HOW SMALL BUSINESS FINANCE WORKS

And how to prepare your business to get business finance

Every month FundingHub see’s hundreds of business finance applications come through our platform. The most common question we get asked is, “As an SME, what are my business finance options?”

In retail especially, the options to a business owner are now wide-ranging and can sometimes be complicated and confusing.

The team from FundingHub has broken this down into a quick 4-part crash course so that when your business is ready to accelerate it’s growth – you’re informed to make the right decisions.

1: What’s the deal with non-bank lenders?

Traditionally if a business wanted to get finance they’d have to apply through one of the big banks and be able to offer some sort of security or collateral to the bank in the form of a fixed asset (normally property).

But for most small businesses owning a property before getting finance is not feasible.

That’s where new non-bank lenders have stepped in. They offer finance products that don’t require collateral, and the decisions are made mostly using the transactional (sales) data of that business. These products, although sometimes slightly more expensive than a bank loan, are:

• Fast: Funds can be disbursed in a matter of hours.

• Fair: Decisions are often made automatically using algorithms. This removes any potential bias in a human-processed application.

• Inclusive: You don’t need collateral to get finance.

• Easy to compare: Marketplaces like FundingHub have made finding the right option fast and efficient.

What to watch out for

• Some alternative lenders will push the envelope in terms of their interest rates. This is especially true if your annual turnover is in lower than R1M.

• Pushy salespeople who make you “one-time” offers.

• Any company without a formal loan agreement.

Okay, that was a quick overview. Let’s get into finance for the retail sector.

2: Business Finance in Retail

Because the retail sector often involves lots of smaller business-to-consumer sales transactions, it lends itself well to data-backed decision making.

Some of the products that are built off the back of this data (from a POS-device, as an example) include:

Merchant Cash Advance

This is basically pre-drawing some of your expected sales. The most expensive retail-finance solution by far, it should only be used when you have no other options.

Unsecured Loans

This is a general type of loan that can be used for anything from a business premises upgrade to buying new inventory. The term “unsecured” means that there is no security behind the loan. Repayment is usually less than 24 months.

Equipment Finance

If you want to buy specialized equipment, there are new equipment-finance deal structures that make a rent-to-own facility possible. If you own specialized equipment, you could also use a refinance option to unlock cash flow.

There are many other options available including Invoice Discounting, Vehicle Finance, payroll finance and more.

3: Application Requirements

So, what do you need to apply?

Here’s the application checklist:

1. Calculate the potential return on investment that this finance will provide your business, before you know the cost of finance.

2. Your annual turnover (not profit) needs to be more than R360k.

3. Your business needs to have been trading for 6 months or more.

4. Business registration number.

5. 6 to 12 months bank statements.

Requirements do vary for different types of finance, but this is a good starting point.

4: Compare before you Commit

The last recommendation we always leave with our clients is to compare your options before you commit.

It may be tempting to take up the cash when a lender makes you an offer. But our experience as a marketplace has shown us that prices between products and lenders varies hugely. If you don’t compare your options, you’re likely missing out on a better price.

FundingHub makes the comparison process super-fast, easy… and it’s free. One application with us will get you real-time quotes from multiple lenders so you have all your options in front of you before you make a decision.