Understanding the difference between loan eligibility and loan affordability
A business may meet a funder’s eligibility requirements but still be unable to afford the repayments.
Eligibility answers the question:
Does this business qualify to apply?
Affordability answers:
Can this business repay the loan without damaging its operations?
Both matter.
Consider a business that generates R80,000 in monthly revenue but spends R65,000 on operating expenses. Its remaining R15,000 is not automatically available for loan repayments. The business must also consider tax, owner drawings, unexpected expenses, stock replacement and working capital.
A lender will want to understand the cash available for repayment, not just monthly sales.
How to calculate a realistic repayment capacity
Start with the following:
| Description | Example |
|---|---|
| Monthly revenue | R80,000 |
| Operating expenses | R55,000 |
| Other regular obligations | R5,000 |
| Cash remaining before new loan | R20,000 |
The business should not assume it can commit the entire R20,000 to repayments. It needs a safety margin for fluctuations and unexpected costs.
Ask a qualified financial adviser or accountant to help assess affordability before accepting a loan.
What makes a strong SEDFA application?
A strong application should demonstrate:
- A registered and identifiable business.
- A clear funding purpose.
- A realistic market opportunity.
- Evidence of trading or project feasibility.
- Financial records.
- A repayment plan.
- Relevant management experience.
- Supplier quotations.
- Evidence of demand.
- Risk management.
Choosing the right loan term
A loan should ideally be matched to the useful life of the asset or the period in which the investment generates returns.
For example:
- Equipment may justify a longer repayment period if it generates income over several years.
- Seasonal working capital may require a shorter financing arrangement.
- Stock purchases should be linked to a realistic sales and cash-recovery cycle.
Avoid borrowing long-term money for an expense that does not generate lasting value.
Common mistakes
- Borrowing more than the business can repay.
- Using loan funds for personal expenses.
- Failing to include maintenance and operating costs.
- Assuming revenue will increase immediately after buying equipment.
- Submitting projections without explaining how sales will be generated.
- Ignoring existing debts.
Frequently asked questions
Rural businesses may qualify for relevant development finance products, subject to the programme’s criteria.
Equipment finance may be available for qualifying projects. The equipment should be linked to the business’s operations and supported by quotations.
Security requirements vary by product, loan size and risk assessment. Confirm the current requirements directly with SEDFA.
Start compiling management accounts, bank statements and sales records. Ask the funder what alternative documents it accepts for businesses without formal financial statements.