What do businesses need to know about alternative credit providers

Secured finance is not the same experience it was 100 or 10 years ago. The process involved mountains of paperwork and endless back-and-forth.

Daniel Goldberg is the co-founder of Bridgement and its chief executive. He believes that technology, digitization efforts and a push toward alternative credit sources have made the game more interesting. This has given rise to South Africa’s ecosystem of alternative credit providers.

But who are we to trust? Non-legacy lenders are a paradigm shift in the way businesses can get financing in convenient and new ways. But it is crucial to know the signs and benefits of a trusted lender for your business.

What is the 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.

It is important to have alternative lenders. A 2015 study found that alternative lenders are needed. the survey only 2% of South African small and medium-sized businesses (SMEs) said they depend on banks for financing. 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.

There are many alternatives to traditional credit providers. 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. A new type of loan arrangement can offset the cumbersome and tedious experience of securing credit. 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.

Experience a different type 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 is a crucial point that should not be overlooked: flexibility can provide a lifeline in times 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. Covid-19 is a great example of this ability.

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, centralizing their entire existence around offering and refining said products.

While a single business loan solution may sound simple, the real complexity lies in how the product is structured in the short-term and what impact it has on customers. While banks may be lenders, they can also serve as investment funds or exchange platforms.

A lender who is solely focused only on credit offers all their effort, energy, and dedication to that product. 

Credit 2.0 = Digitization

Africa is known for its ability to explore and develop new ideas in finance. In 2021, the continent’s fintechs 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 capitalized on mobile penetration rates, using an almost all-digital approach to dealing with money. This environment is a new one that allows lenders to reconsider how they lend.

Lenders can now look to the integration specific enterprise solutions to give them the client insight they need to approve funding. Sage and Xero, two accounting and invoicing softwares, have digitalized old administrative processes. Lenders can access these data to make credit decisions and can use them as a source of reliable information.

Communication is another example. Businesses may find it difficult to communicate with their bank representative because banks are often large structures that have many channels. A different lender offers more accessibility, with direct lines of communication like an online chat feature and prioritized treatment. Clients are kept in constant touch and informed about 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. There are many variables in the local lending market. Hence, it’s up to businesses to partner with entities that they know they can trust and engage in forward-thinking practices. Together, we’re redefining credit security.

  • Daniel Goldberg is co-founder and chief executive at Bridgement.
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