Worldwide, banks and other traditional finance providers are no longer the dominant players in the personal and business lending space.
In the US, only around 13% of small business loans are approved by banks each month. Alternative lenders are picking up the remainder.
The systemic risk of dealing with major banks is one factor. The ease of doing business with agile web- and cloud-based lenders is another.
Looking for a loan in South Africa?
So, what are a few of the alternatives to business bank loans in South Africa? And why is this niche lending sector booming in 2024?
Peer-to-peer lending
Peer-to-peer (P2P) lending is an alternative financing option where private lenders connect with potential borrowers on an online platform.
This lending model is popular for two reasons. Both lenders and borrowers get a higher rate than they would at a traditional bank, and transactions are entirely web-based.
Usually, P2P platforms have strict criteria for the use of funds. Also, you can expect to pay comparatively high fees.
If you fail to meet the repayment terms, you’ll be handed over to debt collectors, which is a significant black mark on your credit record.
The advantages of P2P lending include:
- more attractive interest rates
- flexible repayment terms
- quick and convenient online process
- large and small loans available.
Asset-based financing
One increasingly desirable solution is a short-term asset-based business loan. Cash is released against qualifying personal or business assets. The typical turnaround time from application to access to capital is around 24 hours.
Entrepreneurs and small business owners use accounts receivable, balance sheets, inventory, machinery or equipment to secure loans.
Other lenders, such as LoanAgainst, issue loans against high-value items, such as luxury wristwatches, jewellery, art works, hand bags, delivery vans, company cars and boats.
The available financing is based on the appraised re-sale value of the asset. Approvals are virtually guaranteed. Transactions have no impact on a client’s debt, repayment history and credit score.
The advantages of asset-based personal or business loans include:
- quick approval times
- rapid access to funding
- low risk
- no credit checks
- relaxed qualifying criteria.
Invoice financing
Invoice financing involves using a business’ unpaid invoices as collateral for a loan. This financing option improves cash flow by unlocking the funds tied up in the unpaid invoices.
It can be a straight loan, as in invoice financing, or it can be a cash advance of a percentage of the invoices’ value. In this instance, the business sells the unpaid invoices to the lender in a process known as invoice discounting.
One disadvantage of invoice financing is the hefty commission. Another is risk. If your clients don’t pay the invoices, you’re in trouble.
The benefits of using invoice financing to boost cash flow include:
- immediate access to funds
- no restrictions on the loan
- confidentiality
- no collateral required.
Why the alternative lending market is booming in 2024
Strict lending requirements, tedious application processes and slower approval times are forcing more small businesses to seek alternative funding.
That is a snapshot of the practical difficulties facing entrepreneurs, start-ups and small businesses in South Africa.
When you consider millions of South Africans have no credit history or the existing track record is too lean to generate a credit score, qualifying for a bank loan is often impossible.
Global bank collapses bank
Another factor driving the transition to alternative lenders is the elevated risk associated with banks in the US, UK, Europe and in South Africa.
The negative sentiment is underscored by recent failures of the Silicon Valley Bank and Signature Bank, high-profile collapses that have had dire consequences for the global economy.
As an article in Forbes points out, banking failures are not an anomaly. Over the past 24 years, 569 financial institutions in the US have failed.
South African banks not immune to systemic risk
In South Africa, the stats are as unnerving. Since 1990, 13 banks have been put under the curatorship of the Reserve Bank.
Among the most notable scandals of recent years, the VBS banking scandal involved a combination of bad management, liquidity issues and all-out looting.
The earlier collapse of African Bank won’t easily be erased from South Africans’ memory, either.
Both locally and globally, the past few decades have seriously shaken consumers’ faith in traditional banking. Once popular phrases like “as safe as the Bank of England” have fallen into disuse. Instead, we’re increasingly aware of the volatility and potential risk associated with modern banking.
At the same time, a flourishing number of alternative funding options have become available. Many are efficient, affordable and available online.
These require careful regulation (just as banks do).
However, they are meeting consumers’ funding needs. And in some cases, they’re offering easier access to finance and a better, overall customer experience than the big banks.
Considering alternatives to bank loans in South Africa? LoanAgainst specialises in providing short-term loans against movable assets (from vehicles through to luxury watches or artwork), to individuals and businesses. Contact us on 064 976 7106 for more information or simply complete and submit our online loan application.
