michael-longmire-RhBVoJnRqVg-unsplash (1)

How alternative lending options support SMEs

Funding remains one of the biggest limitations to both large and small businesses as banks adopt more stringent lending terms.

The contraction in the economy has seen investors and conventional credit providers alike pull back on lending. If credit provision for large corporates is being restricted, one can only imagine what is happening to businesses that have typically been fragile - the small and medium-sized businesses (SMEs).

The focus should be on empowering the entrepreneur and expanding their perspective when they think about access to funding.

Entrepreneurs have long fallen into the trap of familiarity. When they think funding, they naturally gravitate towards the traditional banks - forgetting the space that is full of alternative lenders.

The biggest obstacle for alternative lenders is not bad debts or stringent credit policies, but educating entrepreneurs about the benefits of alternative funding solutions.

Among the reasons entrepreneurs get declined for funding is a misalignment between their funding needs and the potential funder’s lending criteria.

Other countries, such as the UK, have clearly become conscious to this misalignment. Since 2016, as part of the UK government's bid to promote small business, they passed an Act (SBEE Act) that obliged the major banks to refer SME finance applications that they have declined to alternative credit providers.

We certainly need that in South Africa, an intentional referral effort by banks to connect SMMEs with alternative funders. Nonetheless, entrepreneurs must do their homework to find alternative funders that match their business requirements and stage of the business’ life. Alternative funders tend to be niché and specialised, with their credit policies built around funding support.

Small businesses must think about a concept that's not as complex as it sounds: building a “data bank”. Many alternative funders use transaction data to perform their risk underwriting processes. Having reliable transaction data opens new channels of funding.

Asset-backed solutions are well suited for businesses that have equity trapped in assets they already own. They can leverage business assets (for example, vehicles or specialised equipment) by providing them as security to alternative lenders to access quick short-term funding.

Cash is, and always has been, king in any business. Furthermore, a rand received by a business today, if redeployed effectively, is better than a rand received tomorrow. Businesses fail every day, due to cash flow pressure as debtors stretch repayment terms.

The funding solution seeks to address working capital and cash flow challenges for business that have invoiced their debtors. The funder buys a business's future invoice for a fee. This allows businesses to transfer the risk of the invoice to the funder and unlock the cash from its debtors by getting it upfront.

The availability of fintech lenders challenges conventional lenders in the algorithms that they use to understand risk. They cut the high acquisition costs and operating leverage from their business models, as they lend through proprietary channels.

Mandla Khupe is the head of commercial at Retail Capital.

Latest Articles

Interview: South African Techpreneur Aisha Pandor Out to Sweep Kenya

04/01/2021

Aisha Pandor-SweepSouth Cofounder and CEO. Determined to link homeowners to cleaners and eradicate the plights they faced came the inception of Sweepsouth. The online platform, which began with the home-cleaning service, is now operating in 4 major cities in South Africa, Nairobi and a future expansion to West African countries in the works.   Women’s…

Read More

Litigation funding: Pioneering an alternative asset class in South Africa

04/01/2021

Provided By Taurus Capital 18 Mar 2021 Litigation funding occurs when a third party, with no direct interest in a legal case, finances the legal costs in return for a share of the claim proceeds if successful. “This form of finance allows proceedings to be pursued which otherwise would be hindered by a claimant’s lack of…

Read More

50th South African school now water-secure thanks to Woolies Water Fund, MySchool MyVillage MyPlanet

03/24/2021

Emafini Primary School in New Brighton, Gqeberha is the 50th school to receive a comprehensive water harvesting system from the Woolies Water Fund, helping them become water secure. The water harvesting system consists of two x 10 000l water tanks, gutters on the roof to channel the rain water into the tanks, a filtration system and large…

Read More

Interview: South African Techpreneur Aisha Pandor Out to Sweep Kenya

04/01/2021

Aisha Pandor-SweepSouth Cofounder and CEO. Determined to link homeowners to cleaners and eradicate the plights they faced came the inception of Sweepsouth. The online platform, which began with the home-cleaning service, is now operating in 4 major cities in South Africa, Nairobi and a future expansion to West African countries in the works.   Women’s…

Read More

Litigation funding: Pioneering an alternative asset class in South Africa

04/01/2021

Provided By Taurus Capital 18 Mar 2021 Litigation funding occurs when a third party, with no direct interest in a legal case, finances the legal costs in return for a share of the claim proceeds if successful. “This form of finance allows proceedings to be pursued which otherwise would be hindered by a claimant’s lack of…

Read More

50th South African school now water-secure thanks to Woolies Water Fund, MySchool MyVillage MyPlanet

03/24/2021

Emafini Primary School in New Brighton, Gqeberha is the 50th school to receive a comprehensive water harvesting system from the Woolies Water Fund, helping them become water secure. The water harvesting system consists of two x 10 000l water tanks, gutters on the roof to channel the rain water into the tanks, a filtration system and large…

Read More

Aiming high: how to make investment choices in the cannabis world

03/24/2021

Picking stocks in the cannabis space can be a daunting task, but what once used to be a very ‘out there’ sector is now whetting the appetite of investors. It all started in 2018, when Canada legalised recreational use, but the UK is becoming an increasingly fertile ground for the sector after the FCA allowed…

Read More