Be selective when choosing private credit funders

Be selective when choosing private credit funders

Gary Palmer, CEO of Paragon Lending Solutions

In the search for yield, off the back of a disappointing local equity market and more companies delisting from the JSE, some investors are seeking new opportunities to build wealth. One avenue many are trying is lending money via private credit to businesses.

Compounding this trend is the less-than-ideal landscape of high interest rates and the fluctuations in liquidity that some businesses may be experiencing. While private credit will be an appealing option, it’s important to understand the realities involved.

The prospect of earning extra yield can blindside individuals to the full extent of offering private lending facilities. Some may not realise what needs to be included in a deal.  For example, many individuals fail to grasp the legal intricacies involved when a borrower defaults.

From the borrower’s side, some may not know what to ask, desperate for the funds to be released, without realising what they are signing.

Security concerns loom large, along with maintaining compliance with the National Credit Act (NCA), Consumer Protection Act (CPA) and the Financial Intelligence Centre Act (FICA) as just some aspects involved in a successful and compliant deal.

The assumption, for example, that property serves as foolproof security can be misleading. There are many legal practicalities to consider. It’s important to keep in mind that it can take awhile to exit property transactions, more so than other assets, particularly as South Africa’s legal system is slow. There are also risks involved such as unpaid municipal rates and body corporate levies.

The importance of working with reputable lenders cannot be overstated. Don’t be fooled by private funders or non-bank lenders who promise speedy transactions or a relaxation of certain conditions or security. What happens in the case of default is the most important factor. It can happen that non-bank lenders run out of money themselves and go out of business and then clients are forced to exit deals. It’s essential to look at the financial strength of a lender and the support behind them. This is why it’s so essential to ask questions. As non-bank lenders will have questions for the borrower, it’s crucial that the borrower also asks questions about the lender, such as:

  • How long have they been in business?
  • How are they funded?
  • What is their long-term strategy?
  • How many defaults have they dealt with? If there are quite a few on their books, such as ten deals and ten defaults, this could be a red flag depending on how the defaults were handled.

Unscrupulous private lenders may attempt a ‘loan to own’ strategy whereby they intend to claim the security asset if there is a default, but that isn’t allowed as every person has the right to fair legal recourse.

Establishing partnerships with entities well-versed in compliance procedures and legal requirements can be the differentiator between a successful venture and a financial pitfall.

Reputable lenders are typically financially stable and have a solid track record. Choosing a lender with a strong financial standing reduces the risk of sudden changes in lending terms, interest rates, or the lender’s ability to provide funds when needed.

Established lenders are more likely to offer competitive and fair interest rates, along with clear and transparent terms and conditions. They communicate effectively on repayment terms, fees, and any other relevant details. This transparency helps to make informed decisions and to avoid unpleasant surprises down the line.

Working with a reputable lender adds credibility to your business in the eyes of other stakeholders, such as suppliers, investors, and customers. It further demonstrates that your business is financially responsible and has the support of trusted financial institutions. A reputable lender will also deliver prompt and professional services.

To make the most of the ample opportunities the new year will bring, particularly for businesses who may have assets but lack liquidity, it’s essential to align with a reputable funding partner as soon as possible. Having robust and reliable lending facilities in place will ensure that no opportunities are missed.