31 Jan Exploding alternative funding market offers radical change for SMEs
Exploding alternative funding market offers radical change for SMEs
The lending landscape in South Africa is transitioning. Taking the lead from their global counterparts, there are a host of smaller and FinTech lenders entering the market, bringing with them an exciting opportunity for SMEs looking for growth funding. However, by year-end we could see yet another shift.
As traditional organisations continue with their cautious approach, a host of new players have entered the South African lending market. These new players, including peer-to-peer (P2P) fintech companies, have replicated international models, and in some instances designed their own innovative products.
Figures released late December 2016 by P2P lending platform, Twino, and KPMG, show that the UK and EU alternative lending market has grown significantly.
While the report shows that the UK is still markedly ahead in alternative finance, with four times higher volumes (in aggregate) than the rest of Continental Europe, the EU is the dominate geography when it comes to online lending platforms. Lenders on the Continent are focusing on niches in both the subprime and prime unsecured lending segments.
P2P consumer lending makes up the lion’s share of the alternative online lending market with 72% of the total in Q1-Q3 2016. Business lending, meanwhile, is growing steadily, but volumes still remain low in comparison to the consumer space.
Local market forges ahead
Back home, the growth in the alternative lending space has largely been in response to the increased demand from SMEs looking for smaller and more short-term loans. These smaller deals generally attract more interest and are often unattractive to the bigger, traditional lenders.
Over the past year, Paragon has played a significant role in accessing debt funding for these new alternative financiers who then on-lend to individual business owners. We now have around 60 alternative lenders on our books, with new ones coming on board.
Like Europe, the demand for unsecured lending has also seen newer players specialising, with niched lenders now the order of the day. Online working capital financiers are finding traction. Added to this, various government incentives are proving quite attractive to opportunistic small businesses looking to grow operations. A good example of this is section 12 J of the Income Tax Act, which allows an investor to put money into a venture capital company and receive tax exemption on that investment, and which can then be passed on to SMEs. Recently Paragon has used this to raise R40 million for a client looking to grow their business.
While it’s great that there are so many niched specialist lenders in South Africa, there are moves afoot to leverage the collective power of lenders under one roof. It is reasonable to expect to see some consolidation in the lending market – although we expect this to happen later in the year.
International uncertainty, especially around shifts in regulations under the Trump administration, could see shifts in how banks are able to lend. However, the South African Reserve Bank has traditionally erred on the side of caution and we can expect a steady hand in our regulatory outlook. Similarly, if the US interest rates tick upwards, additional risk will enter the market and lending will be affected.
Finally, we are seeing more and more people approach us to help them with equity finance. This can significantly benefit companies looking for additional expertise and new networks, which comes with their new partners.
As always, making sure you work with a financial partner who has access to diverse funding and equity networks remains key for businesses looking to access the most appropriate finance options available.