There exists a common myth in the small- and medium-sized entity (SME) community globally that only struggling businesses take on debt. The opposite is true, says Tom Stuart, chief marketing officer of fintech lender Lulalend. “Most successful businesses take on debt to actually grow.”
A survey by TransUnion, a credit bureau that maintains consumer and business data, indicated that half of the 10 000 participating SMEs considered the lack of fast access to funding to be their biggest barrier to growth or survival.
Stuart says it is critical for any SME to have access to additional capital at any given point in time, and not only when the company already finds itself in distress.
Traditional lenders apply a one-size-fits-all approach, which means that a good business with strong cash flows may be declined for funding simply because it does not have a physical or valuable asset to put up as collateral.
“Speed is critical for an SME, because when an opportunity presents itself, it cannot wait eight to ten weeks for funding approval. By that time the opportunity may be long gone.”
Stuart says despite an increase in the number of alternative lenders such as Lulalend, most SME owners still approach their bank, even if they know it is going to be a painful experience.
Securing the debt
As an important first step, Stuart advises businesses that want to access funding to have a clear objective of what they want to achieve with the additional capital. This will help it better understand when the funding is needed and for how long it will be needing it. “The business should not simply apply for funding when it is struggling. That rarely leads to a good outcome,” warns Stuart.
When approaching lenders, it is important for the business owner to understand his or her own personal credit score and that of the business. If the company intends applying for funding, it is critical to ensure that both credit scores are healthy.
Lenders will have other qualifying criteria that applicants need to be aware of. Lulalend will only consider businesses that have been trading for at least 12 months and have an annual turnover of R500 000 or more.
Stuart advises SMEs to secure access to additional funds when the business is doing well. Having capital readily available can offer the business a strategic benefit.
Lulalend specialises in short-term funding ranging from R10 000 up to R2 million over a maximum period of 12 months. The current offering includes fixed-term loans and a revolving credit product.
According to Stuart the fintech’s revolving credit product is becoming increasingly popular. The business gets access to an approved amount and is able to draw down when it needs it, without having to reapply. Once the business makes a repayment, the capital portion becomes available again. “It offers the business owner peace of mind that if he or she suddenly needs cash it is literally three clicks away. We are encouraging customers to switch to this product, mainly because of the flexibility and control it offers.”
The application process is all done digitally and takes only minutes as Lulalend requires minimal information compared to traditional lenders. The use of artificial intelligence algorithms in the assessment model makes it possible to almost instantly give the applicant a decision. Once the customer accepts the offer and the terms of the loan the funds will be transferred, often within a day of the customer applying. Existing Lulalend customers could expect to receive funding within the hour.
Lulalend charges a fixed risk-based monthly fee on both of its credit offerings. Stuart explains that if the loan is taken over a six-month period the business will have to repay one-sixth of the loan plus the risk-based fixed fee monthly.
“Unlike traditional lenders we do not require collateral, but we do require personal surety from the directors in the business. Our default and bad debt rates are low mainly because of the accuracy and competency of our assessment model.”
Lulalend will not grant credit if, based on its assessment of the business, it believes it cannot even afford the minimum loan amount because it does not have sufficient cash flow to meet the repayments, or if it does make the repayments, it places the business in jeopardy.
If an additional loan, on top of existing debt or funding with other providers, will “burn the business”, Lulalend will not assist. “Stacking of debt actually brings down more businesses than almost anything else,” says Stuart.
Stuart also advises business owners to be clear on the total costs of any loan, beyond just the interest rates. As an example, many traditional lenders will charge initiation and monthly admin fees, as well as early repayment penalty charges.
“Despite all the trouble we have had this year, we have not seen a major increase in the number of customers who are defaulting or falling into arrears,” says Stuart.
The majority of small businesses are still resilient, have taken measures and learnt lessons from what happened last year. They are not over-indebted, are focused on cutting costs and have been quite conservative in the way they run their businesses, he concludes.
Brought to you by Lulalend.
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