SMEs who are not adequately prepared when applying for credit often develop an incorrect assumption that banks are not open to lending.
Valentine Jingura, Head of Pricing at FNB Business, says the banking sector is eager to lend to SMEs as means to stimulate economic activity and broader GDP growth. As responsible financial services providers, banks are bound by a set of guidelines and principles, which prohibit reckless lending – to protect consumers and businesses.
Accordingly, SMEs who seek financial assistance should familiarise themselves with the credit application process, and what lenders require, to increase their changes of being approved.
There are three things that banks generally look for when assessing an application for business credit; history, affordability and security.
When applying for a loan, the business needs to demonstrate that it has a healthy bank account and turnover, good credit history and profile, no outstanding bills and judgements. In a nutshell, banks need to determine that the entrepreneur and business have a good financial track record.
From an affordability perspective, lenders consider the cash flow of the business to determine what you can pay back and when. This information can be gathered through a variety of sources including audited financials and monthly financial statements etc. Importantly, funds should flow through the business’ bank account in order for the bank to assess affordability.
With certain loans, you may be required to put up collateral as security over the credit, depending on the business’ financial standing and realistic ability to meet the credit obligation. For example, deposit, equipment or property.
Jingura says SMEs often mistakenly assume that bank credit is the only form of formal funding for SMEs. Depending on the nature and stage of the business, grants from Enterprise and Supplier Development Programmes (ESD) are often more suitable for early stage funding. As a result, SMEs are encouraged to do research and understand the needs of corporates, as well as the types of grants/ assistance they are willing to offer, in line with their preferential procurement and supplier development strategies.
“Before applying for business credit, be clear on how much you need, what the funds will be used for, and when you are likely to pay back the loan. Lack of planning often results in SMEs who qualify for credit misusing funds, or opting for a type of loan that is not suitable for their business, leading to unintended debt challenges,” concludes Jingura.
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