SMEs use formal financial bank accounts for funding – many other small businesses try but fail to access financial services. But why is that?
Tom Stuart, Chief Marketing Officer at SME lending and banking platform Lula, explains: “The biggest challenge with getting business funding in South Africa today is often the stringent requirements imposed by traditional institutions, including high collateral demands, lengthy approval processes, and strict credit criteria.” According to Stuart, “this can make it difficult for many small and medium-sized enterprises (SMEs) to qualify for financing.”
[Stringent requirements] can make it difficult for many small and medium-sized enterprises (SMEs) to qualify for financing.
— Tom Stuart, Chief Marketing Officer at Lula
Another major challenge with business loans in South Africa is not so much about whether, but when you can get one. “Processes are also laborious and painful in some instances when applied through many traditional institutions”, Tom Stuart comments.
Acquiring funding can easily take two to four weeks (or more) between the application process and the time it takes for traditional institutions like banks to review your paperwork. That’s precious time most businesses in need of quick bridging finance simply don’t have.
To ensure a smooth application process, it’s a good idea to meet all business loan requirements and have your paperwork sorted. So, what is required for a business loan?
The 3 must-haves before applying for a traditional bank loan
Here are some fundamental criteria your business must meet to be eligible for a traditional business loan in South Africa.
- Business registration
Your business must be a legally registered entity. This means registering with the Companies and Intellectual Property Commission (CIPC) as one of the following:
- A private company,
- A public company,
- A partnership,
- A sole proprietorship,
- Any other recognised business structure.
If you haven’t already registered your company, you can do so on the Bizportal.gov.za website, a platform created by the CIPC that offers company registration and related services.
- Tax filing
Your SME must be tax-compliant with SARS and have a valid tax clearance certificate. Credit providers want to see that you meet your tax obligations as a responsible business.
Failure to pay taxes is a major red flag and will seriously affect your creditworthiness.
- Regulation compliance
Beyond the legal registrations, financial institutions also want to see your business comply with relevant regulatory and statutory requirements for your particular industry.
Let’s say you operate a restaurant; you will then need a valid business license, health permits, liquor licenses, etc. Similarly, professional services may need industry accreditations or membership certificates.
These basic requirements prove the legitimacy and credibility of your business operations and show you are a serious entrepreneur running a business worth investing in.
The essential documents you need for a traditional business loan
Many SMEs hire business advisors and accountants to help navigate the swamp of business loan application requirements and assemble the necessary compliance documents.
If you’re applying for a traditional business loan, we recommend you do the same.
If your small business or startup meets the mentioned basics, you can think about applying for business funding. Let’s dive into the documents needed to get a business loan – here’s how to apply for a business loan.
Business plan & projections
- A comprehensive business plan outlining your company overview, products/services, market analysis, strategies, and financial projections
- Projected cash flow statements showing estimated revenues, expenses, profit, and cash position
- Some lenders require this business plan to specifically detail how the loan funds will increase profits.
Historical financials
- Income statements and balance sheets for the last two to three years (if established)
- Cash flow statements covering the same historical period
- Annual financial statements audited/reviewed by an accountant
- List of outstanding debtors (customers who owe you money)
Banking records
- Personal and business bank statements for the last six-12 months
- Management accounts like profit & loss statements, balance sheets for recent months
- Businesses need a dedicated business bank account separate from their personal accounts.
Tax & Compliance
- Up-to-date SARS tax clearance certificates for the business and owners
- Recent VAT returns and VAT registration if applicable
- Industry-specific licenses, permits, and accreditations based on your business type.
Above all, lenders want to see financial health. That means providing a good credit score and a clear track record of your business’s financial performance, cash flow patterns, and credit management.
The more established and profitable your business, the stronger your case. But even startups need to provide professionally prepared financial projections and planning.
Lastly, having an organised paper trail is key to getting funding, so be sure to collect financial statements, account records, tax documents, and other paperwork before applying. Any missing, incomplete, or inconsistent information can raise red flags.
Do you have all the updated paperwork at hand? Great, get applying. Still not sure what is required for a small business loan?
Costs associated with SME traditional business loans
With all the paperwork out of the way, cost is the last subject to discuss.
While costs will ultimately depend on the loan amount and the loan repayments, here are some important factors that will determine how much you pay for an SME business loan.
- Interest Rates: The interest rates on SME business loans can vary depending on the lender, the type of business loan (secured vs unsecured), and your business’s creditworthiness. Secured loans generally get lower interest rates than unsecured loans.
- Fees: Lenders charge various fees as part of the business loan. Common costs are application fees, origination fees, early repayment penalties, and overdraft fees.
- Collateral Requirements: For secured business loans, you will need to provide collateral such as real estate, vehicles, equipment, or other personal assets. Tying up those assets comes with opportunity costs.
- Credit Checks: Credit providers perform credit checks on both the business and the business owners. Your business credit score impacts loan terms.
- Cash Flow Impact: You should carefully assess the impact of the loan payments on your cash flow and overall financial health. Taking on too much debt can be extremely risky for a small business.
While funding can keep your business afloat, the costs of getting a traditional business loan add up quickly. Before committing to a loan, make sure you understand all the costs involved.
Alternative funding for SMEs
Meeting the stringent business loan requirements of traditional banks is one way to secure business funding – but it is no guarantee for actually qualifying.
Tom Stuart, Chief Marketing Officer at SME lending platform Lula, notes how “traditional institutions, like banks, provide an impersonal service because they’re not so interested in the smaller, not so profitable accounts.” He further commented on traditional banks that “they build their business models around and channel their resources toward larger corporate accounts.”
[Banks] build their business models around and channel their resources toward larger corporate accounts.
— Tom Stuart, Chief Marketing Officer at Lula
This disconnect between traditional credit providers and the business financing needs of SMEs has opened the door for alternative lending solutions better tailored to smaller businesses.
Fintech platforms like Lula can leverage technology for more efficient, flexible, and cost-effective funding.
Lula offers an alternative financing option to traditional banks by providing small businesses in South Africa with access to flexible funding facilities that have fewer requirements and faster approval processes.
- Lula’s Revolving Capital Facility provides you with a replenishable line of funding in case of unexpected expenses or opportunities. No early repayment penalties and no need to reapply.
- Lulalends Capital Advance is a fixed-term capital advance that offers speed and simplicity. Once approved you receive your funding within two hours. Simply repay over the agreed term, with fixed costs that won’t change. No early repayment penalties. No surprises.
How to apply for a business loan with Lula? Below is a list of everything you need to apply:
- Basic personal and business details in an online form.
- 3 months’ recent transactional banking data, which can be done quickly and securely by giving your bank permission to send us read-only data
For SME owners tired of jumping through the hoops of stringent business loan requirements only to get rejected, accessing alternative funding from fintech lenders like Lula is the key to unlocking their growth ambitions.
[Say goodbye to impossible term loans. Apply for working capital financing today and get up to R5 million in unsecured funding in just 2 hours, depending on your company’s valuation.]
