Feb 17, 2012
Banks’ stringent finance criteria open way for alternative lendersBack
Paragon Lending|Price|South Africa|Gary Palmer
© Reuse this
He explains that banks are under signifi- cant pressure to meet the more stringent liquidity and funding requirements of Basel 3, a global regulatory standard agreed by the Basel Committee on Banking Supervision members, of which South Africa is one.
“As banks become more selective in terms of financing, self-employed investors will need to seek alternative funding sources,” he says.
Further, Palmer points out that, as a result of the mounting pressure, banks are increasing their reliance on noninterest income as a source of earnings, shifting their focus from direct lending to growing trading income over the short term.
This trend is evident in an analysis of South Africa’s major banks conducted by global professional services firm Price- waterhouseCoopers and released in March last year, which revealed that noninterest income for the second quarter of 2010 was up 8.4% on that of the first quarter.
Noninterest income represented about 53.8% of total income across the four major banks, up from 53% in the first quarter of 2010.
Palmer notes that owner-managed companies, largely in the civil engineering and construction sectors, are likely to face challenges when securing funding from commercial banks.
“The engineering sector will battle to get funding from banks this year, because banks also consider the inconsistency of the sector, even if their relationship with the company has been a long one,” he adds.
However, Palmer highlights that, amid the challenging times, there are financing alternatives available to construction companies and engineers. “There are alternative lenders that are willing to provide financing for contracts and projects.
“We were recently approached by an engineering business to fund its potential growth. Given the new orders received by the business, we approved a financing facility within 36 hours,” he points out.
Palmer admits that more work needs to be put into creating awareness about nonbank lenders, so that companies have more options in securing financing for projects, as well as the sustainability of their businesses.
“Although we see the stringent criteria by banks to fund companies as a growth opportunity, we must continue to work hard to achieve the level of awareness that will help companies stay afloat and sustain our economy,” he says.
Further, he points out that there are differences between how commercial banks and alternative lenders assess financing applications.
“We look at a deal differently, [compared with] the bank. We look at future orders.”
Paragon Lending Solutions, which offers funding by securing property as collateral, says construction companies that are likely to experience greater financing challenges are those that do not have any security.
Meanwhile, Palmer stresses that keeping a company’s accounts and order book in order is key to securing funding.
“Bookkeeping is a skill that is sadly overlooked in many small businesses and entrepreneurial ventures because business owners try to minimise expenditure on extras,” he says.
However, he emphasises that accurate and up-to-date financial information provides a potential lender with information on the security of a loan and, there- fore, should not be overlooked.
Edited by: Chanel de Bruyn© Reuse this Comment Guidelines
Other Civil Engineering and Construction News
Many South African private and public construction projects are experiencing severe cost overruns and delays, which inevitably lead to claims by contractors for a revised or extended completion date and for the payment of additional and associated costs, says...
The quality of construction work is one of several vital issues that should be considered before construction can start on major projects, as this eliminates the risks of facing challenges later on in the building phase, construction industry trade association Master...
The South African construction industry, which many expect to go through a high growth phase this year, owing to an increased number of construction projects, and a greater focus on housing projects and large-scale infrastructure projects, is facing severe problems...
Recent Research Reports
Automotive 2014: A review of South Africa's automotive sector (PDF Report)
The report provides insight into the business environment, the key participants in the sector, local construction demand, geographic diversification, competition within the sector, corporate activity, skills, safety, environmental considerations and the challenges...
Construction 2014: A review of South Africa's construction sector (PDF Report)
Construction data released during 2013 hints at a halt to the decline in the industry during the last few years, with some commentators averring that the industry could be poised for recovery. However, others have urged caution, noting that the prospects for a...
Electricity 2014: A Review of South Africa's Electricity Sector (PDF Report)
This report provides an overview of the state of electricity generation and transmission in South Africa and examines electricity planning, investment in generation capacity, electricity tariffs, the role of independent power producers and demand-focused initiatives,...
Defence 2013: A review of South Africa's defence industry (PDF Report)
Creamer Media’s 2013 Defence Report examines South Africa’s defence industry, with particular focus on the key players in the sector, the innovations that have come out of the defence sector, local and export demand, South Africa’s controversial...
Road and Rail 2013: A review of South Africa's road and rail infrastructure (PDF Report)
Creamer Media’s Road and Rail 2013 Report examines South Africa’s road and rail transport system, with particular focus on the size and state of the country’s road and rail network, the funding and maintenance of these respective networks, and the push to move...
Liquid Fuels 2013 (PDF Report)
Creamer Media’s 2013 Liquid Fuels report examines South Africa’s liquid fuels market, focusing on the business environment, oil and gas exploration, the country’s feedstock supplies, the development of South Africa’s biofuels industry, fuel pricing,...
This Week's Magazine
Electricity Supply Corporation of Malawi (Escom) is inviting expressions of interest from eligible firms for the supply and install automatic fire suppression systems in the cable tunnels at its Nkula B and Tedzani power stations, on the Shire river. Escom will...
Lubricant company Castrol will provide lubricants, brake and hydraulic fluids for use in the Bloodhound supersonic car (SSC). The 1 600 km/h car, which will attempt to break the land-speed record in 2015 through to 2016, is being constructed in Bristol, in the UK.
State-owned electricity producer Eskom and government are assessing ways to secure the financial resources necessary to enable the utility to resume power-saving schemes, as well as to contract with those municipalities and independent power producers (IPPs) able to...
Diversified industrial engineering group PSV’s subsidiary African Cryogenics is gearing up to increase its operating capacity through an investment into a 7 000 m2 manufacturing facility, which is under construction and expected to be completed at the end of this...
Freight and logistics service provider Grindrod has a R10-billion project pipeline planned for sub-Saharan Africa, says Grindrod CEO Alan Olivier. He says the capital expenditure for some of these projects has already been approved by the Grindrod board –...