By: Anglo Cape Confirming (Pty) Ltd.
30 October, 2019.
I just wanted to touch on a point that we hear often, and that is business owners’ being very wary of taking on any debt and using outside finance. Many business owners feel there is a stigma, thinking that taking on debt they are admitting that their business has problems.
Even thriving businesses can find themselves cash strapped with money tied up in equipment or if customer’s are not paying within their agreed terms.
Lets discuss 5 considerations when thinking about taking on debt as a small to medium sized business (SME’s), also referred to as leverage.
1. HAVE A CLEAR UNDERSTANDING OF WHAT YOU NEED THE MONEY FOR:
Having a very clear understanding of what the small business loan will be used for seems obvious but is critical for various reasons, most importantly it will guide you towards finding the correct type of business loan to fit your business’s requirements. For example do you require the funds for a fixed or variable cost? If you need the money to purchase raw materials (variable cost) for the product/s you make, the debt taken on, should have an associated cash inflow, which should enable you to pay off the loan sooner.
2. WHAT TERMS DO YOU REQUIRE:
Do you require a short term business loan such as 90 or a 120 days or do you need a longer term business loan such as 6 months or 3 years.
A short term business loan might be best suited for example, as mentioned above, for purchasing raw materials, which can be turned into a final product and sold to your customers, from whom you receive payment all within 90 days, and in this case a trade finance facility such as the one Anglo Cape Confirming offers would be an appropriate form of funding.
However if you are looking to buy an expensive piece of machinery for example costing R2 million, and this machinery will only start yielding results several months down the line, a longer term business loan such as 18 months will be better suited.
In principle then, you should look to match the term of the loan to the asset to be financed, for example a machine, which has a relatively long life, should be financed with a loan that has longer repayment term.
3. UNDERSTANDING YOUR CASH FLOW CYCLE:
Understanding your business cash inflows and outflows are crucial to determining what business loan best suits your businesses ability to make repayments. Cash flow is affected by factors such as the accounts receivables, payables and credit terms. It is extremely important to understand your cash flow as making late repayments will incur increased costs and have a negative impact on your credit score and ability to obtain further loans in the future. The cash flow is also a big part of the lenders credit decision to advance a loan, being able to see the ability of the business repay the loan.
4. COLLATERAL/SECURITY:
Collateral requirements differ depending on the type of business loan, size of the loan and use of the funds. It is important for the business owner to understand what is available as collateral as this will guide many factors of the credit decision process, such as what amount can be extended to the business or SME (Small to medium sized business.)
Collateral is generally taken as a way for the lender to mitigate some of the risk taken by advancing the business loan, NOT as the primary repayment source.
So examples of collateral or also known as security:
· Personal suretyship from shareholder/s
· Cession of debtors
· Notarial bond over stock
· Mortgage bond over property
Most lenders require some sort of collateral for the loan, facility, and or overdraft extend.
5. PARTNERING WITH THE RIGHT LENDER:
These days, there are a variety of sources from which to seek funding. Traditional sources, such as banks, used to be the go to lenders. However today we are very fortunate to have a wide variety of choice when it comes to lenders that specialise in a variety of options, so do your homework before jumping right in.
Price is extremely important, especially if your margins are tight, but do not always go with the cheapest option, especially if you are looking to continue to grow your business and will be requiring future financing, building a strong relationship with your lender is integral to your future financing requirements and growth.
To conclude these are general guidelines to assist you in beginning your research for business financing or SME short- term loans. Since all businesses are unique in their structure and style it is important to discuss all lending requirements with your business advisor/partners before making any decisions.
We look forward to hearing from you!
(021) 419 5820