As increased economic and regulatory pressure on the banking sector forces banks to pursue new income streams such as unsecured lending with higher margins, securing finance to start or grow a business is likely to be an even greater challenge for self-employed South Africans. However, there are other alternative sources of funding options available to companies and entrepreneurs with sound business prospects for 2012.
This is according to Gary Palmer, CEO of Paragon Lending Solutions who says that even those business owners with good businesses are not likely to meet the banks’ criteria for a business loan.
“Banks are under a lot of pressure to meet the more stringent liquidity and net stable funding requirements that Basel 3 demands. As such, banks are increasing their reliance on non-interest income as a source of earnings, shifting their focus from direct lending to growing trading income over the short term.
This trend is evident in the PriceWaterhouseCooper analysis of the major South African banks released in March 2011. The report revealed that non-interest income for Q2 2010 was up 8,4% on Q1 2010 and represents approximately 53,8% of total income across the four major banks – up from 53.0% in Q1 2010.
“As banks become more selective with regards to financing, self-employed investors will need to seek alternative sources of funding. We are already noticing more and more investors moving towards second tier lenders and away from banks,” he says.
These second-tier lenders tend to be forward-looking in terms of assessing the loan criteria. “While the banks will decline a loan to a business due to past financial results and the quality of financial information, other lenders – such as asset-backed lenders – will focus on the future prospects of the business as often substantiated but a strong order book of the business as well as the value of unbonded property owned by the business or business owner. If the business is deemed to have good future prospects and can put the property up as security against the loan, the probability of being able to secure a loan is relatively high,” says Palmer.
Know your books
Palmer stresses the importance of keeping one’s accounts and order books in order. “Bookkeeping is a skill that is sadly overlooked in many small businesses and entrepreneurial ventures, because business owners try to minimise expenditure on “extras”. However, accurate and up-to-date financial information gives a potential lender an excellent picture of the security of a loan and should therefore not be overlooked.”
He warns that while many banks are giving the impression of offering support to SMEs, business owners should carefully assess the terms of these loans before rushing into a deal.