How to secure a loan for your side hustle

Here are a few basic guidelines about borrowing money when you have a bright idea and need to finance it

1 YOUR DREAM MUST BE FEASIBLE

If you want to borrow money, whether it’s from your uncle or the bank, you’ll need to persuade the lender that you’ll be able to make money from your side hustle in the long term to pay back your debt. Prepare well before you apply for the loan. If a financier sees your preparation has been thorough they’ll realise you’re serious about your venture. Make available all important information, such as your expenses and expected income.

Don’t overestimate your income and underestimate your expenses. You must establish exactly how much money you’ll need and then be able to outline how you’ve arrived at that amount.

Many companies and banks such as Old Mutual and FNB have useful information on their websites about how to put together a basic business plan.

2 KNOW WHAT TYPE OF LOAN YOU NEED

There’s a difference between personal loans and business loans. For a side hustle you probably won’t need to rent premises but you might well need to rent or buy equipment.

Personal loans of up to R250 000 from banks are common. Because these loans are unsecured, meaning you don’t take out the loan with an asset such as property as security, the interest rates tend to be high.

The longer your payment period, the smaller your instalments could be. But it could turn out to be expensive because the interest rate is high and could, for example, be stretched over 60 months. Most banks’ websites have loan calculators you can use to work out how much the loan will cost you over different payment periods.

Unlike personal loans, business loans are taken out in the name of the business. It can also be for larger amounts than a personal loan. Usually some form of security, such as surety or an asset, is a requirement.

There’s a wide range of business loans, from direct loans to overdraft facilities. Small home businesses probably don’t meet the requirements for a business loan. Some financiers will want the business to be registered as a company and you’ll need a comprehensive business plan. Your bank will be able to tell you what its specific requirements are. It might also have a loan tailored for small businesses to promote entrepreneurship, with different conditions to those applicable to companies.

Also look into options such as government funding (www. gov.za/about-government/ small-business-development) for small business. Another option is to borrow money from private individuals called angel investors, who support people with plans for enterprises.

But be careful about trusting just anybody who offers to invest capital in your side hustle. Look carefully at what they want in return, for example charging you monthly interest or taking a percentage of your income. Ask an accountant or lawyer for advice if you’re unsure about this.

3 YOUR CREDIT RECORD MUST BE GOOD

Financiers want to know you’re able to pay your debt, and whether you have a good debt-payment history and pay your accounts on time. They’ll also look at the source and sustainability of your current income. They verify your credit record with credit bureaus and by looking at your bank statements.

You must be able to confirm all your information with supporting documentation. If you have a positive credit record, keep it that way. If not, sort out any credit-record problems before applying for a loan.

If you don’t know what your credit record looks like, request one immediately. In terms of the National Credit Act you can request one credit record free of charge annually from a credit bureau. But it’s your responsibility to do this. The National Credit Regulator (ncr.org.za) has a list of accredited credit bureaus on its website.

4 DON’T APPLY FOR LOANS WITHOUT A GOOD REASON

The financing institution will inquire about your credit record every time you apply for a loan. This shows on your credit record, including the reason and purpose of your applications.

Too many inquiries of this nature can create a bad impression. The more you apply for credit, the more likely you’ll be seen as a credit risk. This won’t apply when you’re inquiring to see where you can get the best interest rate and payment conditions.

5 BE PROFESSIONAL

Your dress and conduct show whether you have respect for the financier and the situation. From Investopedia to Forbes.com, the message remains the same: if you want financiers to treat you in a professional way, look and behave like a professional.