Whether your needs are large or small, business lines of credit allow you to access cash when you need it. Funds can be used for a variety of business purposes, from meeting short-term cash needs to purchasing inventory. Here’s how to go about setting up lines of credit.
A line of credit is effectively a bank account that can readily be tapped at the borrower's discretion. Interest is paid only on money actually withdrawn.
Getting a traditional line of credit for your business is difficult when you are just starting out. Without cash flow, the bank cannot be sure that you will have enough money to make payments. If you're turned down for a traditional line of credit, try using the equity in your home as collateral. This is called an equity line of credit.
Building solid relationships
To establish lines of credit with the bank, you need to establish a good relationship with the business banking representative. This is key, as poor communication with the bank can become life threatening for a business.
Without a solid relationship there will inevitably be a breakdown in communication between a business and its bank. In upbeat economic times this may simply mean the business is not being provided with the most appropriate type of facility, or you may be paying a higher interest rate than you should. In difficult economic times the consequences can be dire.
While the economy remains in a downswing, business owners should be talking to their banks all the time. You need to be able to demonstrate that you are effectively managing your business, taking steps to control costs, and have a strategy to deal with the changing economy.
It’s important to make sure that your business and the bank are on the same page – that expectations on both sides are being clearly articulated and managed, that the business does not commit to repayments that it can’t keep, that any breaches that do occur are notified to the bank early, and explained, and that budgets and forecasts have integrity.
What are the options?
While it is difficult for a start-up business to open lines of credit, there are several solutions available when credit is required, provided you meet the criteria:
An overdraft is the ideal way to manage your cash flow. It is linked to your business account and you can use as much as you need, up to your limit. It’s quick and easy to arrange, and the cash is available when you need it. Also, you only pay interest on what you use.
Business revolving credit
A business revolving credit plan is a loan where repayments are made in equal monthly instalments. You only pay interest on the amount you use. Once you have paid back 25% of the loan, you can withdraw the funds up to the original limit. This enables easy cash flow planning because of fixed monthly payments.
Business term loan
Business term loans are a relatively simple way of securing funds for any period up to eight years that is repayable in equal monthly instalments. A business term loan may be used for buying fixed assets, such as property or equipment, making refurbishments and alterations, or acquiring a new business.
The minimum loan amount is R50 000 and there is no maximum, depending on what you can afford.
Medium term loan
This loan is paid off in monthly instalments over two to seven years, sometimes longer. This type of loan is suitable for capital expenses. The amount of the loan, the interest rate and your repayment plan depend on how much collateral you have, and the value of the assets you want to buy. You can agree to a repayment plan that suits your business and cash flow.
Information and documents required
- Details such as the nature of business, product offering, market environment and management skills
- Personal statement of assets and liabilities for all partners, members and directors
- Cash flow forecast
- Projected income and expenditure
- Amount and source of the business owner's contribution or stake in the business
- How will the business use the finance?
- Sales and purchases budgets
- Details of proposed or offered collateral
- Credit bureau checks of business and partners
Additional requirements if you have an existing business that has been banking at another institution
- Financial statements of the business
- Three months' bank statements
- Facilities letter from existing bank
- Details of collateral held by existing bankers
If you have had your Standard Bank account for more than six months, you may not need to provide financial information when applying for an overdraft or loan. We will determine a facility for you by assessing, among other things, how you manage your account and your business' turnover.
Sole proprietors with a Business AutoBank card can apply using one of our electronic banking channels, such as AutoPlus, Internet or telephone banking. You may also visit your branch.
Partnerships, close corporations and private companies will need to visit a branch and complete a suretyship form.
If the amount agreed to does not meet your requirements, business bankers may help you to apply for a higher amount. You may need to provide additional information and documentation in this case.