Advice and Opinion

New lending innovations address market demands

South Africa’s banking sector remains under pressure following the 2008 recession, resulting in banks continuing to impose strict lending criteria on both businesses and consumers. In light of the price increases that took place in 2015, including petrol price increases, the increase in municipal rates and the increase in interest rates, banks are likely to become even stricter in 2016.

This is according to Gary Palmer, CEO of Paragon Lending Solutions, who says that South Africa’s non-bank lending industry has consequently stepped in to fill the gap of meeting the growing demand from business owners and property investors seeking capital fast. He says that as such, a myriad of innovative products from non-bank lenders are entering the market, thereby bolstering the non-bank lending sector and, enabling lenders to be more competitive.

“As a result of banks adhering to stringent lending regulations, access to capital is a continuous challenge for business owners and property investors who need to secure business transactions timeously. As such, non-bank lenders are developing innovative products to address borrowers’ financial needs. These products include new innovative property mezzanine funding, invoice discounting, bridging finance, crowd funding and access facilities or otherwise known as overdraft facilities.”

According to Palmer, invoice discounting has become a popular method of borrowing in South Africa. “Invoice discounting allows business owners and property investors to apply for advances on capital that is due from clients, as opposed to waiting for payment from clients. Delayed payment from clients can be very problematic, and invoice discounting enables business owners and property investors to access money which is tied up in the invoicing process.”

Palmer says that another innovative lending product which is proving to be popular among South African business owners and property investors is bridging finance – a short-term loan that ‘bridges the gap’ between the termination of one loan and the start of another. “Due to the long lead times between finalising the paperwork from a transaction and obtaining the capital, which can take up to two months, bridging finance is often needed to provide businesses with access to funds quicker than traditional bank loans.”

He says that a product that has gained popularity fast is crowdfunding. He explains that this is the practice of raising capital from a large number of people to fund a venture, and can often be a simpler method to obtain capital. “Crowdfunding is also often more cost effective than obtaining a loan from a bank, which comes with high interest rates, and can be structured to suit specific business needs. “If we look at the 2015 Crowdfunding Industry Report, which reveals that crowdfunding increased globally by 167% in 2014 to reach $16.2 billion accumulated, and in 2015 it estimated to raise $34.4 billion, it is clear that investor interest in crowdfunding platforms will continue to grow in the years to come.”

Palmer says another product gaining popularity is access facilities, also known as overdraft facilities, which Paragon has been offering to clients for a number of years. He explains that this product allows access to capital to secure equity and property.

He says that borrowers are not always knowledgeable about what exactly banks are able to offer and therefore tend to approach non-bank lenders who they know offer these services. Palmer says that Paragon has lately seen that borrowers who are looking to secure a loan fast, are approaching non-bank lenders as they are able to provide a full service. He notes that it is important that borrowers are educated about the services being offered.

“The non-bank lending industry continues to advance as new products are conceptualised to meet industry demands, and because of this alternative lenders are becoming a preferred source of capital for business owners and property investors,” he says.