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Borrowing money: a short guide for SMEs

Whether you are a fledgling start-up or a seasoned business, there may come a time when you need to borrow money to take your business to the next level. With the options available when it comes to borrowing money, you may feel overwhelmed. But here is a short guide of aspects to consider when you borrow money for your SME.

Why are you borrowing money?

This is probably the key question to answer before you start the borrowing process. Are you borrowing money to plug a hole in a sinking ship riddled with holes or do you need a small push to complete a contract? The reason for leading money will have a great influence on whether you will get the loan or not. You need to objectively evaluate your position and assess if taking on new debt will help you to build a better and stronger business. If it will then let’s look at the five steps to borrowing money.

1. Evaluate how much money you need to borrow

Let’s say you need a new piece of equipment for your business. You should not only consider the cost of the equipment but also the cost of installing it into your business and the increase in insurance premiums you will need to pay each month for the new piece of equipment. By considering the complete cost of what you want to fund you will be able to have a better idea of how much money you need to borrow.

2. Become compliant

If you want to borrow money, you will need to register your business. You can visit the CIPC’s BizPortal to register your company. Next, you need to ensure you have the right licences for the type of business you have and any other regulations that are required for the industry you work in.

3. Have your documents in order

You will need to have financial documents which are up to date and readily available. These will include management accounts (income statement, balance sheet and cash flow statement), cash flow projections, any outstanding debts, the latest annual financial statements, the latest three- or six- month bank statements, the latest VAT statement, and a tax clearance certificate. Depending on where you apply you may only need some of these documents but it is important to know what documents you may need.

You will also need to get your personal and business documents in order. You will need your company registration document, office lease or mortgage agreement, shareholder agreements, share register, proof of business address, and relevant business licenses, accreditations or registrations.

4. Write a business plan

Your lender will want to know what you plan to do with the money they are lending you. By having a good business plan in place, you can show the lender what you plan to do in the next period with the money they lend you. This will help to build confidence in your lender.

5. Research your borrowing options

Depending on the amount of money you want to borrow you may have a variety of lending options. It is important to review how much interest will be charged on the amount you borrow, how long you will have to pay off the amount, if they charge a penalty for early settlement, and the other requirements which they have in their terms and conditions.

The types of financing which are available:

  • A bank loan: A loan which is offered by a bank
  • Bridging finance: A short-term loan used by a business to finance its working capital.
  • Purchase order finance: Used by a business to complete an order. This loan pays for the resources needed to complete the contract.
  • Inventory loans: This loan is best suited for product-based businesses that need to purchase inventory to sell.
  • Working capital finance: This loan will increase your working capital and give your cash flow a boost.
  • Merchant cash advance: These are funds extended to a business which uses a card terminal. The loan amount and repayment are based on the monthly revenue of the business.

5. Fill out the application

When you have chosen your financing option, it is time to complete the application. You must be honest and transparent in your application to have the best opportunity of getting the loan you require.

By following these five steps you will be well on the way to building your business to take the next step in growth.

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