Gary Palmer, CEO, Paragon Finance
Banks have become increasingly cautious about extending business loans, particularly to SMEs. The main reason for this is that banks are seeing higher impairments given increased interest rates and slowing economic growth. Consequently, stringent credit checks, collateral requirements, and lengthy approval processes are required by banks, leaving many businesses in the lurch, struggling to secure the funds necessary for their stability.
Crucial towards the end of the year is sufficient working capital to sustain business activities.
Alternative lending solutions are available, offered by a range of financial institutions providing flexibility, speed, and accessibility that traditional banks can lack, particularly in the current market. But many businesses may be unaware that they can look beyond the banks for funding.
Here are three trends to note if your business is looking for finance.
Nod to non-standard deals
Where banks are active is vanilla/straightforward transactions, competing heavily on price to secure those deals. But deals with perceived higher risk are not currently favoured by the banks. For alternative lenders, however, non-standard deals are possible, and proving to be a viable and often necessary option. Whether it’s an SME looking to bridge a cash flow gap, or a solar funding deal, or larger enterprise seeking agility in their financing, alternative lending channels offer hope and financial flexibility.
To illustrate, some businesses might be recovering from business rescue. Some will have liquidated their previous entity and started a new business. The entity has no operating experience, but the business owner has a track record. Given the commercial banks have specific criteria to extend lending facilities, usually including a business track record, the deal can be a non-starter. An alternative lender may, however, share a rising business owner’s vision and be open to finding a solution for funding.
Act accordingly
There is a noticeable delay in finalising funding options, partly due to the requirements of the National Credit Act and the Financial Intelligence Centre Act (FICA). It’s crucial for individuals and businesses to realise that these requirements may introduce a slowdown in the process of securing business funding. With a heightened emphasis on due diligence and regulatory compliance, more boxes need to be ticked, more documents need to be submitted, and more hoops need to be jumped through. It’s crucial to have your paperwork up to date and ready to go when applying for funding, to avoid any further administrative delays.
Keep in mind that the significance of Environmental, Social, and Governance (ESG) cannot be ignored – and can be a distinguishing feature in a funding application. For businesses that don’t align with ESG principles, there’s a possibility that funding requests may be declined.
Don’t wait
In this climate, it’s wise not to leave your funding applications to the last minute. November can be the general timeframe when funding closes until the new year, so it’s important not to wait to apply. Even more so if there are additional checks and balances to meet regulations.
No change to interest rates recently could also mean lower rates are on the horizon, as some economists believe. But suffice to say the costs of doing business make it essential to ensure sufficient cashflow. For businesses in South Africa, alternative funding solutions provide a glimmer of hope in an otherwise challenging credit environment.
