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Feb 17, 2012

Banks’ stringent finance criteria open way for alternative lenders

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The civil engineering and construction sectors, which are already expe- riencing a decline in year-to-year earnings, largely owing to government’s underspending on infrastructure, are now faced with an additional challenge of securing financing for projects and con- tracts through commercial banks, says private lending solutions provider Paragon Lending CEO Gary Palmer.

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
Creamer Media Senior Deputy Editor Online
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