YOUR MONEY: What is the best way to finance a business?

Question:

I require some guidance, please. I need R1.5m for a business. I have the options of taking a 20-year bond on the business property, a five-year bank loan or a bank overdraft for five years. What would be the best approach?

— A Fat Wallet Facebook community member

Answer:

There are two distinct differences in your options. The first is that the interest rate on the bond will likely be lower than that on the bank loan or the overdraft.

The second issue is the duration — 20 years vs only five. As a rule shorter is better, especially for a business. The bond will involve lower repayments, but 20 years is a long payoff period for a business. Things will change, as will your requirements for the company.

So I would look at the shorter loans, even at higher rates. Over the term of the loan it’s possible that the interest will be lower overall than that on the bond, and the business will be debt free within five years.

Last, have you looked at issuing some equity instead of a loan? Maybe not for the full amount, but a portion of it. It is not easy finding investors, but with a strong business case you can approach friends, family and even maybe some start-up investors. Look around for business chambers or SME business organisations in your region that may be able to assist.

— Simon Brown, Just One Lap

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