Small businesses are key drivers in the South African economy. They contribute almost 40% to the GDP, yet struggle to raise the capital required to support growth.
Fortunately, there are small business funding alternatives to banks for SMEs in South Africa.
Why are small enterprises and start-ups being forced to look elsewhere for growth capital?
Disconnect between small business funding needs and bank loans
According to a report by McKinsey & Company, around 90% of funding in South Africa goes to businesses that are more than five years old.
This is largely due to traditional lenders imposing strict criteria on their loan approval processes. In the majority of cases, only businesses with a stable five-year profile are eligible for bank-approved funding.
Another factor disqualifying start-ups is finance providers’ heavy reliance on credit metrics in the decision-making process.
Without a financial track record or good credit score, emerging businesses are excluded from raising the capital they need.
Formal lenders are not solely to blame for the funding stalemate.
Small business owners in South Africa aren’t sufficiently aware of available financial support.
Even when they are, poor liquidity and cash-flow management results in a failure to deliver the financial outcomes required to secure the funding.
Main reasons SMEs seek alternative funding
Small business owners pursue alternative funding for a number of reasons.
Quick turnaround times. Alternative finance providers typically process funding applications within five working days.
Relaxed qualifying criteria. Capital is more easily available.
Low or no credit requirements. Even businesses with a low credit score or history of debt can qualify for alternative business funding.
Alternatives to bank loans for businesses
Here are a few alternatives to consider when attempting to raise small business capital in South Africa.
Crowdfunding finances businesses through nominal investments made by multiple investors via online platforms like Uprise.Africa and Thundafund.
Invoice financing is a type of short-term loan backed by the business’s outstanding accounts receivable.
Peer-to-peer financing connects borrowers and lenders on online P2P lending sites, such as RainFin and PeerFin.
Angel investors fund start-ups and young businesses without taking equity in the company.
Asset-based financing uses high-value business assets, such as machinery, equipment and inventory, to secure the funds.
Venture capitalists take equity in the business in exchange for capital.
A low-risk alternative: asset-based business funding
Asset-based business funding is a low-risk financing model that uses an asset as security.
If the funds are not paid back within the agreed term, only that asset can be sold and the proceeds used to cover the debt.
The business’s income and other assets are precluded from any further legal action.
When an asset-based loan makes good business sense
When funding is needed to bridge a short-term gap in cash flow or to take advantage of a viable business opportunity, it can be the key to business survival and growth.
For example, using a company vehicle to secure the funds required to complete an outstanding project makes business sense.
How to apply for secured small business funding with Lamna
If your start-up requires access to capital fast, Lamna processes small business funding within 24 hours.
Simply complete our online application form. Provide details about the asset to be used to secure the funding. We’ll revert with an offer, which you can accept or reject.
If the capital we offer matches your business requirements, the asset is brought to one of our branches, where it’s appraised and stored for the duration of the contract.
The funds are electronically transferred into your small business account.
At Lamna, we offer fast, discreet loans against the value of a wide range of assets, from luxury watches and jewellery to vehicles or artwork.
Client borrows R10,000 for 90 days.
Total Cost of Loan
Fixed rates range from 36% to 60% APR and payment options range from minimum 3 to maximum 24 months. Apart from the initiation and monthly fees shown below, the only additional fee is credit life insurance if the borrower does not have this already.