We are going to discuss some of the common challenges that face small businesses when they first want to access finance. The topics listed below are not covered here as they have their own modules. Clicking on a title will open the relevant module:
Topics covered in this module are:
- Your company is not registered.
- You do not have a credit history.
- Your business track record isn't good.
Your company is not registered
If you haven’t registered your company, then it will be considered a Sole Proprietor company. This means that in terms of the law, all profits from the business accrue to you and that all business debts are your debts. In other words, if the company has debts and can no longer pay its creditors, the creditors are quite entitled to sue you personally for the debt and attach your assets so that these can be sold to recover their money.
As a result of this, lenders are wary of working with Sole Proprietors, unless they have an excellent credit history and can show that their business has a good trading history (and preferably a good future order book). If you are approved for a loan, it is likely that the loan would be in your name, rather than the name of the business.
If you are looking for finance for your business, you need to register the company with the Companies and Intellectual Property Commission (CIPC
). They have a very helpful website with information on the different types of companies, as well as the steps you need to take to register a company.
You can also register a company online or, if you prefer, you can work through FNB (First National Bank) who will register the company for you and open its bank account.
You do not have a credit history
This is a common problem faced by many young entrepreneurs. If you are relatively new to the working world, then you will not have accounts or credit cards. As a result, even if you applied for your free credit record, there would be nothing available in the report.
Why a credit history is important
Lenders like to see credit reports, as they provide a good indication of how a person manages their money. If you have no credit history, they are unable to form an independent assessment of whether you would pay them back if they were to provide you with finance. Some of the larger lenders are not prepared to lend money to someone they cannot check up on. Small lenders can sometimes be more flexible, but they might require a higher collateral amount and personal surety documents as well.
What you can do to build a credit history:
Open a bank account
The moment your business starts trading, it is advisable to open a separate business account. Also, as a general rule, you want your business to pay you a salary. Obviously, this is only possible once the business is generating sufficient income.
Apply for a credit card
Once you have a bank account, and the bank can see that your business is generating income, and you are handling your finances well, you can apply for a credit card. Responsible use of the card will build a good credit rating for the company. Just remember that if you use the credit card to pay for business goods, it is helpful to pay off the full amount at the end of each month as this avoids the high interest charges.
Some small businesses use their business credit cards as a means of financing their businesses. Provided they carefully manage the repayments, this can be a quick and painless means of accessing small amounts of finance.
Apply for an overdraft
bureaus automatically collect information from banks, so if you have an overdraft that you manage well, the bank will give you a good rating and this will be recorded on your credit history.
Open a business account with suppliers
Building good trade references is always a good idea. Opening an account for goods your business needs on a regular basis is another very effective way of building a credit history e.g. consider opening a stationery account. However, it is up to you to manage the credit of each account responsibly. This means that you control the spending and make sure to settle the debt every month.
The type of business you open an account with matters. It is important to realise that accounts opened at large, well-known stores count for a lot. These companies have firm criteria for opening accounts and policies for managing payments. Therefore credit checks are made frequently on the larger companies and if you receive a good credit rating from them, it will count for a lot.
Opening accounts at smaller stores can also help build a good credit history, but it might require some management of the credit record. If, when you apply for your free credit record, you find that they do not have any credit records for you, then you need to immediately contact the credit report provider and give them the details of your accounts and request they update your records. It is useful to warn the supplier to expect a call from the credit report provider.
The best advice is to understand all the types of credit listed above and then work out which suits your needs best, and is the easiest to manage. Once you have been using credit facilities for a while, you can check your credit record to make sure it has been updated.
Your business track record isn’t good
Most small businesses struggle in the early years. The most important thing is to be able to show that the business is now doing well. Its history is always examined by lenders as they don’t want to lend money if there is little chance of it being repaid. However, if you have now resolved the early start-up financial problems, then you stand a better chance of accessing finance.
Be prepared to explain the stresses the business went through, and also how and why its financial state has changed for the better. Also, remember that SEFA has been specifically set up by the government to help finance small businesses that other lenders have rejected. They are definitely worth a visit, but do remember that due to the increased risk they take in financing companies that have been turned down elsewhere, their charges are often more expensive.