One of the greatest challenges involved in starting and running a business is securing funding. It can also be intimidating to navigate the jungle of finance ads out there, and – given the proliferation of jargon – to work out what kind of finance best suits your needs.
Here we offer a basic breakdown of the types of finance available to businesses.
Debt finance versus equity finance
In simple terms, the main two types of finance are debt finance and equity finance.
Equity finance is capital raised through the sale of shares in a company. The shares may be sold to equity investors with no existing stake in the business, or to existing shareholders.
Debt finance involves borrowing money from a lender and, most commonly, repaying the loan with interest over an agreed period. Unlike equity finance, it doesn’t involve relinquishing any share in ownership or control of a business.
To secure debt finance, you typically need a good credit rating and/or a valuable asset to supply as collateral.
Different kinds of debt finance
There are three broad categories of debt finance:
- bank loans and overdrafts
- asset-based loans – any form of lending secured using an asset as collateral
- fixed-income debt securities, such as bonds, treasury bills, Guaranteed Investment Certificates (GICs) and mortgages.
Debt finance in South Africa
Key sources of debt finance for businesses include banks, asset finance houses, the South African Government and private lenders.
ABSA, FNB, Standard Bank and Capitec Bank all offer business loans. However, getting approval for a loan can be complicated.
To qualify for a business loan, you’ll need to provide the bank with a detailed business plan that outlines how much money you need, how the money will be spent, and the returns you expect on your business venture. You will also need a good credit rating, or your application is likely to be rejected.
Asset finance houses
Asset finance involves using assets of value, such as your company’s balance sheet assets, in order to borrow money. Asset finance houses specialise in providing this type of finance.
In South Africa, the main asset finance houses are divisions of the four large banking groups. Stannic is a division of Standard Bank; Bankfin is part of ABSA; FNB has Wesbank; and Nedbank Vehicle and Asset Finance is a division of Nedbank.
Asset financing can be easier to obtain than traditional bank loans because it represents a lower risk to the lender, especially where the value of the asset you offer serves as collateral for the loan.
Government funding for businesses typically comes with a lower interest rate than a bank loan. However, the requirements for this form of funding are strict. Generally companies need to be B-BBEE compliant, and competition for funding is fierce.
Government grants are available from the Department of Trade and Industry (DTI) and the National Empowerment Fund (NEF).
If you don’t qualify for a bank loan or government funding, you may still be able to borrow from a private lender.
Private lenders offer loans to high-risk businesses and even individuals with poor credit ratings. These loans may be much costlier than bank loans, so you should consider all of your options first.
Examples of major private lenders in South Africa are Business Partners, Khethani Business Finance and New Business Finance.
Short-term, asset-based loans with Lamna
With an asset-based loan of the type we offer at Lamna, you secure a loan using a valuable physical asset such as a vehicle, artwork or jewellery as collateral. The loan amount depends on the value of the asset – so there’s no need for credit checks.
Advantages are that you can secure funds almost immediately, you don’t need a spotless credit record to qualify and you don’t have to part with your asset – once you’ve repaid the loan and agreed interest, it will be returned to you in the same condition.
Client borrows R10,000 for 90 days.
Total Cost of Loan
Fixed rates range from 36% to 60% APR and payment options range from minimum 3 to maximum 24 months. Apart from the initiation and monthly fees shown below, the only additional fee is credit life insurance if the borrower does not have this already.