For a small busi­ness

In­vestors who want a rea­son­able re­turn but pre­fer the con­cept of so­cial shar­ing are putting their money into small busi­nesses through RainFin, writes Maya Fisher-French

CityPress - - Business -

RainFin CEO Sean Emery fre­quently holds in­vestor meet­ings with mem­bers of his fam­ily, who are all in­vestors in small busi­nesses through the fund­ing plat­form. “My mum is an in­vestor and she al­ways asks me ‘Am I mak­ing money?’ and ‘Am I help­ing peo­ple?’” That sums up the con­cept be­hind RainFin, a crowd­fund­ing plat­form that brings in­vestors and bor­row­ers to­gether by cut­ting out the mid­dle­man. It is aimed at in­vestors who want a rea­son­able re­turn, but pre­fer the con­cept of so­cial shar­ing and sup­port­ing the growth of on­line mar­ket­place lend­ing (pre­vi­ously known as peer-to-peer lend­ing) as an al­ter­na­tive to banks, which dom­i­nate the lend­ing and bor­row­ing space.

RainFin was South Africa’s first on­line mar­ket­place lend­ing plat­form and launched in 2012. Ini­tially, it fo­cused on per­sonal loans, but last year Emery de­cided to fo­cus pri­mar­ily on the small and medium-sized en­ter­prise sec­tor to pro­vide fi­nanc­ing for small busi­nesses.

To­day, the plat­form has lent about R140 mil­lion to about 340 small busi­nesses, with an av­er­age loan size of just less than R500 000.

The premise is that a small busi­ness is able to ap­ply for a loan through RainFin’s plat­form and in­vestors are able to de­cide whether or not they wish to in­vest. A loan can be is­sued for up to R750 000.

The mar­ket­place lend­ing model is not, how­ever, without its chal­lenges, both in terms of find­ing the right mix of in­vestors and busi­nesses, as well as over­com­ing oner­ous leg­isla­tive changes.

Emery be­lieves that the in­ter­est charged by banks and mi­crolen­ders makes it al­most im­pos­si­ble for small busi­nesses to suc­ceed, and he aims to lower the cost of loans while com­pen­sat­ing in­vestors for the in­creased risk of in­vest­ing in a small busi­ness.

The chal­lenge is that in­vestors of­ten want un­re­al­is­tic re­turns rather than to un­der­stand the na­ture of mar­ket­place lend­ing, which is to re­ceive a rea­son­able re­turn while help­ing to grow a small busi­ness.

“Af­ford­able credit is pos­si­ble, but both par­ties have to see it as a win-win sit­u­a­tion. If you want to re­ceive a 30% re­turn with no risk, it is just not pos­si­ble,” says Emery, whose av­er­age in­vestor re­turn is about 16% a year.

“There are a lot of des­per­ate peo­ple out there and many lenders take ad­van­tage of them. But just be­cause you can ex­ploit some­one, should you do it?”

Emery adds that many peo­ple claim they want to help small busi­nesses, but in re­al­ity, they just want to take ad­van­tage of them.

The amount of in­ter­est paid by the small busi­ness owner to the in­vestor de­pends on the qual­ity of their busi­ness.

An A-grade small or medium-sized busi­ness with a good credit record can qual­ify for a loan with an in­ter­est rate of as lit­tle as prime plus 1%, while a higher-risk busi­ness may pay the max­i­mum rate un­der the Na­tional Credit Act – repo plus 21% (28%).

To boost the funds avail­able to small busi­nesses, RainFin is now tar­get­ing in­sti­tu­tions that wish to in­vest in a small busi­ness, and RainFin is able to cre­ate dif­fer­ent in­vest­ment port­fo­lios that meet the in­vest­ment re­quire­ments of large cor­po­rates.

This also over­comes the chal­lenge of new leg­is­la­tion that is be­ing in­tro­duced, which will in ef­fect de­stroy mar­ket­place lend­ing in South Africa. Cur­rently, an in­di­vid­ual is al­lowed to lend another per­son/s up to R500 000 without be­ing a reg­is­tered credit provider.

This ex­emp­tion has been abused, and un­scrupu­lous mi­crolen­ders fal­sify their books to avoid fall­ing foul of the Na­tional Credit Act, so the reg­u­la­tor has amended this reg­u­la­tion and – from Novem­ber – no one will be al­lowed to lend money un­less they are reg­is­tered credit providers.

RainFin is restruc­tur­ing its lend­ing plat­form in con­sul­ta­tion with the reg­u­la­tor to still al­low in­di­vid­u­als to in­vest in mar­ket­place lend­ing.

Another chal­lenge fac­ing small busi­ness is the fact that the law stip­u­lates that if a busi­ness has a turnover of less than R1 mil­lion, it has to be treated as an in­di­vid­ual when bor­row­ing money.

In other words, it must meet the cri­te­ria and has the same rights as an in­di­vid­ual, not a busi­ness.

If your busi­ness has a turnover of less than R1 mil­lion, you would have to ap­ply as an in­di­vid­ual on RainFin’s plat­form, and you would be lim­ited to a max­i­mum loan amount of R100 000, payable over a max­i­mum pe­riod of four years.

A fur­ther is­sue is that, be­cause of the high-risk na­ture of start-up busi­nesses, there is lit­tle in­ter­est shown by in­vestors in fund­ing them, so RainFin can only of­fer the plat­form to ex­ist­ing busi­nesses.

As a bor­rower:

A min­i­mum re­quire­ment for a busi­ness loan is that the per­son has a busi­ness ac­count for six months and a turnover of R1 mil­lion. If your turnover is less than R1 mil­lion, you can take a per­sonal loan for up to R100 000. RainFin un­der­takes a full credit as­sess­ment, which in­cludes analysing bank state­ments, in­voices and VAT re­turns.

“Even if you do not have an as­set base, one can lend money against a good busi­ness and cash flow,” says Emery.

As an in­vestor:

RainFin grades the var­i­ous ap­pli­ca­tions ac­cord­ing to a risk pro­file, and in­vestors can de­cide what level of risk and re­turn they wish to take. The higher the risk of the loan de­fault­ing, the higher the po­ten­tial re­turn to the in­vestor – so the risk is highly de­pen­dent on the in­vestor and the choices they make on the plat­form.

RainFin pub­lishes a risk grad­ing and in­ter­est rate band based on the grade of the busi­ness. The rec­om­men­da­tion is that an in­vestor spread their in­vest­ment across a range of loans to lower the risk of one busi­ness de­fault­ing. Cur­rently, the de­fault rate is 1.9% – which means 1.9% of loans are be­hind in pay­ment and the in­vestor takes the di­rect hit if a loan is not re­paid. For ex­am­ple, on the cur­rent re­turn of 16%, a bad debt ex­pe­ri­ence of 1.9% means that the to­tal re­turn to the in­vestor is 14.1%.

The na­ture of the loan re­pay­ment is monthly – an in­vestor re­ceives a monthly in­come, which in­cludes a por­tion of the cap­i­tal in­vested as well as in­ter­est earned. Be­cause the in­ter­est is charged on a re­duc­ing bal­ance, one can­not make a di­rect com­par­i­son with a nor­mal fixed de­posit – the ac­tual in­ter­est rate re­ceived is not a yearly rate. The in­vestor will re­ceive a de­tailed re­pay­ment sched­ule to en­able him/her to make in­formed de­ci­sions.

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