The release of the recent World Economic Forum’s Global Competitiveness report revealed that South Africa has fallen to 32nd place when it comes to the ease of obtaining a loan, down from 22nd last year.
According to Gary Palmer, CEO of Paragon Lending Solutions, this is due to the tighter lending regulations which have been implemented by the banks as a result of growing economic stress and increased compliance requirements by the banks such as Basle III, National Credit Act and the Consumer Protection Act etc.
Palmer says that business owners are being negatively affected by the tighter lending criteria. “A major complaint from many clients is that regardless of having a good track record with the banks, banks are not approving their loans, which in turn is hampering business growth. As banks become more selective with regards to financing, business owners are turning to alternative sources of funding for loans which will allow them to achieve their growth potential.”
He adds that Paragon has seen a noticeable upward trend in enquiries from clients with strong balance sheets and a lot of assets, many with unbonded properties, and because the banks’ turnaround times are increasing further there is greater propensity for businesses to use an alternative sources of funding.
“Because of the banks’ tougher lending criteria and protracted processing times, it makes sense for business to make use of alternative lenders to obtain short-term liquidity for commercial purposes, while waits for the bank to finalise his application further down the line.
According to Palmer, alternative lenders tend to be forward-looking in terms of assessing the loan criteria. “While many traditional banks will decline a loan to a business, other lenders – such as asset-backed lenders – will focus on the future prospects of the business. This decision is often substantiated by 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 use an asset as security for the loan the probability of being able to secure a loan is relatively high,” says Palmer.
He says that alternative lenders can play a crucial role in the growth of businesses and property developments in South Africa. “Alternative lenders tend to have more flexibility in lending compared with commercial banks. This flexibility coupled with fast deal turnaround times, has resulted in a greater demand by borrowers for alternative lenders in South Africa are not restricted by the major banks when it comes to finance as the lender, and should they have a valuable asset, these can utilise these alternative sources to acquire short-term finance from in order to be able to take advantage of investment opportunities,” concludes Palmer.