Social lending has arrived in South Africa, and it promises to change the game for people who need to borrow funds as well as for savvy lenders who want to get good returns on money they have to invest.
According to Sean Emery, co-founder and CEO of RainFin, it’s an option business owners should give serious consideration to if they are looking to put some of their portfolio in a higher-yielding vehicle than a bank savings or fixed deposit account.
“The concept of social lending (or peer to peer lending) cuts banks out of the loop so that borrowers can pay lower interest rates, investors can get higher returns, and both parties can benefit from lower bank charges and fees,” he explains.
“Though new to South Africa, social lending is proving to be wildly successful in the Us, Europe and China.”
Peer to peer loans
In the US, for example, peer to peer loans have eclipsed more than $1 billion since 2006 and social loan volumes are around $50 million a month and growing, according to a report by TechCrunch.
“From the perspective of a lender looking for better returns on their money, social lending is an investment opportunity that offers better interest rates than banks do for cash deposits,” continues Emery.
“Essentially, you become the financer lending money to people who need it, an arrangement that is beneficial both to you and the people who borrow from you.”
Each loan is facilitated through an online platform that allows you to assess the credit risks of prospective borrowers and then loan money to them at an interest rate that is attractive to you and to them.
Cheap and convenient
As a lender, if you chose only to invest in AAA grade loans you might be able to secure returns of 6-10% compared to the 4-5% a bank might offer on a 30-day call account. Another benefit is that you will earn interest monthly from those that you loan money to, giving you an extra stream of income.
In the background, the social lending marketplace will have done the hard work of vetting each borrower’s credit record, so that you are making your investment decision based on transparent, accurate and up-to-date risk information.
The back-office infrastructure for credit-vetting and credit control ensures that only borrowers with a good risk profile are placed in the marketplace and that bad debts are effectively managed. It’s a cheap and convenient process that cuts out much of the cost and inefficiency usually associated with personal loans.
The high interest rates for investors do not necessarily come at a high risk, provided you take care to manage your investments efficiently. “It’s good practice, for example, to manage your investment risk by spreading your money across many different loans at once,” says Emery
“This means that you’re not exposed to one borrower, but spread your risk across a portfolio. The international experience shows that investors who adopt this strategy enjoy low investment volatility, coupled with returns that outperform traditional banking savings products.”
According to Emery, though there are risks to peer to peer loans, RainFin has learnt a great deal from international experience and has aligned itself with the best practices established by loan marketplaces in other parts of the world.
Some examples of these include the following:
- Strict general eligibility requirements for all borrowers. They are required to have identification numbers, be at least 18 years old, and belong to a financial institution.
- A strict credit vetting process includes evaluation of credit report data, income, employment, loan amount and term and other information that may indicate the borrower’s ability and willingness to repay the loan. “We take responsibility for sourcing additional documents such as payslips,” says Emery.
- Like the global P2P lending sites, RainFin ensures that real names and other identifying information about borrowers and lenders is never shared.
- “We report account activity to all three of the major credit bureaus,” adds Emery. “This means late or missed payments will damage a borrower’s credit score and make it more difficult for him or her to get a loan in the future. Serious delinquency could result in their account being handed over for legal collections
Social lending can be a viable investment alternative. “As part of a diversified investment portfolio, it can give you great returns that outperform most vehicles with a similar risk profile,” says Emery.
Top Sectors For SMEs In 2019
“As such, SMEs in the construction, communications and electrical fields are all likely to benefit from supply and sub-contracting agreements over the coming years.”
While the South African economy has been underperforming for a number of years, the first positive signs of turnaround started to become visible by the second quarter of 2018, and by the end of the third quarter, data supplied by Statistics South Africa showed that the economy had indeed grown by 2.2 percent, compared to the previous quarter. This uptick is expected to have a positive effect on business confidence in 2019.
This is according to Jeremy Lang, regional general manager at Business Partners Limited (BUSINESS/PARTNERS), who says that certain business sectors have already seen an increase in opportunities for small businesses and start-ups.
“While these sectors will not be without challenges, the following four industries are likely to offer the best opportunities for small and medium enterprise (SME) owners to grow their enterprises in the coming year.”
The World Travel and Tourism report 2018, revealed that the direct contribution of the travel and tourism sector to South Africa’s GDP has been projected to rise from R136bn in 2016 to R197.9bn by 2028 – set to make up a total of 3.3 percent of the country’s total GDP, says Lang.
“Although this sector experienced some setbacks in 2018, such as the drought in the Western Cape and stricter visa regulations for children entering the country, both the water restrictions and visa regulations have been relaxed and the sector is once again poised for growth,” he says.
Statistics South Africa has credited this industry with being the biggest driver of growth in the country’s GDP, having expanded by 7.5 percent in September 2018, says Lang. “To bolster this, Government has made a concerted effort to stimulate small business growth in this area with initiatives such as the Black Industrialist Programme and the SA Automotive Masterplan.”
He adds that businesses in the manufacturing sphere could therefore likely see significant opportunities in the form of outsourcing contracts and new partnerships with large corporates.
“The debate around land expropriation has occupied most of the discussions surrounding the agricultural sector in 2018, with some questioning growth prospects of this sector. However, this industry has a lot of growth ahead of it, as demonstrated by its 6.5 percent growth over the last three months of 2018,” explains Lang.
“Further to this, the industry is also already taking significant advantage of seven climatic regions in South Africa, with the export of a wide variety of high quality fruit and vegetables increasing substantially,” he points out. The recent outbreak of foot and mouth disease that has resulted in the suspension of the country’s FMD-free status will however significantly impact meat exporters.
In terms of opportunities for SMEs, he says that these may most likely be found in the rural and underdeveloped regions, where the need for resources like efficient transport, state-of-the-art cold storage, better irrigation and private power generation will be key to making agriculture projects more productive and competitive in the export market.
Data and information technology
Connectivity and information technology infrastructure are both crucial to business and employment growth in South Africa, says Lang.
“With many municipalities and the Western Cape government committing to providing all of its residents with free data as part of a plan to expand public Wi-Fi network access, it is clear that this is also becoming a high priority on a state level.”
It has also been reported that South Africa is awaiting the arrival of three international data centres, and large players in the communications sphere, including Vodacom, Telkom and Vumatel, are making huge strides in drastically growing the country’s fibre optic backbone, he adds. “As such, SMEs in the construction, communications and electrical fields are all likely to benefit from supply and sub-contracting agreements over the coming years.”
In conclusion, Lang says that as South Africa’s economic growth has started to turn around, business owners should keep their ears to the ground as 2019 is highly likely to be a year of opportunity.
Herman Mashaba To Talk On City Of Jo’burg Job Creation Initiative
Herman Mashaba to talk on City of Jo’burg job creation initiative at 2019 Business Day TV SME Summit.
Leading organisations at the SME Summit
SME Insurance Checklist For New Year
Malesela Maupa, Head of Product and Insurer Relationships at FNB Insurance Brokers, advises SMEs to consider the following factors when reviewing their policies.
Business owners who are planning for the year ahead should not overlook the importance of reviewing their insurance policies to ensure they are adequately covered against insurable risks.
Malesela Maupa, Head of Product and Insurer Relationships at FNB Insurance Brokers says, every year businesses face unique challenges ranging from credit and market risks, technological disruptions, compliance, operational and regulatory risks, amongst others. As a matter of precaution, insurance policies should at least be reviewed or updated once a year.
He advises SMEs to consider the following factors when reviewing their policies:
- Employee movements – if there are any employees who have left or joined the company, ensure that your policy is updated accordingly.
This type of cover normally depends on the role and contribution of the employee to the business. For instance, directors may be covered for Key Person Insurance and Directors & Officers Liability insurance.
- Protest Actions – this year is the national election year and leading up to elections we can expect to see an increase in the frequency and severity of protest actions, riots and strikes. Thus, it is essential to ensure that adequate special risks cover is in place from the South African Special Risks Insurance Association (SASRIA).
SASRIA provides cover to both individuals and businesses against special risks like civil commotion, public disorder, strikes, riots and terrorism at affordable premiums.
- Cyber risks – it is essential to communicate with your insurer or broker and find out if there are any new risks that your business should be protected against. Cyber incidents continue to be a major risk for businesses especially in the SME sector. Over the last couple of years there has been a major increase in the number of reported cyber incidences.
More businesses are now facing increased cyber threats due to their increased dependency on technology, relating to their internal and customer data being compromised by fraudsters. It is therefore essential to have some form of cyber risk insurance cover and/or enhancement of data security protocols.
- Regulatory changes – every year there are a number of regulatory changes that impact businesses directly or indirectly, which may result in fines and penalties for non-compliance.
- Natural catastrophes – the increase in the frequency and severity of extreme weather conditions, coupled with intensifying natural catastrophes will continue to have a significant impact on businesses.
Businesses should ensure they are adequately protected against these risks to avoid incurring sever financial losses.
- Business changes – should a business consider moving to a new location, purchasing new premises or venture into new business activities, these types of changes could have a major impact on its risks profile. As a result, the policy needs to be updated accordingly.
- New and Enhanced products – An innovative culture has taken over the insurance industry and ever so often we see the introduction of new products or the enhancement of existing products. Get in touch with you broker to advise you on any new products that might add value to your existing insurance portfolio.
“Reviewing your policy regularly gives you peace of mind knowing that you can focus on running your business effectively, without worrying about unforeseen risks,” concludes Maupa.
Start-up Advice1 week ago
6 Fundamental Steps To Consider Before Venturing Into The South African Cannabis Industry
Business Landscape1 week ago
How Algorithmic Forecasting Can Improve Business Efficiency In Challenging Economic Times
Business Ideas Directory1 week ago
300 Business Ideas To Inspire You Into Entrepreneurship
Start-up Advice1 week ago
Outdoor Versus Indoor: How Different Conditions Will Impact Your Budding Marijuana Business
Women Entrepreneur Successes2 days ago
How A Serious Car Accident Led Founder Relebohile Moeng To Starting Afri-Berry
Lessons Learnt4 days ago
(Slideshow) Top Advice From Local Entrepreneurs That Will Change Your Business In 2019
Start-up Advice1 week ago
4 Things Nobody Tells You About Entrepreneurship
Company Posts1 week ago
Success Fuelled By Partnership