The South African economy is highly cyclical. Understanding and adapting to the economic ups and downs is obviously a key informant of long-term success. According to the South African Reserve Bank (SARB), the South African economy is expected to grow by at least 4,2% in 2021, which is favourable for local businesses. In a thriving economy, businesses (especially small, medium and micro-enterprises) are more comfortable to borrow money, because there is a greater chance of growing demand for their offerings, which means they can pay back loans and credit sooner. On the other hand, when the macroeconomic outlook is negative, consumer demand is typically lower, which not only makes credit somewhat riskier, but also makes financial institutions slightly more hesitant about handing out credit.
Why do you need funding?
In a positive economic climate, it may be easier to get funding. But just because you can get funding doesn’t mean you have to take it. Before you apply for funding, make sure that you know exactly why you need it, how much you need, and what terms you are comfortable with. Even at competitive interest rates, credit is expensive. Without a clear reason for borrowing, you are incurring unnecessary extra debt, and you should not get yourself into debt simply because you want the comfort of extra money in your account. Only apply for funding if you know exactly what it is you need funding for.
Do you have enough collateral to support the funding?
To provide the most appropriate credit solutions in a responsible manner, lenders must first assess your financial soundness. Often, a lender will require some form of collateral to mitigate or offset the risk they are exposing themselves to by granting you the funding. This collateral can take many forms, but is most often a property title deed, ownership certificate or owned assets like machinery, equipment, or vehicles. If you have enough collateral, you stand a better chance of getting credit.
What is the best funding option?
Different businesses have different funding needs, depending on their operations and growth objectives. It is very important that the type of funding you apply for is best suited to your particular objectives. For example, it would not be wise to fund capital intensive projects with short-term credit. If you want to borrow small amounts of money to finance a small-business innovation or side hustle, you should rather opt for a suitable short-term solution, like an overdraft. For considerably larger or longer-term projects, medium- or long-term funding solutions make more sense. It’s best to seek appropriate guidance on the best funding solution for your business’ specific needs.
Can you manage the repayments?
Even the most generous of loan agreements have interest costs. After getting a loan, you obviously have to repay the principal debt plus whatever interest is levied, and these loans usually stretches over 12 months, depending on the credit agreement. This means that you should generate enough revenue to meet all your loan repayment obligations when they become due. It’s also important to remember that if the interest rate is not fixed, an increase in the short-term interest rate (repo rate) means you will have to pay back more money at the end.
That is why it is imperative that you carefully assess your business’s liquidity and income generating capabilities for the duration of the loan before you take on extra credit. If the cost of borrowing is higher than your anticipated revenue, getting funding is risky and could even put the survival of your business in jeopardy.
In these instances it is better to look for equity financing solutions, for example selling an ownership stake in your ventures to willing lenders to raise the capital you need. It might be unusual, but it is practical.
It’s also worth remembering that it’s not only big financial institutions that offer funding. A digital exchange platform, like SimplyBiz (powered by Nedbank) empowers small-business owners to access funds from small-scale lenders and connect with other business owners who are willing to give funding in exchange for equity or part-ownership. It is important to consider all your options, rather than simply accepting the first funding offering that comes along.
Alan Shannon, Executive for Client Engagement, Professional Banking and Small-business Services
