[Opinion] Alternative credit providers: What businesses need to know

Securing finance is not the same experience that it was 100 years ago, or even 10 years ago when the process still involved a mountain of paperwork and endless back and forth.

Daniel Goldberg, co-founder and chief executive of Bridgement, believes the game has changed thanks to innovative business models, digitisation efforts, and a new push towards alternative sources of credit. This has given rise to South Africa’s ecosystem of alternative credit providers.

But who should we be trusting? Non-legacy lenders represent a paradigm shift in how businesses can secure financing in new and convenient ways. However, it is imperative to identify the signs of a reliable lender and what that lender can do for you as a business.

What is an alternative credit provider?

Traditionally alternative credit providers have been defined as a source of funding that’s an alternative to traditional banks. The trade-off was simple: in exchange for a shortened application and approval process (requiring minimal client information, credit history or security/collateral), money could be lent with the possibility of potentially higher interest rates or additional fees.

The need for alternative lenders is significant. According to a 2015 survey of small and medium-sized enterprises (SMEs) in South Africa, only 2% of respondents indicated that they rely on banks for funding. However, the survey also suggested that SMEs are unsure of what products they need from banks though, as they couldn’t articulate what was lacking.

Not all alternative credit providers are the same, though. Some can be dangerous, such as payday loan schemes or loan sharks that deploy predatory lending tactics that can leave clients in a debt trap – which is far from ideal for a start-up enterprise.

What’s needed is a middle ground. The archaic, cumbersome experience of securing credit, characterised by a lengthy administrative process, can be offset by a new kind of lending arrangement. This is where fintech comes in, and it’s the home of alternative providers that leverage their technical and logistical capabilities to create sustainable credit conditions.

A different kind of financial experience

Sitting at the core of a robust credit provider’s product offering is flexibility. Clients have the option to amend payment terms – a choice that has the potential to dictate their business’s full-term success. This cannot be stressed enough: flexibility can serve as a lifeline in the event of cash flow disruptions.

While lending is traditionally set in stone and payment plans are accepted or declined at the very start of the client’s journey, ‘locking them in’ so to speak, the ability to renegotiate is paramount in an unpredictable business environment. Especially the one we are now just emerging from due to Covid-19.

Underpinning that flexibility is a lender’s ability to focus. Modern finance entities are in the business of ‘designing’ financial products that have a targeted function, centralising their entire existence around offering and refining said products.

A single business loan solution may seem like a straightforward idea, but the complexity lies in how that product is structured in the medium-to-long term and the overall impact it has on the customer. Banks may be lenders, but they can also be many other things, such as exchange platforms or investment funds.

A lender solely focussed on offering credit puts all their time, energy, and dedication into that product. 

Digitisation equals credit 2.0

Africa has gained a reputation for exploring and developing new ideas in finance. In 2021, the continent’s fintech’s accounted for nearly $3 billion, or two-thirds of the $5 billion raised by start-ups during that year. From the get-go, Africa’s financial services industry has capitalised on mobile penetration rates, using an almost all-digital approach to dealing with money. This is an innovative environment in which lenders can rethink how they go about lending.

For example, lenders can now turn to the integration of specific enterprise solutions to provide them with client insights they need to approve funding. Accounting and invoicing solutions such as Sage and Xero have digitised traditional administrative processes, which in turn can be accessed by lenders and treated as a reliable source of information that can be used to make a credit decision, eliminating the need for paperwork.

Another example is in communication. Banks are typically large structures where channels are blurred, and businesses can have great difficulty interacting with their financial representative. An alternative lender is more accessible, offering direct lines of communication, such as an online chat feature, and prioritised treatment, ensuring that a client remains in constant contact and up to date with operational and cash flow updates.

These elements – the combination of reduced red tape and turnaround times – are the tell-tale signs of a reliable, innovative credit provider. The local lending landscape is varied and filled with much uncertainty. Hence, it’s up to businesses to partner with entities that they know they can trust and engage in forward-thinking practices. Together, we are redefining what it means to secure credit.

• Daniel Goldberg, is the co-founder and chief executive of Bridgement.

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