One of the most daunting challenges for an entrepreneur is to obtain financing for his new venture. After all internal sources of financing (such as using profits, selling unused assets, obtaining credit from suppliers and reducing working capital) have been explored; the entrepreneur may find that it is still necessary to acquire additional funds through external financing.
Commercial banks are the most popular source of short-term financing for entrepreneurs. There are several types of Bank Loans available, and in this article, we will explore some of the more popular ones.
Overdraft facilities
An overdraft is the ideal way to manage your cash flow, and overdraft facilities are available from all major banks in South Africa. Pricing is negotiated based on the client's credit rating and this arrangement will be reviewed every 12 months.
Accounts Receivable Loans
This type of financing is based on the creditworthiness of your customers. Accounts receivable provide a good basis for a loan, and some banks will finance up the 80 percent of the value thereof.
An example of this type of loan is ABSA’s new invoice clearing loan (IC loan) product. When customers such as large companies or the government are involved, suppliers are usually forced to offer credit terms, but with ASBA’s IC loan, the bank immediately makes cash available to the borrower. The large corporate customer then has to pay the full amount directly to ABSA, who then deducts the borrower’s loan amount together with the costs involved, and then pays the balance to the borrower. For more information, contact FSP at info@fsp.org.za
FNB’s Debtor Finance is a facility that improves your cash flow for immediate business growth. It is a non-disclosed facility, which is designed to afford cash flow acceleration against the security of your debtor's book. This facility is available for businesses with an annual turnover of approximately 12 million.
Inventory Loans
Inventory loans are based on the asset value of your businesses’ inventory, and some banks will provide financing for up to 50 percent of its value.
Cash-Flow Financing
Cash-flow financing is often used by companies who need to fund their operations, but do not have the cash flow to do so. In contrast with the asset based loans above, this form of financing is backed by the company’s expected cash flows.
In essence, companies borrow from the cash flows that they are expecting to receive in the future, by giving the bank the rights to an agreed portion of their receivables. This will enable a company to be able to afford operational expenditures, such as meeting payroll requirements, at times when expected income is lower than usual.
FNB offers a specialised financing product, called Selective Invoice Finance, with the aim of improving cash flow for businesses. There is no monthly administration fee, and cash is received within 24 hours. Visit FNB’s website for more information.
Long –term business loan
This type of loan is usually only available to strong, more mature companies and can make funds available for up to 10 years. Commercial clients seeking to finance capital expenditure or to alter expand or acquire business premises, prefer to use this kind of financing. The debt incurred is usually repaid according to a fixed interest and principal schedule.
