Business funding without collateral: what actually works in South Africa

Can you get a business loan with no collateral in South Africa?

You can, but it helps to know what you are asking for. A lender lends against a way of being repaid. Collateral is the second way: if the business cannot pay, the lender takes something and sells it. When a business has no property or spare assets to pledge, lenders look for a different second way, or they price the risk of having none. Those are the only two things that change.

That is why the same business can hear “no” from a bank on a term loan and “yes” from a funder who lends against its invoices. The business did not change. The funder found something in it that works as security. This article sets out what those things are, so you can match your business to the funder most likely to say yes before you spend weeks on applications that were never going to succeed.

What do lenders accept instead of property?

When there is no building or surplus equipment to pledge, South African lenders use one or more of the following. The list is not exhaustive, but it covers most of what we see.

• The thing being financed. The funder owns or holds a claim over the vehicle, machine or equipment you are buying. This is asset finance, and the asset is the security.
• Your invoices. If your customers are creditworthy and you invoice on 30 to 90 day terms, a funder can advance against those invoices and take a cession of the debtors’ book. See invoice discounting and working capital finance.
• A confirmed purchase order. For a supplier with a large order from a reputable buyer and no cash to fulfil it, purchase order funding relies on the order and the buyer’s payment, not on your balance sheet.
• A cession of contracts or receipts. A lender may take a cession of key customer contracts, insurance proceeds or the bank account your customers pay into, so that the money reaches the lender first.
• A guarantee from someone else. That can be a director, a shareholder, a related company or a state-backed guarantee scheme, covered below.
• Your cash flow, shown on paper. Some non-bank lenders lend against a record of sales, such as card turnover or monthly bank deposits, and take repayment as a share of future receipts.

The formal security documents you will meet include a mortgage bond over property, a pledge of shares, a cession of rights, and special or general notarial bonds over movable assets such as stock and equipment. A bond over movables has to be prepared by a conveyancer and registered, which is slow and costs money, and a specific bond over named assets is stronger security than a general bond over everything. If a lender asks for one, ask what it is for and what it adds to the loan.

What are your options if the business has nothing to pledge?

Here are the seven routes we see most, with the honest trade-off on each.

• 1. Asset finance. Works when the money buys equipment or vehicles. You usually pay a deposit and the funder keeps its claim over the asset. The downside is that it can only fund the asset itself, not wages or stock. See the asset finance guide for what a balloon payment really costs.
• 2. Invoice finance. Works for business-to-business sellers with invoices to reputable customers. You get cash earlier, and you pay a fee for it. The downside is that the funder will check your customers as closely as it checks you, and one slow payer can affect the whole facility.
• 3. Purchase order funding. Works for resellers, importers and manufacturers with a signed order. It is short-term and pays for one order at a time. It costs more than a bank loan and suits businesses with healthy margins that can absorb the fee.
• 4. Unsecured term loans from non-bank lenders. These lend on cash flow alone. They are quick, but they are the most expensive option here, repayments are often daily or weekly, and the total repaid can be a large share of the amount borrowed. Always ask for the full repayment schedule in rand and compare that figure, not the headline rate.
• 5. State and development funders. The Small Enterprise Development and Finance Agency (SEDFA), the National Empowerment Fund and the Industrial Development Corporation lend on cash flow, impact and ownership criteria rather than only on property. The trade-off is time and paperwork: they ask for a thorough application and decide on their own schedule.
• 6. A credit guarantee. South Africa has had a state-backed credit guarantee scheme for small businesses, under which the guarantor covers part of a bank’s loss if the borrower defaults. This can make a bank willing to lend where collateral is the only obstacle. Cover levels, eligible banks and conditions change, so ask your bank and SEDFA whether a guarantee is available for your loan today.
• 7. Mezzanine or equity. If you need R1m or more and the business has real growth, mezzanine finance or an equity investor takes the risk without needing security. The price is dilution or a higher cost of capital. This is where Caban works most often, because security-light funding at this size is a structuring problem, not a form-filling one.

Is it ever really “no collateral”? Watch the personal suretyship

This is the point most owners miss. Many lenders that say they need no collateral still ask each director or owner to sign a personal suretyship. A suretyship is a promise that, if the company does not pay, you will. It means the lender has no claim over company assets, but it does have a claim over your house, savings and other personal assets.

A limited company exists so that its debts are not yours. A suretyship removes that protection for the debt it covers. Before you sign:

• Ask whether the suretyship is limited to a stated amount or covers all the company’s debts to that lender, now and in future.
• Ask whether it is a limited-period suretyship, and what releases it.
• If there are several shareholders, ask whether all of them are signing, and whether the liability is shared. A lender will often go after the one who has assets.
• Understand your marital property regime, because it can decide whose assets are exposed. Take advice from an attorney.
• Check that you will be released when you sell the business or leave. A sale does not automatically end a suretyship.

What will a lender ask to see?

Prepare these before you approach anyone. Lenders usually want recent bank statements, commonly six to twelve months, financial statements or management accounts, an ageing of debtors and creditors, a tax-compliance status from SARS, and a short explanation of what the money is for and how it will be repaid. The clearer the repayment story, the less the lender needs to lean on security. If your numbers are untidy, fixing them is the cheapest improvement you can make. Our investor readiness guide covers the same preparation for equity funders.

Also be aware of the National Credit Act. As we understand section 4 of the Act, it generally does not apply to a loan to a company whose asset value or annual turnover is R1,000,000 or more, but it can apply to very small borrowers, which affects fees and interest-rate caps. Check which rules apply to you before you accept an offer.

How do you choose between these routes?

• You need equipment or a vehicle: start with asset finance.
• You are waiting on customers to pay: start with invoice finance.
• You have a big order and no cash to deliver it: start with purchase order funding.
• You need working capital to grow, with a track record under two years: try a state or development funder, and run the funding finder to see where you fit.
• You need R1m or more for growth, an acquisition or a restructure: speak to us about structuring it, because this is usually a mix of debt and equity rather than one product.

If your need is below R1m, our principals will usually not be the right people for it, and the funding finder and the SEDFA guide are the better starting points. For larger amounts, see our business loans guide for how bank credit decisions are made.

Whatever you choose, compare the total rand cost over the life of the facility and ask what happens on a missed payment. The cheapest route on a monthly basis is not always the cheapest overall, and the one that needs no collateral can cost the most.

Sources. DLA Piper, Common lending structures: South Africa (security packages and the National Credit Act note); MJ Kotze Inc, Notarial bonds and Loans, suretyship and acknowledgements of debt; FinFind, Khula Credit Guarantee; Caban’s own funding-guide pages linked above.