Stressful, time-consuming, and daunting. It may sound like a courtroom scenario, but it could also apply to searching for business loans in South Africa.
Fittingly, small business and medium-sized companies (SME) owners may feel like they’re going up on trial with the stringent requirements and uncertainties that come with the loan application process.
From credit card checks to bank statement demands, no wonder entrepreneurs and established owners alike feel like they’re under the spotlight when applying for business finance – one of the key challenges for SMEs.
Worse, they might not even get a response.
Almost a third of South African SMEs that made a loan application since the COVID-19 lockdown report received no response from lenders, with 35.3% turned down thanks to tough credit requirements, according to research by funding specialists Finfind.
Way to encourage the enterprises that make up over 98% of all businesses in South Africa.
Being able to access funding, however, is vital for business growth, whether it’s for recruiting new employees, managing cash flow, or buying the necessary equipment.
The good news is that it’s not impossible.
Established business owners and new business start-ups can get hold of funding solutions with a bit of research into alternative lenders, government programs, and other finance options available in South Africa today.
The following guide is designed to help you find out which financial services are out there and how to get business loans in South Africa.
Worried about securing finance for your business’s short-term future? Open a Lula account today and find out how our revolving credit facility for SMEs can help you better manage your cash flow and access funding fast.
What qualifies for a business loan in South Africa?
To qualify for a business loan in South Africa, SMEs must meet various demands that they may not get with personal loans.
These typically include proving creditworthiness (such as a score and report), a certain level of annual turnover, and a clear loan purpose.
Lenders might also look at factors like cash flow, time in business, and industry conditions when reaching a decision.
These factors vary according to the credit provider, though, so applicants must always examine the lending criteria and possibly seek expert advice before taking on the finance.
How can I get a loan to start a business in South Africa?
Like in most countries, new South African businesses must show a detailed business plan about where they intend to take the enterprise, as well as the demands outlined in the previous section.
Another key factor (that SA entrepreneurs in this situation may not have considered) is to stress that they intend to embrace digital technologies.
Only half (52%) of new SME applicants said they planned to use technology to sell their goods and services, according to a recent report by GEM South Africa, an assessor of global business activity.
This is a mistake in the eyes of Angus Bowman-Falconer, a research fellow at Stellenbosch Business School.
“This is an indication that South African early-stage entrepreneurs are less likely to adjust their business plans in response to new global business realities,” said Bowmaker-Falconer. “South Africa’s low rating on ease of access to entrepreneurial finance (3.4/10) is a constraint that could dampen business investment, including in digital technology.”
South African early-stage entrepreneurs are less likely to adjust their business plans in response to new global business realities”
Angus Bowman-Falconer, Research Fellow at Stellenbosch Business SchoolAngus Bowman-Falconer Research Fellow at Stellenbosch Business School
New enterprises that want to find a business loan may discover that a shift to digital integration could be the key to small business funding.
The 5 most common types of business loans in South Africa
The lending landscape may be tough now, but SME owners still have several types of loans to consider depending on their business needs.
Here are six of the most common options available in South Africa.
1. Small business bank loans
Small business loans from a bank are still the most common way for SMEs to raise finance.
Entrepreneurs with an innovative business idea, an excellent credit history, and a solid business plan have a good chance of qualifying for a bank loan. Interest rates, however, can be in excess of the prime rate of 11.75%, making them a costly option for any enterprise.
Term loans are one example of such a bank loan, coming with a fixed repayment term and regular instalments. The borrowed amount is returned over a repayment period (normally several years) with interest applied to the outstanding loan amount.
Following the global recession in 2008, term loans have become more common from alternative lenders willing to offer more flexible terms.
Microloans are another type of small bank loan. These tend to be for much smaller day-to-day expenses like product purchases and small-scale maintenance.
How to qualify
Businesses almost always need a solid business plan and creditworthiness to qualify, as well as a demonstrated ability to generate steady revenue. Additionally, the bank may ask for collateral to secure the loan.
Microloans are less demanding, but the lender will still want to see signs of financial stability.
Established businesses with a proven track record and stable cash flow stand the best chance of landing a small or microloan, but newer enterprises with a stable financial history and a clear loan plan might also qualify.
2. Unsecured loans
Unsecured loans – finance that isn’t backed up by collateral – are still a possible avenue for SA businesses.
An unsecured business loan allows you to borrow without having to secure the loan against any business assets, such as property, equipment or machinery. These loans are a simple fast way to get a cash injection if a business needs quick access to cash or assets, and without the hassle or concern of securing your assets against your loan.
How to qualify
A credit score helps lenders see how likely you are to repay your debts. The higher your credit score, the lower your risk of defaulting on payments and the easier it is to get funding this way.
Lenders may assess the business’s revenue, creditworthiness, and the overall risk associated with providing an unsecured loan. Demonstrating a consistent ability to meet financial obligations is crucial.
More established small businesses in need of quick, short-term funding where traditional collateral is unavailable or undesirable. It’s suitable for companies with a credible credit history and a need for flexibility in fund utilisation.
3. Startup loans
Startup business loans in South Africa are financial instruments designed to provide capital for new businesses. These loans can help cover essential expenses like equipment, marketing, and operating costs.
How to qualify
Qualification typically requires a well-structured business plan, a demonstration of the business’s viability, good creditworthiness, and the ability to repay the loan.
Lenders may also consider the entrepreneur’s industry experience and potential for success.
Entrepreneurs launching new ventures or startups in need of initial capital to kickstart their business operations.
4. Purchase order loans
Purchase order loans provide funding to businesses to fulfil specific customer orders. This type of trade finance helps cover the costs associated with producing or purchasing goods so that transactions can occur.
A downside of a purchase order loan is that it often involves higher interest rates and fees, which can affect the profitability of the transaction, sometimes making it counter-productive.
How to qualify
Qualification often requires a confirmed and creditworthy purchase order from a reliable customer. Lenders may look at the borrower’s credit score, the customer’s ability to fulfill the order, and the overall financial health of both companies.
Businesses face cash flow constraints to fulfil large customer orders or contracts, particularly those with a successful track record and growth potential.
5. Revolving credit facility
A revolving credit facility is a flexible financing arrangement that provides businesses with access to funds within a certain limit.
Unlike a term loan, businesses can withdraw and repay funds as needed, and interest is charged only on the amount borrowed.
This instant access to working capital is convenient for both new and more established SMEs that need to address short-term cash flow gaps and seize immediate opportunities for business expansion.
A credit facility is often compared to an overdraft but is more structured, has a more flexible repayment schedule, and is not tied to the business’s account balance.
How to qualify
Qualifying for a revolving credit facility tends to be more likely for small businesses as requirements are often linked to affordability rather than being able to provide the collateral which is often required for long-term term loans.
Most businesses with an ability to manage debt responsibly and a sound financial standing qualify.
A facility like this can be ideal for all types of businesses with fluctuating or seasonal cash flow needs.
How Lula provides a useful alternative to business loans in South Africa
Business funding options in South Africa are available, but they normally come with tough credit requirements and restrictive conditions that may end up doing SMEs more harm than good.
Lula’s Revolving Capital Facility is designed to take the stress out of SME financing. We believe all hard-working businesses deserve easy access to working capital and enhanced control over their finances – and our flexible funding is designed to give just that.
Here’s how it can help you:
Instant access to capital:
- No need to reapply; tap into funds whenever your business needs a boost.
Pay for what you use:
- Only pay interest on the amount you utilise, providing flexibility and cost-effectiveness.
No monthly fees:
- Enjoy the convenience of managing your capital without worrying about monthly accounts or admin fees.
Quick and easy application:
- Apply online, link your bank account, and receive a commitment-free quote within minutes and gain easier access to construction finance for your business.
- Repay on your terms with no early repayment penalties, offering financial control tailored to your business.
Trusted and efficient:
- Benefit from Lula’s expertise, tech-driven decisions, and high-security standards, trusted by numerous SMEs.
Liberate your business from financial constraints with Lula — your key to instant funds, flexible repayments, and hassle-free financial control.
Ready to see how easy it is to access funding? Sign up to Lula today and find out how our revolving capital facility can help grow your business.