Financing your business through loans from commercial banks.
This is the most well known type of finance, largely due to the significant amount of advertising and marketing by the four big banks in South Africa. Basically a bank will loan you money provided you have an asset that can act as security and that you can assure them of good possibility of being able to repay the loan in good time.
Banks would normally want residential property to be given as security, but will also accept business properties, certain insurance policies, investments such as shares and unit trusts and sometimes even business equipment. They will not provide you with the full value of your asset as a loan, only a portion. For example, your house may be worth R700’000, but they may well only grant you a loan of say R500’000. This protects them from price fluctuations in the market and the more risky the asset, the lower the percentage loan.
Do not even consider wasting your time applying for a significant business loan if you have no security. No matter how fantastic your business idea is or how lucrative your future profits may be, the banks will not be interested. Their business is to lend money safely and not to gamble on entrepreneurs. Besides with the high failure rate of small businesses, who can really blame them?
This is where your banker might ask for a business plan. Even if you have all the security necessary to cover the loan, they will often still want to be assured that you can actually repay the debt. This is because they don’t really want to have to sell your assets to recover a bad debt. It is expensive to do so and not part of their core business.
One of the reasons we would strongly recommend that you run your business as a cc or company instead of as a sole proprietor is because this means that in the event of a business failure, the debts are owed by the company and not by you personally (unless you have traded illegally or recklessly). The banks don’t like this because often when a business fails there are very few assets left from which to recover their loans. So they have a clause in their contract which requires you to sign a “personal surety”. This means that you personally are liable for any of the company’s debts.
This clause is happily signed by many trusting and ambitious new entrepreneurs, but it has often resulted in ruined lives. Houses have been repossessed, furniture sold and cars taken to repay debts incurred by a company that were sometimes beyond the control of the owner. Please make an effort to understand the repercussions of this cause in more detail and be aware of how to protect yourself by taking a look at the business warriors website.
Who to contact?
If you still feel that bank finance is the best way to go, here follows a list of banks in South Africa who you can contact for business loans:
First National Bank