Substitute finance is an important part of the credit mix for entrepreneurs in a sluggish economy.
The entrepreneurial spirit of South Africans is one of our finest qualities. Even in exceptionally difficult times, business owners are taking advantage of opportunities. Unfortunately, macro-economic data and tighter regulations have led to a risk adverse lending environment. Adding alternate lending into the financial mix is becoming a growing trend.
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Property development as a litmus test
Speaking to property developers has driven home just how risk averse the traditional banks have become. Unless pre-sales are at, or close to, 100%, many banks are cautious about development deals. This has resulted in a slowdown in the sector and has placed pressure on many developers.
Adding to this pressure is the conservative nature of the local consumer. I’ve heard from a developer that people are far more willing to purchase houses which were 90% complete, rather than off-plan, even though they may be saving more than R100 000 on the same house in the same neighbourhood by buying off-plan. In a skittish economy, consumers are looking for solid evidence of what they are investing in.
To work around these conditions, some developers are accessing funding from non-bank lenders, despite the slight premium. This allows them to get the development ball rolling.
Deals such as these are often achieved by one non-bank lender putting up the money to allow the installation of services. Once these are installed, finance can be secured to begin work on the top structure. Banks are often only able to look at extending finance at the pre-sales stage, and in my experience, only for bigger developments.
Alternate lending companies can assist
The alternate lending space is already showing signs of consolidation, as smaller players team up with larger companies. That said, lenders are still specialising. Some prefer property development, some equipment finance, while others are lending against stock. However, it’s difficult for an entrepreneur to know what the options are.
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Each deal is different. Lenders will look at how long the money is needed, what the exit strategy is and, of course, cash flow. A key reason why more and more business owners are turning to alternate lenders is that they won’t be fixated on security. In many instances, non-bank lenders will look at cash flow before security when making an investment decision.
I am often asked about revolving lines of credit. Most banks have taken the access facility away from home loans as it is just too expensive for them. Basel III has been a key influencer in this. Alternate lenders can still offer revolving credit because they are not impacted by Basel requirements, which can be a big help to a business owner looking to make use of time-sensitive opportunities.
Entrepreneurs are focused on running and growing their business. They are not finance specialists. Independent lenders can advise on what credit is available, assist in preparing documentation, and access a large scope of potential investors – including the traditional banks. Now, more than ever, it’s crucial to keep the deals flowing. A healthy cooperation between traditional and non-traditional lenders is the key to achieve this.