Challenges to accessing finance
Learn more about collateral
What does collateral mean?
Collateral refers to assets that a borrower signs over to a lender to secure a loan. If the borrower stops making the promised loan payments, the lender can sell the assets to recover the money loaned. This means that, if you have ceded an asset to a lender as collateral for a loan, you CANNOT sell that asset without the written consent of the lender. Once the loan has been repaid in full, the lender no longer has a claim to the asset and you are free to sell it if you wish.
Because collateral offers some security to the lender in case the borrower fails to pay back the loan, loans that are secured by collateral typically have lower interest rates than unsecured loans. A lender's claim to a borrower's collateral is called a lien.
What can be used as collateral?
To answer this question you need to “get into the shoes” of the lender. The only reason they want collateral is that they need to guarantee they will get their money back, even if your business fails and you cannot repay the loan. As a result, lenders only work with items that can be quickly sold and converted into money. The harder it is to sell the item, the less likely it is that you can use it as collateral.
Common types of collateral are:
- Property e.g. your house.
- Vehicles e.g. your car.
- Insurance policies.
Understanding how assets are valued
Often lenders and business owners view the value of assets differently when it comes to collateral. While you may value an asset based on what it cost, its use, current value and the upper end of what it might sell for, lenders take a more cautious, and sometimes pessimistic, view of your asset.
It costs money to sell your asset
As always there is a cost to ending a loan agreement before time, and particularly when the business can no longer pay its loan instalments. Understanding these costs helps you understand why lenders value assets at less than you would expect.
- Administration costs: Someone is going to have to spend time working on recording the problems, identifying which assets can be sold to cover the outstanding costs, work out the interest charges and when the last payment was made and so on.
- Finding a seller: Once the lender has identified which assets are to be sold, they are faced with the headache of finding a buyer. This might be done by auctioning the asset, in which case they will have to pay the auction costs. If they choose to advertise to find a buyer, then this cost will also need to be covered.
- Transfer of ownership: Assuming that a buyer has been found, the seller now needs to prepare the paperwork required to transfer the asset into the name of the person or company buying the asset. Again someone needs to be paid to do this. In the case of a house, there would also be a seller’s commission to consider and conveyancing fees etc.
Some assets, such as a house, might already have bonds against them. In this case, the asset cannot be used as collateral but, if a fair amount of money has already been paid into the bond, it might be possible to secure a second bond on the house.
Other assets, such as insurance policies, only have value up to the amount that you have paid so far. This will be the surrender value of the policy, less the costs associated with the administration of the policy and the act of closing the policy.
The point is that there are costs attached to selling an asset and the future is always unpredictable. Imagine if you were a lender and had loaned money to a small business. The owner had offered his house as collateral for the loan and you had valued the house at a specific value. Then an economic recession hits, and the business crashes, and house prices fall dramatically. This would be a disaster for you if you had valued the asset at its full value, because you would clearly lose money. To avoid this type of risk, lenders value assets at significantly less than their true value.
Educate the lender about your assets
You know the value of your assets, but the lender might not. This is something you and your business advisor can work on together to educate your lender. It is important to understand that the lender doesn’t always know the industry in which you operate. In light of this, they may place a low collateral value on a specialised industry-related asset, such as a machine or stock, simply because they do not understand its value in your industry. If you can present a good argument and evidence not only of the value of the asset but also of how easily it could be liquidated, it may be possible to convince a lender to place a higher collateral value on an asset.
Examples of how different types of assets are valued:
If your business sells on credit, an option may be to offer your debtors' book as collateral. Generally, a lender will place a collateral value of between 30% and 75% of the face value, on payments that are owed to you. Usually, this is only for invoices that are less than 90 days old. If you have more business customers than individual customers, the lender values your accounts more. The bigger the businesses and the more business customers you have, the better, as the lender views this as an opportunity to spread the risk. The quality of your customers is also important and will influence how the lender values your debtors’ book.
Keep in mind that lenders are wary of invoices for customers who are difficult to chase, such as businesses based in other countries. These invoices won’t fetch a high value.
Maybe you have a business that can offer stock as collateral. The value that the lender will attach to your stock will range from 10% to a maximum of 50%. This depends on whether the lender thinks the stock would sell easily under a forced-sale condition.
These are the types of questions a lender might ask:
- How quickly would these items sell?
- How quickly will they go out of fashion?
- Does the stock have to be shipped far, or exported?
- Is it a completed product or would they be selling unfinished goods?
- Is it expensive to store?
- Is it insured, and if so, what are the terms of the insurance?
You won’t get more than 75% of the value of equipment and machines in your business. The collateral value can go down to as little as 10% if it is highly specialised and therefore has a limited market willing to buy (or if it is second-hand as these types of goods are considered to be high risk), or even if it is difficult to move or store and/or can easily be stolen.
Land and buildings usually fetch the best collateral values, sometimes as much as 90% of the book value. Bear in mind though, that anything that makes the sale more difficult is likely to bring the value down to less than 50% of its official valuation. A property will be less easy to sell if it is a building that has been specifically designed for specialised needs, if the building is in a less wealthy area, or if it is anticipated that the property market is going to drop. Any existing mortgage on the property will, of course, be deducted from the value.
Cession of a contract's proceeds
Does your business deal with contracts? If so, a lender will sometimes consider the cession of the proceeds of a contract (or order that you have landed) as collateral for finance. This means that the contract and its associated income is signed over to the lender in return for the financial loan. The proceeds will then be paid into the lender's account, or into an account jointly held by you and the lender. The lender first takes their payment and then pays the rest over to you.
As collateral, this kind of surety usually only fetches a fraction of its face value, mainly because the lender doesn’t know if you will fulfil your side of the contract or not.
You can raise the value if you have:
- A good track record
- Testimonials and evidence
A lender will only consider the surrender value of your life or endowment insurance policies as collateral, and will then usually attach a value of no more than 90% of the surrender value of that policy, which will be ceded to the lender.
Stock exchange shares are usually valued at less than 50% of their current value. This is to make provision for the fluctuations in value that will happen should the market dip. If you have less risky assets, they may fetch a higher collateral value, but that will depend on how easy they are to liquidate (turn into cash). Retirement annuities cannot be used as collateral unless you have already reached retirement age and you are entitled to access the money.
Very few lenders will accept forms of investment that are not liquid (available in cash) as collateral, for example pieces of art, stamp collections etc.
Cash and savings
Bear in mind that the interest on the loan will be much higher than the interest received on your savings or cash investments, so think carefully about using your savings as collateral.
Help is available if you don't have collateral!
Absa - Thembani International Guarantee Fund
This fund has been designed to assist SMMEs who are unable to offer the required collateral.
For details on how this fund works, read What to do when you don't have collateral.
Money, which is owed to a company by a customer, for products and services provided but not yet paid for.
Accrue means that something accumulates over time. For example, when you deposit money into your bank account, you are paid interest on that money, so the money in the bank account accrues interest.
Acquisition means to acquire or gain something. For example, if one company buys another company, then it has acquired that company. Similarly, if you buy an expensive piece of equipment, you are said to have acquired the equipment.
This refers to whether or not you have the financial means to afford a service/product.
This test works out whether or not you can afford to repay the loan amount.
The AltX is the JSE's board for good quality, small and medium-sized high-growth companies. The AltX provides smaller companies with access to capital while providing investors with exposure to fast-growing smaller companies in a regulated environment.
Angel investors are people who use their own money to invest in early stage businesses, which are usually considered to be high risk. As a result of this, once they invest in a business, they often like to work with you so that they can lessen the risk of business failure.
Appraisal means to assess the value, condition or importance of something. For example, if you are applying for finance and wish to use your house as collateral, the bank will send someone to appraise the value of the house.
An asset is any item that has a recorded cash value and can be owned or controlled to produce economic benefit . For example, when a company buys equipment, the name and purchase price of the equipment is recorded in the company's asset register. Each year, the value of the asset is depreciated (reduced) to take into account the use and age of the product. Over time an asset will finally reduce to a zero value. For tax purposes, companies need to keep a register of all assets. The rate at which the value of the asset is depreciated (this is a rate provided by SARS) can be deducted as an expense in the company financials. Assets can also be things like trademarks, patents, property, cash, inventory or accounts.
Asset finance is the term used to describe the type of loan provided by lenders to enable you to purchase assets required for your company.
Assets and liabilities
A statement of assets and liabilities refers to a list of everything of value that the business or individual owns (assets such as cash, stock, equipment etc.) and everything that is owes (liabilities such as loans, debts that still have to be paid and outstanding taxes). Subtracting liabilities from assets shows the net worth of the business or the individual.
If you describe an amount, especially the cost of something as astronomical, you are making it clear that it is very large cost/very expensive.
Attach and sell
If a business is unable to settle its debts, the creditors may apply to the court to attach assets and sell them to recover the money the business owes. This means that a court order is given that allows the creditors to have the assets taken and sold.
Auctioning an asset
When a company is unable to repay its debts, its assets may be sold to raise the money required to settle those debts. One of the ways of selling these assets is to auction them. In this instance a minimum price is attached to the asset and the auction is advertised to the general public. Thereafter the asset will be sold to the highest bidder providing that this amount at least equals, or is greater than, the set minimum value.
Black Economic Empowerment (BEE) is a programme launched by the South African Government to redress the inequalities of Apartheid by giving previously disadvantaged groups economic opportunities previously not available to them. Black as defined by the Department of Trade and Industry, includes Black, Coloured, Indian and Chinese South Africans who were declared to be Black in June 2008. BEE includes measures such as employment equity, skills development, ownership, management, socio-economic development and preferential procurement.
When an individual is consistently unable to pay their debts, they are considered to be insolvent. The people or companies they owe money to can apply to a court of law to have the individual declared bankrupt, or the individual can request the court to declare them bankrupt. This means that all the assets owned by this person can be sold to pay off some of the debts. Most importantly, the bankrupt individual will now be protected by law and cannot be harrassed by creditors. However, bankruptcy has severe consequences for the individual and is therefore considered as a last resort to solving the problem of over indebtedness.
Basis point is the common unit of measure for interest rates. One basis point is equal to 1/100th of 1% (0.01%).
If you do not repay money that you owe, this is recorded in your credit record as an adverse or default judgement against you. The process of recording such judgements in your credit record is called blacklisting. So, remember to check your credit record and if you have any judgements against you, you can get these reversed if you can show that you have settled the debt.
In South Africa the term bond is used to describe a home loan. When you buy a home, you can borrow money from the bank to pay for the property. The bank uses the property as collateral against the money you have borrowed. This means that they have the right to repossess and sell your property should you default on the monthly repayments.
When you purchase an asset (e.g. equipment for the business) it must be recorded in your asset register. The tax laws do not allow you to claim this purchase as an expense, rather you may only deduct the depreciation value per year. The depreciation value is determined by the type of equipment. For example, computer equipment may be depreciated (deducted as an expense) at a rate of 33% per year for three years, whereas office furniture may be depreciated at a rate of 10% per year for ten years. The book value is the initial cost of the item, less the annual depreciation.
A situation in which an entrepreneur starts a company with little capital. An individual is said to be "bootstrapping" when he/ she attempts to start and build a company from personal finances or from the operating revenues of the new company.
This term is also used to describe a person who has been given funds and signed a contract to repay the money, together with any administrative costs and interest costs.
Bridging finance is often also referred to as contract finance. If a business has signed a work contract from a client, but does not have the funds required to execute the orders, they can apply for bridging or contract finance. The lender uses the contract as collateral for the money they provide to the company. In some cases the client pays the lender, who in turn will pay the contract owner (the business) and the suppliers. They charge a fee for lending the money. Therefore the contract prices need to be profitable enough to include the cost of borrowing the bridging or contract finance.
A term used to describe a person who has an excellent understanding of business and is capable of making decisions that benefit the business.
A written document that sets out the business benefits for a particular case. The aim of the document is to convince the person or company to work with you as set out in the document.
A legal process to help businesses that are having financial problems. A business rescue practitioner is appointed to temporarily manage the business with the sole aim of preserving jobs and assisting the business to get back on its feet.
The Companies and Intellectual Property Commission is an agency of the Department of Trade and Industry in South Africa.
CIPRO (Companies and Intellectual Property Registration Office) and OCIPE (Office of Company and Intellectual Property Enforcement) merged to form CIPC (Companies and Intellectual Property Commission) in 2011. CIPC controls the registration of companies, co-operatives and intellectual property rights (trademarks, patents, designs and copyright) and the maintenance thereof.
This is the name given to the original amount of money borrowed. It is also used to describe the remaining unpaid amount of the loan, but excludes the amount of interest that is charged for the loan.
Capital gains tax
In South Africa, a capital gains tax may be charged if you sell an asset (e.g. a building or specialised equipment) for a higher price than you originally paid for the asset.
People who have a lot of money and assets that are used to produce more money.
Cede / ceded
When an asset is ceded (ownership is transferred) to a third party, it means that ownership of the asset has been transferred to that person or company according to the terms of a legal document. This is often done as a way of raising collateral for a loan. The business owner may cede their house to the company that loans them money. When they repay the loan in full, the ownership of the house will return to the business owner. If, however, they cannot repay the debt, then the ownership of the house remains with the person or company it was ceded to.
When an asset is ceded (ownership is transferred) to a third party, it means that ownership of the asset has been transferred to that person or company according to the terms of a legal document. This legal document is called a cession agreement and it sets out the terms and conditions under which the asset is ceded.
Chicken and egg
This is a saying that is used to describe a situation in which two things being spoken about are so closely related, it is impossible to know which one came first.
A numbered part or section of a document, that clarifies, defines, or explains the subject matter.
Collateral refers to property or goods that can be sold or ceded to pay back a loan in the event that you can’t.
Collateral refers to the assets (items of high value) that a borrower cedes to the lender in order to raise finance. For example, if you apply for a loan to buy a house, the house then becomes the collateral. This means that whilst it is registered in your name, it is ceded to the lender for the duration of the mortgage loan. If you stop making your monthly mortgage payments, the lender has the legal right to sell the house to recover the full amount of money owing (the original capital amount together with all accumulated interest charges).
Permission for something to happen or agreement to do something.
If you have been awarded a contract, a bank will lend you the money needed to execute the contract. They may require you to open a separate bank account into which the customer pays. They will then deduct their fees and the loan repayment costs and the balance of the money is paid to you.
Controlling interest is a phrase used to describe a majority shareholder in a company. For example, if the business owner has sold 25% of its shares to an investor, he still owns 75% of the share of the business and will be considered to have a controlling interest since his vote will count for more than those of his investors.
When a property is bought, the sale must be registered and the property transferred to the new owner's name. This process is called coneyancing. Most legal offices have a conveyancing department and a fee is charged for this process. This is the conveyancing fee.
Credit refers to the ability for a customer to be provided with goods, services or access to finance based on an agreement of future payment.
Agencies that gather and sell information about how you manage your money. They gather information on your accounts and record your payment history.
The credit committee has the authority to make a final decision on approval or rejection of proposed loans. They also assess the risk of the business applying for the loan, as their aim is to give loans to businesses that they believe can afford to repay them.
The Khula Credit Indemnity Scheme provides the banks with a legal contract that states that they are NOT responsible for the cost of the portion of the collateral that the scheme covers.
Credit information ombudsman
This terms refers to an independent public official who is appointed to resolve disputes that arise between people and the credit bureau companies.
Credit bureaus keep records on debts and repayments for both individuals and businesses. They are then able to provide a credit rating (score) based on the historical evidence of payments. This rating can be used by other businesses to check whether it is risky to provide you with credit.
This refers to a record where you are scored by a credit bureau on your credit history. Lenders use this information to decide how risky it is to lend money to you. The record has your personal data, a summary of credit history (the debts you have had and your payment history), detailed account information, any accounts that were unpaid or legal action taken against you, and the number of inquiries into your credit record.
A creditor is a person or company to whom you owe money.
Creditors' age analysis
A summary/list of all the suppliers to whom the company owes money. Suppliers are grouped according to the number of days the debt is outstanding: current month, 30 days, 60 days, 90 days and over 90 days.
The assessment of the likelihood that you will not be able to repay your loan. They look at history of past repayments on loans, your credit score and at your assets and liabilities.
Crowd sourcing companies enable you to raise small amounts of money from a large number of individual investors. These companies run online campaigns where you post your project or business idea and they monitor the income generated from the campaign. The crowd sourcing company will either charge you a set fee for listing your funding request or take a small percentage of the monies raised.
It is standard practice in many industries to request customers to pay a portion of the cost of the sales, before the delivery date. This is called a customer deposit.
A debt refers to an amount of money that has been borrowed but not yet repaid.
Replacing several smaller loans with one large loan. Usually, the new loan has longer pay back period, and its monthly instalment amount is smaller than the total of the monthly instalment amounts of the older (replaced) loans.
A debtor is a person or company who owes you money.
Debtor finance is a form of short‐term borrowing often used to improve a company's working capital and cash flow position. It allows a business to withdraw money against its invoices before the customer has actually paid. To do this, the business must have completed the work and issued the invoice to the client. The company then approaches a lender who offers debtor finance and borrows a percentage of the value of its invoices, effectively using the unpaid invoices as collateral for the borrowing. There are two types of debtor financing: invoice discounting (where the client is not aware that the company has borrowed against its invoice) and factoring (where the client is aware of the loan and pays the invoice amount directly to the lender).
Debtor's book refers to the records of customer invoices and payments. Outstanding amounts are reflected according to the length of time they have been outstanding, for example: current, 30 days, 60 days, 90 days. If you are looking to use your debtor's book to raise finance, then be aware that lenders will not be interested in outstanding debtors, as there is a risk that the clients may not pay the debt.
Default occurs when an individual or business fails to meet the legal obligations and terms of a loan agreement, or make repayment by the due date.
The decrease in the value of an asset as a result of wear and tear, age, or practical need. Most assets lose their value over time and must be replaced once the end of their useful life is reached.
Disposable income is the amount of money available for spending and saving, after all expenses and income taxes have been paid.
A business or product that significantly alters the way that businesses operate. A disruptive business may force companies to alter the way that they approach their business by developing new products or services to replace existing technologies and gain a competitive advantage. For example Uber has disrupted the taxi industry and the Internet has disrupted the way knowledge is distributed.
Distress funding is designed to help businesses that have a history of success, but have been negatively impacted by the economic crisis. The aim is to provide them with finance (which must be linked to a credible turnaround strategy) to minimise job losses and to help them regain sustainability.
This is the word used to describe the process of receiving a portion of the funds.
A comprehensive appraisal of all aspects of the business, in particular its finances, to establish its true value. A due diligence is undertaken by potential investors looking to provide equity finance.
Economic indicators are used by governments, investors and business people to assess the current or future investment possibilities of a country and to judge how healthy its economy is. Economic indicators are types of economic data such as unemployment figures, the price of crude oil, the gross domestic product or the consumer price index.
Economic recession describes the economy when it has slowed down significantly for a number of months. Recessions are characterised by a fall in GDP (Gross Domestic Product), investment spending, capacity utilisation, household income, business profits, inflation and a rise in bankruptcies and unemployment.
Refers to businesses that are profitable, and able to continue making money on an ongoing basis.
Eligibility requirements means the conditions that the person applying for the loan needs to fulfil.
Empowerdex is a company that is well known for auditing BEE compliance.
Endowment insurance policies
An endowment insurance policy insures a person for a set period of time (usually ten, fifteen or twenty years). At the end of this period the policy will be paid out in full (unless of course, the policy owner has borrowed against the policy or ceded it to a third party). In some instances, endowment policies also pay out in the event of death or critical illness.
An equity investment refers to the buying of shares in a business. The investors provide finance to the business in return for being issued with shares in the company. Their aim is to be able to sell their shares for far more than they bought them. Generally equity investors will exit (sell their shares) within three to seven years of the initial purchase.
In return for providing funding to grow your business, the lenders take shares in the business. Many equity finance providers become actively involved in the business so that they can monitor their investment.
Irregular or uneven.
A government law that determines how money may be moved from one country to another.
Excussion refers to the action a creditor (the person/company that is owed money) takes to use legal proceedings against the principal debtor (the person or persons who took out the loan) and their assets to recover the debt, before they try to recover the money from the surety (person or company that stood guarantee for the loan).
Export refers to trading goods produced in one’s own country with another country. Export finance refers to loans raised by the exporting company to help cover the costs of delivering the goods to the customer.
Export credit guarantee
Export credit guarantee is a type of insurance against the risk of your clients not paying the monies they owe your company.
To take something at face value is to believe that what is being said is true, and therefore there is no need to look for a hidden meaning.
Factoring is a financial transaction where a business sells its invoices to a third party (called a factor) at a discount. Factoring helps resolve cash flow issues since the factor (third party that buys the invoices) gives them cash. The factor then deals directly with the client to collect the money. Once customers pay, the factor deducts the cash given to the business owner, their fee for lending the money and then, if there is money left over, gives that to the business owner.
Fair market value
Fair market value is supposed to represent the most accurate assessment of the value of an asset. Fair market value is worked out using the following assumptions: potential buyers and sellers are reasonably knowledgeable about the asset and will act in their own best interest and are not under pressure to conclude a deal. A second condition that must be applied to work out the fair market value is that the buyer and seller must be given a reasonable time period in which to complete the transaction.
Financial statements are used by businesses/individuals/entities to record their financial activities. Typically financial statements include income and expenses, debtors' analysis, cash flow statements and balance sheets.
Fixed interest rate
When you borrow money, you will have to pay it back with interest. There are two options available to calculate the amount of interest the loan will cost. These are: fixed and variable. A fixed interest rate means that the rate does not change for the entire period of repayment. This avoids the risk associated with variable interest rates that change when the Reserve Bank changes the REPO rate. This is the rate that the central bank of a country lends money to other banks and is used as a benchmark by lenders to calculate the interest charges for the loans they approve. A variable interest rate means that the rate will change over the period of repayment, based on changes in the REPO rate.
A forced sale of a business can happen when the business owes a lot of money and the creditors are worried that it will not be able to pay its debts. The creditors can apply to a court for a forced sale to take place. In this case, any assets that the business owns will be sold and paid to the creditors to settle the debts.
Forecast refers to a method of predicting (estimating) the future financial performance of a company. Forecasting analyses the historical financial data to estimate future trends.
Future order book
Future order book refers to the record of all the sales that have been confirmed, but will only be delivered in the future.
A garnishee order is obtained when a creditor goes to court due to non-payment of a debt. They apply for a court order that states that the debtor's employer must deduct a set amount of money from the employee's salary. This amount is then paid directly to the creditor.
Gearing is a term used to describe a financial formula (called the gearing ratio) that compares the amount of capital the business owner has invested in the company, to the amount of money they have borrowed.
This term is used by auditors to describe a company that has the ability to continue trading profitably.
This refers to someone who will guarantee to pay your debt if you have defaulted on a loan (that is, you have been unable to repay the debt).
This is finance provided to companies and organisations who generate social and environmental impact alongside a financial return. Impact Investing is basically a newer term for Social Enterprise Funding. If your business provides a social impact then this form of funding could be applicable to you. Below is a list of funders who provide this type of finance.
In-kind contributions refer to any contribution that is not financial. For example, materials, equipment or services that are given at no cost are in-kind contributions.
Indemnity means to be protected against loss. For example, in the case of household insurance, the home owner pays an insurance company a monthly premium. Should the house sustain damage (and this damage is covered by the terms of the contract), the house owner is indemnified (protected or not responsible) against the cost of fixing the damage.
An insurance policy is a legal contract between a person, or a company, and the insurance company. The policy will clearly state what item it is insuring, what the terms of the insurance are, and the cost of the monthly or annual payment. For example, if you insure your car against accidents, then you will need to sign an insurance policy that details exactly what type of accident damage is covered, whether you are responsible for part payment of the damages, the cost of the monthly fee (premium) that has to be paid to the insurance company, who may legally drive the vehicle and so on. Each type of insurance will have its own insurance policy.
Interest is the amount charged by the lender for the use of their asset or money. For example, if you take a loan of R100 and you sign a loan agreement that states you will repay R120 in two weeks, then R20 is the interest charged (the fee the lender will earn from lending you money).
The interest rate refers to the percentage of interest you will be charged on the amount of the loan. For example, if you borrow R100 and have to repay R120, then the interest charged is 12% (R120/R100 x 100). This is a simple example, in most cases you are charged interest on a daily basis and it is accumulative. However, it is up to you to find out the details of loans, preferably from a number of lenders, so that you can compare their charges and find the best deal.
Invariably describes things that don't change and never vary i.e. they're predictable. For example, many people invariably start each morning with a hot cup of coffee means that many people always start each morning with a hot cup of coffee.
Invoice discounting a financial transaction where a business sells its invoices to a third party at a discount. Invoice discounting helps resolve cash flow issues since the lender (third party that buys the invoices) gives them cash. Unlike factoring, where the lender collects the money from the customer, in the case of invoice discounting, the customer pays the business as normal, and the business must then pay the lender.
A stock exchange based in Sandton, South Africa where stocks are purchased and sold. It is the largest stock exchange on the entire African continent, and is primarily dominated by mining companies.
When a company applies for a loan, all of its directors (or members in the case of a Close Corporation) share equally in the risk of lending money, and all are fully responsible for the repayment of the loan (this is termed jointly liable). This means that any one of the directors can be sued for the FULL amount of the loan.
Kernel of wisdom
This is an expression used to describe the central and most important part of a discussion that is brief and to the point (small, like a kernel), but very wise.
Khula Credit Guarantee
Khula Credit Guarantee is a fund that will provide a guarantee to the bank for the collateral that you need to raise a loan.
Where businesses generate most of their income from knowledge intensive products and services. This means that companies and people need to constantly invest in their knowledge, in order to continue adding new products and services.
The London Interbank Offered Rate (LIBOR) is a benchmark rate that some of the world's leading banks charge each other for short-term loans. It is used as the first step in calculating interest rates on loans throughout the world.
Someone who is not trained in, or does not have a detailed knowledge of, a particular subject.
Lender is the word used to describe a person or entity (company) that lends you money.
The conditions that must be met in order to be granted a loan.
The word transaction refers to a formal exchange of something such as goods, services or money. So a lending transaction refers to an agreement whereby money is lent by a person or company to another person or company.
Letter of credit
A letter of credit is a letter from a bank guaranteeing that a buyer's payment to a seller will be received on time, and for the correct amount. In the event that the buyer is unable to make payment on the purchase, the bank will be required to cover the full, or remaining amount, of the purchase.
Letter of intent
A letter of intent (LOI) is a letter from one company to another stating their willingness and ability to do business together. However, it is not a contract and cannot be legally enforced.
Leverage refers to the ability to use something to its maximum benefit.
To be held liable means that by law, you are held legally responsible or answerable.
The term lien refers to a type of security (collateral) offered to secure a loan. For example, if you apply to a bank for a bond in order to buy a house, the house itself becomes the collateral. The lien (agreement that the lender retains the right over the property) stays in place until such time as the loan is repaid.
Lines of credit
A line of credit is the amount of credit (money) a lender is prepared to lend to a borrower.
When a business is unable to pay its debts, it may be liquidated. This means the business closes and its assets are sold. The money received for its assets is then used to pay its creditors. Most liquidations result is less money being raised from the sale of assets than is needed to pay the creditors. In this case the creditors may only be paid a portion of the money they are owed.
A loan is the word used to describe the act of providing money or other valuable assets, to a person or company, for a fixed period of time and with the agreement that the borrower will repay the amount loaned, together with interest and other finance charges.
A loan guarantee is a promise by a person or company to pay the outstanding loan in the event that the person or company that originally borrowed the money is unable to pay.
Mezzanine finance is available for medium to large companies. This finance is often unsecured (no guarantees for the money borrowed) and therefore is expensive. It can be a loan, or a loan and equity (buy shares in the company) and sometimes may include the option to convert the loan portion of the funding to additional ownership shares.
Minimum volume criteria
Some lenders require long-term commitments, and will only finance companies that can show they invoice at least a specific amount each month. Others debtor financiers are prepared to buy individual invoices on a needs basis, provided the invoice is for a large amount.
Mitigate means to lessen. For example, to mitigate the risk of a loan not being repaid, lenders often ask for collateral.
Monitoring and evaluation
Monitoring is the regular observation and recording of activities taking place in a project or programme. It is a process of routinely gathering information on all aspects of the project. This data is then used to check the progress of the project or programme against the agreed upon deliverables. The checking process is called evaluation.
An overdraft enables a person or business to withdraw money from their bank account, even though the account does not have that amount of money in it. Overdraft facilities have to be arranged in advance with the lender who charges a fee for the use of the overdraft facility, as well as interest on the overdrawn amount.
A business owner's loan account shows the amount of money the business owes the owner, or the amount of money the owner owes the business. For example, when a new business starts, the owner will use his/her own money to start the business and this is recorded in the loan account as money owing to the business. Likewise, if the owner withdraws money from the company (other than a salary), this is recorded in the loan account as money the owner owes the business.
Persistent is the ability to stick with something and not give up, even if it is difficult.
Personal credit refers to credit (money, goods or services that you have not yet paid for) that has been given to you in your personal capacity. The amount of credit granted is based on the value of the assets you own, your personal ability to repay the debt and your personal credit rating (determined by Experian or TransUnion).
If you own valuable assets such as a house, expensive vehicles or equipment or insurance policies that have already accumulated a high surrender value (the sum of money an insurance company will pay you, the policyholder, in the event that you choose to terminate the policy before it has matured/the insured event has occured), then the lender may ask you to sign personal surety for the loan you have applied for. This means that if you cannot repay the loan, they have the legal right to sell your assets to recover their money. Always be very cautious about signing personal surety. Please read the module on Personal Surety to make sure you know how best to protect yourself.
Pessimistic describes a way of thinking that focuses on the negative and gloomy possibilities.
Preconceived ideas are ideas that the person believes are true, even before they have all the information needed to make an informed opinion.
When a company decides to sell its shares in return for equity capital, the lenders often demand that the shares they are allocated are preference shares. This means that in the event that the company is liquidated, they are the first shareholders to be paid.
Preferential interest rates
Banks often reward their existing clients for being loyal by offering them a lower interest rate than they would normally charge. This reduced/lower rate of interest is called a preferential rate. Normally, at most, a preferential interest rate on a loan is a couple of percentage points lower than a bank's standard interest rate.
When you sign a loan contract or an insurance policy, you will have to make a monthly payment to cover the cost of the finance or insurance. This monthly payment is called a premium.
In South Africa, the prime lending rate refers to the average rate of interest charged on loans by major commercial banks to private individuals and companies. It is used as a point of reference by lenders. For example, your loan contract may state the interest rate as prime plus 3%. The prime rate varies, so it is important to check its value before signing the loan contract, and to see whether you can negotiate a better interest rate.
A prime-linked interest rate means that you are being charged the average rate of interest charged on loans by the major commercial banks. It also means that if the prime rate increases, then your interest charges will increase accordingly. These types of loans are less risky for the lenders.
The principal amount refers to the amount of money you loan before the interest and administrative charges are added.
The main person or institution that owes a sum of money to a creditor. This person is primarily liable for the debt. A lender will always seek payment from the principal debtor before approaching the surety.
Proceeds of a sale refers to the final amount of money received from the sale.
There are two ways to measure the total income of a country. One way of doing this is to calculate the GPP (Gross Purchasing Power Parity). This compares the cost of the same basket of consumer goods (such as orange juice, pencils, etc.) in the various countries. The cost is converted to Dollars to enable comparisons to be made.
This term refers to loans that have many of the benefits of equity investments, but no transfer of shares take place. For example, money may be loaned, usually without the need for collateral, and repayments could be made through a profit-sharing process.
This is the cost charged for the work involved initialising the loan.
Reconciliation is the process used by business owners and their accountants to check that the money leaving an account matches the amount spent. The aim is to balance the two to show exactly how much the business earned and spent during the year. The difference between what was earned and what was spent is the profit the business made.
To get back (money that has been spent, invested, lost, etc.), especially through profits.
Recurring monthly minimum invoice discounting volumes
This refers to the minimum total value of the sales invoices.
Restoration of a business to its normal or near-normal functional capabilities after the occurrence of a disabling event.
To break a promise or the terms of an agreement.
The time period in which you pay back money borrowed from a lender.
The value at which an item owned by the business (for example, equipment) can be sold.
This is a policy that provides you with a monthly pension once you reach a certain age. The money in the policy can only be accessed at a specific age. Retirement annuities cannot be used as collateral, as the money is only available when you reach a certain age and therefore the lender would not be able to be repaid if you do not repay the loan.
Return on investment
The return on investment is the profit made from an investment. In the case of a lender, the return on investment is the total amount of interest that you pay, less any costs associated with lending you the money.
Revolving credit is a line of credit that is automatically renewed as debts are paid off. Once the customer pays a certain agreed upon amount, he/she is then allowed to use the line of credit again when cash flow is needed.
Small Enterprise Finance Agency. SEFA is a government agency and has been given the mandate is to foster the establishment, survival and growth of SMMEs, and contribute towards poverty alleviation and job creation. Since they are part of the South African Government's implementation plan to grow the base of SMMEs, they are willing to consider funding SMMEs that commercial lenders have rejected.
SWOT stands for Strengths, Weaknesses, Opportunities, and Threats. Companies regularly note their strengths, weaknesses, opportunities and threats as this helps them plan and take action to maintain strong growth.
Scalability is a characteristic of an business that describes its ability to cope and perform under an increased or expanding workload. A business/system that scales well will be able to maintain, or even increase, its level of performance or efficiency when tested by larger operational demands.
The initial capital used to start a business. Seed capital often comes from the company founder's personal assets, or from friends and family where investors invest capital in exchange for an equity stake in the company. The amount of money is usually relatively small because the business is still in the very early idea stage. Such a venture is generally at a pre-revenue stage and seed capital is needed for research and development, to cover initial operating expenses until a product or service can start generating revenue, and to attract the attention of venture capitalists.
Seller financing is a loan provided by the seller of a property or business to the purchaser. Usually, the buyer will make some sort of down payment to the seller and then make instalment payments (usually on a monthly basis) over a specified time, at an agreed-upon interest rate, until the loan is fully repaid.
To temporarily seize someone's account or property (through legal action or court order) until they have paid back the money that is owed, or until they have obeyed a court order.
In general, businesses requiring series A funding have the following characteristics: they have refined their product/services; they have tested the market and can quantify the market need for their product or service; they are generating revenue and now need finance for further growth.
In contrast to jointly liable, where all the parties are individually responsible for the full obligation, severally liable means that the parties are only responsible for their share of the obligation. For example, if a group of contractors agree to build a project, and one of them fails to complete the work, only that contractor is liable. The others in the consortium have no liability.
The owner of a company is known as a Shareholder. A shareholder can be a person, company or other institution that owns at least one share of that company. Shareholders have the potential to profit if the company does well, but they could also lose money if the company performs poorly. Shareholding refers to the amount of shares owned by a shareholder.
Social Enterprise Funding
This is finance provided to companies and organisations who generate social and environmental impact alongside a financial return. Impact Investing is basically a newer term for Social Enterprise Funding. If your business provides a social impact, then this form of funding could be applicable to you. Below is a list of funders who provide this type of finance.
Stock refers to goods that are kept by a business for internal use or to sell to a customers. For example, a manufacturing firm will have to keep stock of the materials it needs in order to produce their products.
The share of a company can also be referred to as stock. Therefore a stock valuation refers to the market value of a company and is determined and/or valued based on its financial data. Business investment specialists use specific calculations (formula) to work out the value of the company.
Money that is paid by the government to keep the cost of finances affordable for small businesses
Supplier credit is essentially like getting a “tab at the bar”. Your suppliers provide you with stock (the goods or merchandise kept on the premises of a business or warehouse and available for own use, sale or distribution), raw material and/or services on a 30 day account allowing you to sell or use their products without paying money upfront. This is a useful way of financing a business provided that you are able to sell and collect payment before you have to pay the supplier.
Surety refers to a guarantee (either by an individual or company) that is given to the lender when they loan you money. The surety is a legal document that they will use to recover the money (from the individual or company that stands surety) should you not be able to repay the loan.
Surplus means more than is needed. For example, if you have R100 and need to buy goods that cost R80, then you have surplus money.
The surrender value is the sum of money an insurance company will pay out in the event that the policy is voluntarily terminated before its maturity or the insured event occurs. The surrender value of an insurance policy can also be referred to as "cash value", "surrender value" and "policy holder's equity".
A tax incentive means that the business may deduct a certain amount from the money it owes in tax. The government offers tax incentives to encourage businesses to engage in a specified activity (such as employing young people) for a certain period of time.
This is a loan given by a lender for a fixed period of time.
A Trace alert is a notification that is added to your credit record report when a company you owe money to has asked to be notified of a change in contact information. This is done when the company has been unable to make contact with you.
Track record refers to the documented history of how your company has done business in the past. The information is reflected in the company's past financial statements. It can also refer to your personal financial history (income received, loans applied for and repayments made).
These are references from businesses that your company does business with. Trade references are often used when a company applies for a loan or supplier credit, as they provide a good idea of how the company conducts itself and, in particular, how it pays its debts.
Trading history refers to the documented history of how the company has been trading. The company's past financial statements are used to gather this information.
A tranche is a slice or portion of something. In finance terms it refers to one of a series of fund allotments earmarked for a specific purpose. Some lenders use this as a means to minimise risk.
The Rand value of the sales a company has made before any expenses are deducted. Turnover is usually shown as monthly, quarterly and annual income.
Unemployment Insurance Fund.
A company is considered to be under capitalised when it does not have sufficient money to conduct normal business operations and pay creditors. This can occur when the company is not generating enough cash flow, or is unable to access forms of financing such as debt or equity. If a company can't generate capital over time, it increases its chance of going bankrupt, as it loses the ability to service its debts. The most common reasons for under capitalised companies are: owners who did not understand the actual cost of starting a business; the inability to get access to finance due to lack of a trading history, lack of collateral or poor credit ratings; operating in a highly competitive field with no real product differentiators.
Undue prejudice is a legal term that refers to a biased or preconceived opinion, an idea formed before having the evidence for its truth or usefulness, that may cause improper or unfair treatment, or negatively influence decisions.
Unencumbered assets are assets that have been fully paid for, and have not been ceded (given up) to a third party. For example, if you have paid cash for an asset and have not used this asset as surety for a loan, then it is considered to be an unencumbered asset. Assets such as these are easy to sell, and lenders are usually happy to use them as guarantees against a loan.
This is a loan that doesn’t require collateral. It is based on the borrower’s creditworthiness. Borrowers usually need to have high credit ratings to be approved for an unsecured loan.
An unsecured loan is one that is obtained without the use of property as collateral for the loan. Borrowers generally must have high credit ratings to be approved for an unsecured loan.
Venture capitalists are investors who provide finance to small businesses they believe have long-term growth potential. The money is loaned to the company in return for shares in the company. That means that if the company uses the loan finance and achieves good growth, the investors will share in the profits. Venture capitalists usually invest in a company for a set period of time, after which the company is committed to buying back the shares at an agreed upon price.
Vetting refers to a thorough and diligent review, appraisal and verification of a person. For investors, vetting is often called "due diligence", which is the rigorous process of researching a potential investment prior to purchase or sale.
This refers to the ability of your business to survive in the long run, and its ability to survive and maintain profits over a long period of time.
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