No matter what the economy is doing in Africa, there is little that can starve the entrepreneurial spirit of the continent. So, it is encouraging that aspiring small business owners have the potential to see a good profit.
The banking sector is meeting start-up demands with comprehensive financing products with world-class terms. Your choice of loan has the power to make your business fly or drown, though, so make your decision count.
Here we discuss some of the options so that you can find the one that will work for you.
Asset-based lenders make their profits through interest, so they’re best for short-term finance. Since they’re secured by your business assets, they come with their share of risk, but they have fewer restrictions and more flexibility than traditional products.
Most asset-based loans function as revolving lines of credit designed to spur growth. They offer short term liquidity and serve stable companies with solid business credit scores.
Unsecured or secured loans
Small and medium enterprises are enormously promising for the growing banking industry, but their size makes them too small for traditional commercial loans and too big for the microfinance sector. Unsecured loans are designed to bridge the gap.
They don’t require collateral, but that amplifies lender risk. Banks look for a few trust points to steady that shaky ground. You’ll need a stellar credit rating, a solid business plan, and detailed cash flow analysis, including interest and monthly payments.
Secured loans use collateral to improve risk and push interest rates into more practical territory. They’re the most accessible type of loan, but you might have to restructure your mortgage and offer your home up as security. If you have more than one property and need quick, easy financing, a secured loan will open your company doors sooner rather than later.
Top-rated banks package bank loans as business or start-up loans. This niche is highly competitive, so you’ll find a versatile range of well-designed products here. Loans can be provided as an overdraft, revolving credit, or fixed-term products. The latter lets you repay at intervals that suit your cash-flow, so it’s a perfect product for start-ups.
Contract financing is a once-off or regular use loan for businesses that are contract-based. As an example, some large South African banks have black economic empowerment policies in place to favour black-owned SMMEs. Others offer specialised products that support BEE principles in the form of leveraged finance and advisory services. Many offer plenty of advice and funding on BEE acquisitions and mergers, helping you to structure a tax-efficient deal.
Make sure you research what particular bank loans will be available to you.
Bank loans demand a sturdy business plan and an impressive credit rating. In return, you get to work with a reputable lender with a long history behind it.
If you’re buying an existing business, the seller may offer you a loan to cover your purchase price. This product is symbiotic, giving you the funds you need while allowing the seller to earn interest.
Seller loans are usually used as a portion of the capital stack rather than its primary source. Sellers will, however, require a good credit score. Even so, this option can offer you cheaper and more accessible financing, with quicker closing to boot.
- Government grants: Governments in most countries on the continent will have loans available to entrepreneurs that are looking to start a business.
- Revenue-based financing: An investor gives you capital upfront in exchange for a cut of your future profits.
- Pawn loans: Short term loans offered in exchange for assets. No credit checks are needed.
- Crowdfunding: Funding is provided through sites like Kickstarter and GoFundMe in exchange for a fee.
- Angel investing: A wealthy individual invests personal capital in your company in exchange for equity.
- Venture capital investing: Capital is provided in exchange for portfolio benefits, media exposure, and other portfolio benefits.
And, remember that banks and lenders rely on your money to turn a profit. Your business’ success is their success, so don’t treat your lender as a service offering. You are the client, and your loan is profitable to them.
Don’t be afraid to negotiate the terms of your loan when you are looking to start or buy a business. Your funding should be just as profitable to you, though. Choosing a product with exorbitant fees and impossible interest rates creates no foundation for a successful future.
By Bruce Hakutizwi, USA and International Accounts Director for BusinessesForSale.com, the world’s largest online marketplace for buying and selling small and medium size businesses.