Welcome to our exclusive series of personal – and business – wealth management insights from Ajay Wasserman, Founder and CEO of the Fio Group. In this article, he explains the ins and outs of business loans so that you can decide whether you’re at the right stage in your entrepreneurial career to make use of this particular borrowing facility.
SUMMARY. Businesses require funding to function, period. Whether you’re a start-up or established corporation, there will more than likely be times when you need a loan to get you over a rough patch.. However, you must make sure that you have a reorganised financial plan in place, and a solid loan repayment structure. Your business will suffer serious consequences if you default on the terms and conditions associated with the loan.
If the global pandemic as well as the recent riots and looting in South Africa have taught us anything, it’s that you need to have a sound worst-case scenario financial contingency plan in place to buffer unforeseen events. If your business doesn’t have an emergency fund in place, you may have to consider getting a business loan.
“I can’t afford to get a loan.”
This is a valid declaration, but ask yourself, “can I afford NOT to get a loan?” It’s vital to employ a borrow-to-build mindset. If your business is struggling and there’s no other source of capital on the horizon, the repayment of a loan outweighs the risk of having to shut your doors permanently.
Take a step back and look at the long-term benefits of a capital injection.
- You’ll have the means to build up the resources required to ensure your business operates properly. This includes everything from purchasing equipment to hiring employees.
- You can enlist the services of wealth management professionals such as independent financial advisers who can assist you in drawing up a viable financial business plan tailored to suit your business’s circumstances.
- Hire an HR company to perform an audit, and based on the results, they can recommend the policies and procedures necessary to ensure your business operates optimally.
- You can consult with marketing experts who will help you map out a compelling short, medium and long-term strategy which may include
- Creating/refining your corporate identity.
- Promoting brand awareness.
- Defining and optimising the marketing channels that are best suited to your product and/or service.
There’s nothing wrong with being risk-averse, but it’s more logical to take informed risks instead of flying blind and hoping for the best.
The different types of business loans available
Short-term and long-term business loans
Major South African banks such as ABSA, Standard Bank and FNB offer short, and long-term loans. They typically require documents including but not limited to business plans, financial statements, tax records, and even financial forecasts.
Now you’ll have to wait approximately two months to find out if your application has been approved, so send yours in sooner than later.
Business lines of credit
Many start-ups and SMEs can’t wait for business loan approval; the next option is considering a line of credit. This is a type of small-business loan that is more flexible than a traditional business loan. It’s crucial to understand that.
There is a limit to how much money you can borrow.
Interest is paid on the amount that you borrow.
You have the leeway to withdraw and pay back funds as you wish, as long as you don’t exceed your credit limit.
Invoice discounting or debtor factoring
A financial institution, e.g. a bank, purchases your company’s debtor book or can lend money against the book. Do you know what a debtor book is? It’s a collection of all your receivable invoices.
The primary benefit of debtors factoring is that businesses can use it to supplement cash flow issues if they’re struggling to survive. It acts as a financial buffer while they wait for their customers to make payment(s).
Consequences of defaulting on a loan
Remember, these are funds you have borrowed to stay afloat; it can’t be seen as ‘extra money’. There are numerous consequences for your business if you don’t use the funds strategically.
In an article published by Moneyshop, Gary Kayle, founder of the Money School and a facilitator of 1Life’s Truth About Money initiative explains the process:
- “Once you default on your monthly repayments, the lender then proceeds to flag you on their system and will contact you either via SMS, email, or telephonically to recover the outstanding monies.”
- If you don’t remedy the problem after the first step, the lender will hand your details over to either their collections department, or a call centre that will act on their behalf.
- If this still doesn’t resolve the problem, the lender will contact the credit bureaus and they will alter your credit record.
- Assuming you’re unaffected by a degraded credit record, lenders will move on to the next step. Here they will involve lawyers and force you to pay for their expenses.
- If the above methods remain unsuccessful, lenders will escalate the matter and take it to court – at your expense.
- As a last resort, assuming none of the above has worked, lenders will apply for a garnishee order against your salary, under instruction of the court. This means they send a sheriff to your employer and demand they attach all outstanding amounts to your salary which will go to the lawyers at the end of each month.”
There are three different types of vehicles through which your business can get a loan. They include:
- Short-term and long-term business loans
- A business line of credit
- Invoice discounting or debtor factoring
The main question you need to answer satisfactorily before taking out a loan: Can you keep up with the payment terms?
You must have a restructured short, medium and long-term financial strategy to ensure loan repayments are your priority? If not, speak with a business consultancy that has access to credible independent financial advisers who will help you build a solid plan.
If you default on loan repayments, the lending entity has the right to take the following steps:
- Flag you on their system and will contact you to recover the outstanding monies.
- Hand your details over to either their collections department.
- Contact the credit bureaus and they will alter your credit record.
- Involve lawyers and force you to pay for their expenses.
- Escalate the matter and take it to court – at your expense.
- Apply for a garnishee order against your salary, under instruction of the court.
Did you know that Elon Musk needed to borrow vast amounts of money from investors to fund his SpaceX project just to survive a period before they launched? It’s best to speak with an independent financial adviser about loan options. Make use of these borrowing facilities if it becomes necessary; don’t feel that you’ve failed because you need help with your cash flow.
I would suggest to any entrepreneur that if you are really passionate about navigating your business through rough patches that you are likely to experience, consider borrowing money and make sure you have a sound financial – and marketing strategy to increase sales and overall business growth. This will ensure that you always meet the loan repayments.
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