Why turnover alone will not get you a R2 million facility

When a Gauteng retailer with R1.5 million in monthly turnover applied for a R2 million facility, the lender’s rejection highlighted why turnover alone will not get you a R2 million facility, even though the top‑line figures looked impressive on paper.

Why turnover alone will not get you a R2 million facility – the missing pieces

Turnover tells a lender how much money flows through your business, but it says nothing about the profitability, cash‑flow timing, or the risk profile of the enterprise. A company can generate R2 million in sales each month and still struggle to meet a debt service because of high cost of goods sold, long payment terms, or seasonal load‑shedding outages that halt production.

Key metrics that sit behind the headline figure include:

• Net profit margin – the percentage of turnover that remains after all expenses.
• EBITDA – earnings before interest, tax, depreciation and amortisation, used to gauge operating cash generation.
• Debt service coverage ratio (DSCR) – the ability to cover loan repayments from operating cash.
• Working capital cycle – how quickly inventory is turned into cash.
• Credit history with SARS and banks – compliance with tax returns and past loan performance.

Without solid numbers in these areas, a lender will view a high turnover as a superficial indicator and will likely decline a R2 million facility.

What lenders really assess – beyond the top line

Alternative‑funding platforms and traditional banks use a similar checklist, though the weighting may differ. Below is a typical hierarchy of assessment:

1. Cash‑flow stability

Lenders model cash inflows and outflows over the next 12‑24 months. They want to see that after paying suppliers, salaries, load‑shedding mitigation costs and operating expenses, there is enough surplus to cover interest and principal. A DSCR of at least 1.3 is commonly required for a R2 million facility.

2. Profitability trends

Consistent net profit margins of 8‑12 % are considered healthy for a manufacturing or wholesale business. If margins are eroding, the lender will ask for a turnaround plan.

3. Balance‑sheet strength

Current assets should comfortably exceed current liabilities. A current ratio above 1.5 signals that the business can meet short‑term obligations without relying on the new loan.

4. Credit and compliance record

All tax returns must be filed on time with SARS. A clean record with the Companies and Intellectual Property Commission (CIPC) and no defaults on previous loans are essential.

5. B‑BBEE and sector risk

While B‑BBEE status does not replace financial metrics, a favourable score can improve the perception of risk, especially for contracts with the public sector.

Worked example – turning R1.8 million monthly turnover into a funded R2 million facility

Consider “CapeCo”, a medium‑size metal‑fabrication PTY LTD that has been trading for 30 months. The company reports the following figures:

• Monthly turnover: R1 800 000
• Cost of goods sold (COGS): R1 200 000
• Operating expenses (incl. load‑shedding generators): R300 000
• Net profit before tax: R300 000 (16.7 % margin)
• Outstanding short‑term debt: R400 000
• Current assets (cash + receivables): R1 200 000
• Current liabilities (payables + short‑term debt): R800 000

Step‑by‑step analysis:

1. Calculate EBITDA: Net profit + depreciation (R50 000) + interest expense (R30 000) = R380 000 per month.
2. Determine DSCR: EBITDA ÷ (interest + principal repayment). Assuming a 12‑month amortisation with 12 % interest, monthly repayment would be about R185 000. DSCR = R380 000 ÷ R185 000 ≈ 2.05, which exceeds the 1.3 threshold.
3. Check current ratio: Current assets R1 200 000 ÷ Current liabilities R800 000 = 1.5, meeting the minimum requirement.
4. Assess working capital cycle: Receivables turn over in 45 days, payables in 30 days, giving a net cycle of 15 days – acceptable for the sector.
5. Compliance check: All SARS returns filed for the last three years, no tax arrears, and a valid B‑BBEE Level 3 certificate.

With these numbers, a lender would likely approve a R2 million facility at 12 % interest, because the cash‑flow and risk metrics are sound despite the high turnover figure. The example shows that turnover is only the starting point; the supporting financial health determines the outcome.

Step‑by‑step method to make turnover work for you

Follow this practical roadmap to ensure that your turnover translates into funding eligibility:

1. Prepare a rolling 12‑month profit and loss statement. Highlight trends in revenue, COGS, and operating expenses. Identify any spikes caused by load‑shedding or seasonal demand.
2. Build a cash‑flow forecast that projects net cash after all outflows for the next 12 months. Include generator fuel costs, overtime wages, and any anticipated inventory purchases.
3. Calculate key ratios – DSCR, current ratio, net profit margin – and compare them against typical lender benchmarks (DSCR ≥ 1.3, current ratio ≥ 1.5, margin ≥ 8 %).
4. Clean up your balance sheet. Pay down short‑term debt where possible, negotiate longer payment terms with suppliers, and accelerate receivable collection (offer a 2 % discount for payment within 10 days).
5. Ensure compliance. Submit the latest SARS tax return, update your CIPC filing, and obtain a current B‑BBEE certificate if you are targeting public‑sector contracts.
6. Package the documentation. Create a concise funding deck that includes:
   • Executive summary with turnover and profit figures.
   • Cash‑flow waterfall chart.
   • Key ratio table.
   • Compliance checklist.
   • Use‑of‑funds plan – how the R2 million will be deployed (e.g., new CNC machine, inventory boost, working‑capital buffer).
7. Approach the right lender. Alternative‑funding platforms often have more flexible underwriting than banks, but they still require the same financial evidence.

When you present a complete picture, the lender sees beyond the turnover number and can evaluate the true repayment capacity of your business.

Common mistakes that keep high‑turnover firms from securing R2 million facilities

Even seasoned owners fall into traps that undermine their funding applications. Avoid these pitfalls:

• Relying on a single month’s sales spike. Lenders look for consistency; a one‑off contract should be disclosed but not used as the basis for the loan.
• Mixing personal and business expenses. If you draw a salary directly from the business account without proper payroll records, it looks like cash leakage.
• Ignoring load‑shedding impact. Failing to budget for generator fuel or lost production time inflates cash‑flow projections and leads to unrealistic repayment plans.
• Submitting outdated tax returns. A missing SARS filing for the previous year automatically flags the application.
• Overstating inventory value. Use recent stock‑take reports; inflated inventory can be challenged during due diligence.
• Not having a clear use‑of‑funds narrative. Lenders want to know how the R2 million will generate additional cash to service the debt.

Addressing each of these issues before you apply dramatically improves your chances of approval.

Quick checklist – is your turnover ready to back a R2 million facility?

• Monthly turnover between R1 million and R3 million with at least 12 months of trading history.
• Net profit margin ≥ 8 % and stable or improving over the last six months.
• DSCR ≥ 1.3 based on a realistic cash‑flow forecast.
• Current ratio ≥ 1.5 after accounting for all short‑term liabilities.
• All SARS tax returns filed for the past three years and no outstanding levies.
• Up‑to‑date CIPC filings and a valid B‑BBEE certificate if applicable.
• Clear, documented use of funds and a repayment schedule aligned with cash inflows.

If you tick all the boxes, you have turned your turnover into a credible funding story. If any item is missing, take the time to fix it before you submit an application.

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