6 Key Steps to Getting a Small Business Loan

Stagnation can ruin a business, and that is why most entrepreneurs pump more funds into their company to make it prosperous. Capital is needed for...

  • 6 Key Steps to Getting a Small Business Loan
    Lethabo Moodley Image Lethabo Moodley

    6 Key Steps to Getting a Small Business Loan

    • Updated: Wednesday 21st of April 2021
    • Loans

    Stagnation can ruin a business, and that is why most entrepreneurs pump more funds into their company to make it prosperous. Capital is needed for growth and expansion through the acquisition of advanced equipment, recruitment of highly qualified staff, research and development, moving into new markets and using an aggressive marketing strategy. Naturally, entrepreneurs look for the easiest source of generating capital and getting a small business loan emerges as a logical alternative.

    Getting business financing helps in maintaining a positive cash flow and reducing stress levels. Thus, if you are planning to purchase a business for sale in South Africa, you must be aware of the ways of getting a small business loan. Here are the six key steps that will help you in securing funding without any hassles.

    1. Find A Suitable Business Loan Type

    There are a variety of institutions and banks that are willing to lend to small and mid-sized businesses. Before you seek a loan, you should be clear about the objective of your loan. Do not unnecessarily get into debt that can become challenging to repay. Find out about different types of loans and seek the one that is appropriate for your entity.

    Entrepreneurs can apply for short-term or working capital loans that must be repaid between three to eighteen months and are beneficial in case of a shortage of working capital. These are helpful in improving the credit history of the business and are readily available.

    An equipment loan is usually secured for the purchase of machinery or business vehicles, wherein the item purchased from the loan amount acts as the collateral. You can also get a cash advance that will help you manage the cash flow if your business is dependent on credit transactions. Another type of loan is accounts receivable financing, which can be utilised when the business has several unpaid invoices. You can sell these invoices to a third party that will pay you the invoice value and wait for the payments to come from the clients.

    2. Identify the Best Lenders

    The South African government has been encouraging entrepreneurs to develop their ventures into flourishing entities. It will help in boosting the economy and generating employment. The Department of Small Business Development and its agencies offer to fund to start-ups and small businesses in the country.

    The Small Enterprise Finance Agency (SEFA)lends R500 up to R3 million directly to the business owners who have a feasible business plan.

    The National Empowerment Fund (NEF) is another institution offering support to black-owned businesses that need funds anywhere between R250 000 and R75 million.

    The Department of Trade and Industry is helping business owners to access funds through the Small Enterprise Development Agency. The agency provides support with the development of a business plan and much more.

    The Co-operatives Incentive Scheme (CIS) offers cash grants for business development. Some of the other agencies that do not directly offer to fund but help in business development include Black Business Supplier Development Programme, Umsobomvu Youth Fund, Khula Enterprise Finance LTD, South African Micro-Finance Apex Fund (Samaf), etc.

    3. Qualify for the Small Business Loan

    For eligibility, the business owner needs to have a perfect credit score. The moneylender or the financial institutions will research the credit history of the business before releasing the funds. It helps them to gauge the repayment ability of the loan seeker. Thus, you should not have default payments that can reduce your creditworthiness.

    In addition, you will require collateral that will act as a guarantee for the loan. It can be any business asset, such as equipment, property, stock, etc., which can be sold off by the moneylender in case of the inability of the entrepreneur to pay back the loan.

    You will also need to provide your financial statements and other paperwork to the bank so that they can verify the financial health of the business and its future prospects.

    4. Prepare A Well-Defined Plan

    To make sure that the bank or the moneylender considers you as a trusted business, you need to prepare a business plan about the use of the loan amount. It must have the details of why the fund is needed and how it will be utilised. You will have to define how it will help in the development of the business and its growth. It must include assessing the risks associated with the business and planning for them.

    The lender would also like to know about the size of your market share and the demand for your products. You must enlist the strengths and weaknesses of the venture and the opportunities and threats along with the competition. All these details will help the financial institution to understand the need for the loan and the probability of its timely repayment.

    5. Determine the Loan Amount

    During the research and discussion carried out by the lending party, the entrepreneur has to provide the exact amount required for the loan. Thus, you must analyse your current financial position and how much money you need to suffice for your needs. Also, you should ask for a realistic amount that can be easily repaid without feeling burdened or making your business short of capital. Keep your ongoing costs and new expenses in mind while making the calculations. You must go through the financial projections with your bookkeeper and determine the right amount.

    In addition, you must have resources ready to fall back on in case you are unable to pay the monthly instalment during a dry period. Make sure you have funds that will not let you go into default.

    6. Understand the Terms and Conditions

    As the borrower, you must pay attention to the rate of interest. The prime lending rate in South Africa is 7% at present, which is lower than what it was a year ago. Therefore, it is a favourable period for business owners as the amount that needs to be paid back fluctuates along with the rate of interest.

    You should know how quickly you can settle the loan. If you intend to pay back gradually, do not opt for short-term loans which have to be repaid within months. Conversely, if you want to pay it back faster, ask the lender about an early settlement option. Enquire if you need to provide security or collateral to the lender and if there are any processing charges.


    Small business loans are easier to secure than you can imagine. If you are planning to acquire a business for sale in South Africa, you must be aware of the steps of getting a loan to keep your venture afloat and scale it.

  • Author Info Lethabo Moodley

    A business expert, Lethabo Moodley is a management consultant who has been working across domains since 2005. His rich experience includes a Masters degree in business administration from the prestigious Gordon Institute of Business Science and Doctor of Business Leadership degree from Unisa Graduate School of Business Leadership. He has been actively working as a consultant with the biggest firms in South Africa and his contribution in the growth of these organisations is considered invaluable. He has saved a lot of small businesses from going bankrupt and has renewed the lost success streak of the big fish in the market. Business2Sell is delighted to have him onboard for his insightful blogs.