What options are there for funding a small business in South Africa?

Whether starting a new business or growing an existing venture when it comes to business finance its crucial that you understand the options available to you for funding your business.

Equity based finance is of course not the only option when it comes to raising money for your business. Once you have compiled your business plan, these may be a few other options you can to consider:

Option 1

Venture Capital

One problem many new businesses face is raising sufficient capital. A business in it’s primary phase will also face a difficult challenge getting a bank loan. One alternative is venture capital. Venture capital firms offer capital in exchange for equity in a company. This type of financing is ideal for new businesses since venture capital firms focus mainly on the future prospects of a company when banks use past performance as a primary criteria.

Option 2

Asset Based Financing

Asset based lending has become increasingly popular as a means of financing growth and providing working capital. Asset based financing is a general term whereby a lender accepts as collateral the assets of a company in exchange for a loan. Most asset based loans are financed against accounts receivable and less often, against inventory since receivables are among the most liquid of a company’s assets followed by inventory. Receivables are favoured by lenders since they self-liquidate in a short period of time by themselves and are not susceptible to problems such as shrinkage or physical damage. Another type of asset based lending rapidly gaining popularity is factoring. Factoring is defined as the purchasing of a company’s accounts receivable on a non-recourse basis. Asset based lending may be the best source of working capital for companies in turnaround where traditional bank loans may not be available or for new and rapidly growing companies where high levels of growth cause the business cycle to outpace the collection of receivables.

Option 3

Long Term Debt

Long term debt is one of the initial financing avenues a company should pursue. Most long term debt takes on the form of a loan where the interest and part of the principal are paid back in equal instalments over the life of the loan. Some of the sources for business loans include the following: commercial banks, government sponsored loan programs, small business investment companies, private lenders.

Option 4

Lines of Credit

A line of credit loan is designed to provide short term funds to a company in order to maintain a positive cash flow. Then, as funds are generated later in the business cycle, the loan is repaid. Most commercial banks offer a revolving line of credit, where a fixed amount is available. As funds are used, the “credit line” is reduced and when payments are made, the line is replenished. One advantage of a line of credit is that the no interest is accrued until the funds are withdrawn, but the line is immediately available for the company’s cash flow needs.

Option 5

Letters of Credit

A letter of credit is a guarantee from a bank that a specific obligation will be honoured by the bank if the borrower fails to pay. Letters of credit can be useful when dealing with new vendors who may not be assured of a company’s credit worthiness. The bank would then offer a letter of credit as an assurance to the vendor of payment. Although no funds are paid by the bank, the credit requirements for a line of credit and a letter of credit are similar.

Option 6

Loan Workouts

A loan workout is the process of repaying a problem loan in a fashion that is most agreeable to the lender and the company. Among the Options involved in a successful workout are maintaining communication with the lender, creating a revised payment schedule, and forming a workout team composed of the company’s management, representatives from the lending institution, and legal counsel to manage the process. One of the initial Options in workout proceedings is to recognize that repayment of the loan will not occur. The earlier the company recognizes that a problem exists, the greater their flexibility in dealing with the problem. Financial consultants who specialize in loan workouts are also available to coordinate the efforts of the company and the lender. These consultants can direct the workout team’s efforts and suggest solutions to the problem. Floor Planning Although relatively new as a financial instrument, floor planning is another asset based lending approach in which companies can finance their inventories. In floor planning, inventory is financed based on the credit of the vendor as well as the company receiving the financing. The inventory purchased acts as collateral until the sale is made.

Please contact us if you require any further information or would like to apply for finance:

Complete this short form online

011.327.4489 / 0861 1111 93

morne@mortgagepluscc.co.za

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Where will all the smart money be going in property in the next twelve months?

Smart money channelled into commercial and industrial property, says author of Jason Lee “Making money out of property”

I have absolutely no doubt that it will be channelled into commercial and industrial property.

My reasoning here is simple.  The barriers to entry in these fields are now high because the banks almost never give more than 60% bonds on commercial units- and insist that it be amortised over ten to twelve years.

This effectively limits the participants in this field to those with available cash reserves which, in turn, ensures that prices are kept low through lack of competition.  Unbelievable opportunities for savvy investors with available resources are, therefore, now being created.

Right now the rental returns on investments in commercial and industrial property are mostly at double digit levels and future capital appreciation will add to the value of these properties.

Those investing at today’s low base levels could see the value of their premises increase significantly in the next five years.

Obviously, therefore, this type of property is currently giving a better return than that obtainable in most money markets or the residential buy-to-let market.

In the current tight economic conditions, landlords have often had to accept ±20% cuts when renewing leases.

Industrial space previously rented at R25 to R30 per m² is now obtainable at R20 to R25 per m² – but it is encouraging to note that in most instances, the lower the initial rental, the higher the annual escalation clauses are pitched.  We have seen cases where space rented at low initial rates had had 10 to 15% escalation clauses – and many landlords are now able to peg the interest rates on their bank loans at close to the current low levels, enabling them to budget ahead very effectively over five to seven years.

In the on-going tough trading conditions, there is a greater danger of tenants failing in business and being unable to pay, This can be avoided if a thorough due diligence exercise is carried out on the tenant before signing him on and the management of the lease is efficiently handled.

The due diligence of the tenant has now become as important, if not more important, than the property deal.

In the current difficult conditions, it is still possible to maximise income and reduce running costs if you carry out such tasks as reviewing the replacement costs of the building and adjusting the insurance premium accordingly, renegotiating the property management fees or taking over the management yourself.  At the same time, it has to be said that, with building costs lower, now is a good time to improve premises with a view to obtaining higher rentals later.

Please contact us if you require any further information or would like to apply for finance:

Complete this short form online

011.327.4489 / 0861 1111 93

morne@mortgagepluscc.co.za

www.mortgagepluscc.co.za