YOU’VE heard the complaint so often – in the pub, in the newspapers, and in academic studies: finding finance is one of your worst headaches when trying to start a business.

Well, it is quite true. In South Africa, banks in particular have come in for much criticism for not being willing to risk their money on start-up businesses. Despite this, banks are still a common source of finance for new businesses.

Bank loans

Most banks are fond of saying they’d like to be “your partner in business” because they “understand your needs” and would like to “grow with you”. Before they get so cosy, however, they like to check you out quite closely.

When you go into a bank looking for a loan, make sure you have not just a business plan, but a load of other information about yourself: such as three to six months of the most recent bank statements; your marriage certificate (the legal status of your relationship with your spouse affects how they view you as a business risk); utility bills (to show you have a real place to live and won’t just disappear); etc.

Now, there are a few different ways of borrowing money from a bank. A straight loan (sometimes called a ‘term’ loan) has these advantages:

The repayment normally stays the same, so you know what you must budget for each month.

There is little risk of the loan suddenly being ‘recalled’ – when the bank decides it wants all the money back now.

As long as you stick to the agreement (by not missing a payment, for instance), you can rest fairly easily knowing that the bank will not require sudden repayment.

You can match the term of the loan (the time over which you’ll pay it back) with the life of the asset that you’re buying. A computer, for instance, could be a short-term loan, while a piece of workshop machinery could be purchased over a longer period.

Your business plan needs to include a detailed financial plan which states not only how much money you will need, but also exactly what that money will be used for.

This helps when it comes to borrowing money, as it is easier to borrow money for some things than for others.

Say, for instance, that your business is going to need a delivery van. It will usually be easier for a bank to give you a loan for the van (through its asset financing schemes) than to give you a loan for six months’ worth of overhead expenses. This is simply because the van is an

asset that can be repossessed if you fail to keep up your repayments, so the risk to the bank is lower.

Mortgages

Many new businesses start from home, or in rented premises, to keep costs and risks down. Entrepreneurs also often extend their housing loans (they can take more money out of their mortgages if the value of their homes has gone up) to fund their start-up.

But if you’re sure of where you want your business to be, and you want to buy premises, then you’ll be able to approach a bank for a mortgage bond.

While this is a fairly safe loan for a bank (they will usually get their money back on property if you fail to repay them), they still need to be convinced that your business is sound enough to manage the monthly repayments.

An advantage of a mortgage bond is that the interest rate should be low – in keeping with the low risk attached to property.

Overdrafts

An overdraft is a loan facility on your cheque account that allows you to spend a certain amount more than you have in your business account, when you need to.

The overdraft could be permanent, or you could ask them for the facility just for a few months – if you are hitting tough times but have money coming in for certain.

You normally need a track record (six months to a year of trading) before a bank will give you an overdraft – but it will help if you show them documentary proof of orders coming in or invoices that are yet to be paid.

The advantage of an overdraft is that you only pay interest on the debit balance in your account – not on the overdraft limit. However, the interest rate on an overdraft is usually quite high,

Credit cards

Business credit cards are a blessing and a curse. In the wrong hands, they could mean serious trouble. But if properly managed, they are a convenient form of credit that will benefit your business in a number of ways.

Paying for expenses with a credit card will give you 30-50 days before you have to meet those obligations with cash from your cheque account.

You can also stretch out your payment period. But this is where discipline is crucial; if you make a habit of delaying payment and you will cost yourself a fortune in interest. The rates of interest on credit cards is exorbitant.

Another benefit of a credit card is that your purchase transactions are neatly recorded on your monthly statement, helping you keep track of what was spent, where and when.

Also, you will save on bank charges by using a credit card to pay for goods. Instead of the bank charging you a fee for processing a cheque, it charges your supplier for the privilege of getting immediate and guaranteed payment.