Business Loans

The pros and cons of business term loans in South Africa: What you need to consider

A business term loan is a type of financing that is commonly used by businesses to fund a variety of needs, such as purchasing equipment, hiring employees, or expanding operations.

It's a type of loan that is repaid over a fixed period of time, usually between one and ten years, and may require collateral to secure. Business term loans are typically offered by banks and other financial institutions and can be a valuable tool for businesses that need a large amount of capital upfront and want to pay it back over a set time period.

What is a business term loan?

A business term loan is a type of loan that is used to finance specific business needs. Unlike a revolving line of credit, where funds can be drawn and repaid as needed, a term loan provides a lump sum of capital upfront that is repaid over a fixed period of time. This type of loan can be used for various business purposes, such as purchasing equipment or inventory, hiring employees, expanding operations, or refinancing existing debt.

For example, a business may take out a term loan to purchase new equipment for its manufacturing operations. They could use the loan to purchase the equipment upfront and then repay the loan over several years. Another example could be a business that needs to expand its office space to accommodate a growing workforce. They could take out a term loan to finance the expansion project and repay the loan over time. In general, business term loans are useful for businesses that need a large amount of capital upfront and want to pay it back over a fixed period of time with regular instalments.

The difference between term loans and other types of business finance

A business term loan is a type of loan that provides a lump sum of money to a business, which is repaid over a fixed term with interest. The loan amount and interest rate are determined by the lender based on the creditworthiness and financial history of the business. Business term loans are typically used for long-term investments such as purchasing assets, expanding operations, or funding major projects.

In contrast, asset finance is a type of loan that is specifically designed to help businesses acquire assets such as machinery, equipment, or vehicles. Invoice factoring involves selling outstanding invoices to a finance company in exchange for immediate cash, which can help businesses improve their cash flow. Bridging finance is a short-term loan that helps businesses bridge a gap in funding, typically used to cover unexpected expenses or to finance a specific project.

On the other hand, venture capital involves obtaining funding from investors in exchange for equity in the business. Unlike business term loans, venture capital does not involve the repayment of a loan, but rather the provision of funds to help grow the business in exchange for a share of ownership. Business term loans are typically less risky than venture capital, as the business retains full ownership and control over its operations.

Typical loan amounts and interest rates and on term loans

The typical amounts and interest rates on business term loans in South Africa vary depending on the lender and the specific circumstances of the business. Generally, loan amounts can range from as little as R50,000 to as much as R50 million or more, with the exact amount depending on the borrower's creditworthiness, business history, and the purpose of the loan.

Interest rates on business term loans in South Africa can also vary widely, depending on factors such as the lender's risk assessment, market conditions, and the borrower's creditworthiness. As of 2021, the average interest rate for business loans in South Africa ranged from 10% to 28%, although some lenders may offer lower rates for established businesses with a strong credit history and financial track record.

It's important to note that interest rates on business term loans are often higher than other types of business finance, such as asset finance or invoice factoring, due to the longer-term repayment period and the higher risk involved in lending to small and medium-sized enterprises.

Pros and cons of business term loans:

Pros:

• Flexibility: Business term loans are generally flexible in terms of their repayment terms, loan amounts, and interest rates, which can be tailored to the specific needs of the business.
• Fixed interest rates: Unlike other types of business finance such as credit cards or overdrafts, business term loans generally offer fixed interest rates, providing business owners with more certainty around their loan repayments.
• Access to capital: For businesses looking to expand or invest in new equipment or assets, a term loan can provide access to a large amount of capital upfront.
• Lower interest rates: In general, term loans tend to have lower interest rates compared to other types of business financing, which can save businesses money over the long term.
• Improves credit rating: Successfully repaying a term loan can improve a business's credit rating and make it easier to obtain financing in the future.

Cons:

• Collateral requirement: In many cases, lenders may require collateral in the form of business assets or personal assets, which can be risky for the business owner if they default on the loan.
• Longer-term commitment: Business term loans are usually long-term commitments, which can be challenging for businesses that are unsure of their future cash flow or have fluctuating revenue.
• Fees and penalties: Some lenders may charge fees or penalties for early repayment, which can add to the overall cost of the loan.
• Approval process: Business term loans generally require a longer approval process than other forms of financing, which can be problematic if the business needs access to capital quickly.
• Risk of overborrowing: While business term loans can provide access to a large amount of capital, there is a risk of overborrowing, which can lead to higher interest payments and financial strain on the business.

When are term loans a good idea?

Business term loans can be an excellent financing option for a range of business needs. They are typically best suited for financing long-term investments in the business, such as the purchase of new equipment, expansion of operations, or investment in technology or infrastructure. Term loans are not typically suitable for short-term cash flow needs or day-to-day expenses.

If your business has a specific long-term project or goal that requires a significant upfront investment, a term loan can provide the necessary funding while allowing you to spread the repayment over a period of several years. This can help you manage your cash flow and ensure that you have the resources you need to complete the project or achieve your business goals.

However, if your business needs short-term cash flow support, such as to cover unexpected expenses or to bridge a gap between payments, then a term loan may not be the best option. In these cases, you may want to consider other financing options, such as a business line of credit or invoice factoring, which can provide more flexible and short-term financing solutions.

Ready to apply for a term loan?

Eligibility requirements for a business term loan in South Africa can vary depending on the lender but typically include:

• Business registration: The business must be registered with the Companies and Intellectual Property Commission (CIPC) and have a valid tax clearance certificate.
• Financial statements: The lender will require recent financial statements that demonstrate the business's ability to repay the loan. This may include income statements, balance sheets, and cash flow statements.
• Credit score: The lender will assess the creditworthiness of the business and its directors. A good credit score and clean credit history are important factors in getting approved for a term business loan.
• Collateral: Some lenders may require collateral, such as property or equipment, to secure the loan.

To increase the chances of getting approved for a term business loan, business owners and directors should ensure that their financial statements are up-to-date and accurate. They should also have a solid business plan in place that outlines how the loan will be used and how it will be repaid. Having a good credit score and a history of on-time payments can also improve the chances of approval. It may be helpful to shop around and compare loan offers from multiple lenders to find the best terms and interest rates.

Who are the top business leaders in South Africa?

In South Africa, the banking sector dominates the business lending market, with major banks such as Nedbank, FNB and Absa offering a range of financing options to businesses of all sizes. However, business finance in South Africa is a complex matter, and there are many different types of financing available to suit different business needs.

In addition to the major banks, there are also a number of independent lenders and specialist finance providers that offer term loans to businesses. These lenders may have different eligibility requirements and interest rates, so it's important for businesses to do their research and shop around for the best deal. We have compiled a list of some of the top business term lenders below to help you make an informed choice when seeking financing.

Your business loan FAQs answered

What is a business term loan, and how does it work?

A business term loan is a lump sum of money borrowed from a lender that's paid back over a set period of time, usually with interest. It can help you finance various aspects of your business, such as equipment, expansion, or working capital.

How do I qualify for a business loan in South Africa?

Qualifying for a business loan depends on several factors, including your credit score, revenue, and cash flow. Lenders will typically review your financial statements, business plan, and credit history to determine your eligibility.

What's the difference between a secured and unsecured business loan?

A secured business loan requires collateral, such as equipment or property, to be pledged as security for the loan. An unsecured loan doesn't require collateral, but the interest rate may be higher.

How much can I borrow with a business loan?

The amount you can borrow depends on the lender and your business's financials. Some lenders may offer loans as low as R50,000, while others may lend up to R5 million or more.

How long does it take to get approved for a business loan in South Africa?

The approval time can vary depending on the lender and the loan amount. Some lenders may provide approval in as little as 24 hours, while others may take several weeks.

What is the typical interest rate for a business loan in South Africa?

The interest rate can vary based on the lender, the loan amount, and the repayment term. Typically, business loan interest rates can range from 8% to 30% per annum.

What are the fees associated with business loans?

Fees can vary depending on the lender and the type of loan. Common fees include application fees, origination fees, and late payment fees.

Can I apply for a business loan if I have bad credit?

Yes, some lenders offer loans for businesses with bad credit, but the interest rates may be higher. Alternatively, you can consider applying for a secured loan or find a co-signer with good credit.

What happens if I can't repay my business loan?

If you can't repay your business loan, the lender may take legal action to recover the debt. This may include seizing collateral, obtaining a court judgment, or hiring a debt collection agency.

How can I compare business loan options in South Africa?

To compare business loan options, consider factors such as the interest rate, repayment term, fees, and loan amount. It's important to shop around and compare multiple lenders to find the best loan for your business's needs.