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
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.