How much can my business borrow based on monthly turnover

Suppose your business brings in R100,000 each month. How much can a lender provide you? In South Africa, the loan amount is typically a percentage of your monthly turnover, reflecting your financial health, credit history, and industry sector.

Most lenders will offer between 20 % and 30 % of your annual turnover, which translates to roughly 1.67 % to 2.5 % of your monthly turnover. That means a business with a R100,000 monthly turnover could qualify for between R1,670 and R2,500. The exact figure depends on the lender, the type of funding, and your creditworthiness.

The method for calculating borrowing capacity

To calculate how much your business can borrow based on monthly turnover, you need to consider several factors, including your company’s financial statements, credit history, and industry. You can use the following step-by-step method to calculate your borrowing capacity:

• Determine your monthly turnover: Calculate your business’s total revenue from sales and other income streams over a month.
• Calculate your annual turnover: Multiply your monthly turnover by 12 to get your annual turnover.
• Determine your borrowing capacity: Calculate 20% to 30% of your annual turnover to determine your borrowing capacity.
• Consider your credit history and industry: Adjust your borrowing capacity based on your credit history and industry. If you have a good credit history and are in a low-risk industry, you may be able to borrow more.

For example, let’s say your business generates R500,000 in monthly turnover. Your annual turnover would be R6 million (R500,000 x 12). Based on the general rule of thumb, you may be able to borrow around R1.2 million to R1.8 million (20% to 30% of R6 million).

Using financial statements to support your funding application

When applying for funding, you will typically need to provide financial statements such as your balance sheet, income statement, and cash flow statement. These statements will help lenders assess your business’s financial health and creditworthiness. You can obtain these statements from your accounting records or by consulting with an accountant. For example, you can visit the CIPC website to learn more about the financial reporting requirements for companies in South Africa.

A worked example of calculating borrowing capacity

Let’s consider a real-life example of a business that generates R200,000 in monthly turnover. The business is a small manufacturing company that produces clothing and textiles. The company has a good credit history and is in a relatively low-risk industry. To calculate the borrowing capacity, we can follow the step-by-step method outlined above:

• Monthly turnover: R200,000
• Annual turnover: R2.4 million (R200,000 x 12)
• Borrowing capacity: 20% to 30% of R2.4 million = R480,000 to R720,000

Based on this calculation, the business may be able to borrow around R480,000 to R720,000. However, the actual amount that the business can borrow will depend on various factors, including the lender’s criteria, the type of funding, and the business’s creditworthiness.

How to apply for funding based on borrowing capacity

Once you have calculated your borrowing capacity, you can start applying for funding from various lenders. In South Africa, you can consider lenders such as SEFA, which provides financing to small businesses and entrepreneurs. You can also consider alternative funding platforms such as Business Funds, which matches businesses with the right lenders. To apply for funding, you will typically need to provide financial statements, business plans, and other supporting documents.

When applying for funding, it’s essential to consider the terms and conditions of the loan, including the interest rate, repayment terms, and fees. You should also ensure that you understand the implications of the loan on your business’s cash flow and financial health. For example, you can visit the SARS website to learn more about the tax implications of borrowing and the potential impact on your business’s tax obligations.

Considering B-BBEE and POPIA compliance

When applying for funding, you should also consider compliance with relevant regulations such as B-BBEE and POPIA. B-BBEE (Broad-Based Black Economic Empowerment) is a South African regulation that aims to promote economic empowerment and transformation. POPIA (Protection of Personal Information Act) is a regulation that aims to protect personal information and ensure that businesses handle personal data responsibly. You can visit the Department of Trade and Industry website to learn more about B-BBEE compliance and the Department of Justice and Constitutional Development website to learn more about POPIA compliance.

Common mistakes to avoid when applying for funding

When applying for funding, there are several common mistakes that businesses should avoid. These include:

• Not having a clear business plan and financial projections
• Not providing accurate and complete financial statements
• Not considering the terms and conditions of the loan
• Not ensuring compliance with relevant regulations such as B-BBEE and POPIA

By avoiding these mistakes, you can increase your chances of securing funding and ensure that your business is well-prepared for the loan. You can also consider seeking advice from a financial advisor or business consultant to help you navigate the funding process.

To see if your business qualifies for funding in 60 seconds, you can use the Business Funds funding qualifier. This tool will help you determine your borrowing capacity and match you with the right lenders.