Self-employed individuals in South Africa are finding it increasingly difficult to obtain finance to secure transactions from traditional lenders, as they are viewed as high risk candidates with unpredictable earnings. As a result, the growth potential of many of South Africa’s self-employed individuals is being hindered.
SA's self-employed individuals often find it a struggle to get a home loan, as they are viewed as high risk candidates with unpredictable earnings.This is according to Gary Palmer, CEO of Paragon Lending Solutions, who says that as a result of the strict regulatory environmenthe has witnessed an increase in the number of unsuccessful loan applications by business owners, regardless of the full business potential of the client.
“South Africa’s banking sector has tightened up its regulations around the lending criteria to self-employed individuals arguing that their earnings are volatile, despite the fact that some self-employed individuals earn more than those employed,and as such self-employed individuals are increasingly making use of alternative lending solutions by non-bank lenderswho are providing much-needed cash flow to take advantage of opportunities.”
Palmer says that by cutting out the red tape often experienced with traditional bank loans, self-employed individuals have quicker access to funds in shorter time periods, allowing their businesses to grow.
According to Palmer, the perceived risk of being self-employed is much greater in South Africa than in other parts of the world. He points to Australia’s general views on self-employed individuals. “In Australia, self-employed individuals are looked at in a different light. They are seen as more secure and financially stable. As South Africa’s economy isn’t as stable as first world economies, self-employed individuals are simply seen as ‘riskier’ candidates.”
He says that the requirements are more complex for banks when reviewing employed vs. self-employed individuals’ loan applications. “Lenders are more inclined to grant loans to those who have demonstrated financial discipline in the past. Banks’ decisions are also based on how they understand an individual’s finances, their business and their ability to pay back the loan. Therefore, the best advice I can give to a self-employed individual looking to obtain finance is to have their financials in order, as it demonstrates the strength of an individual’s business, and confirms whether the business will be able to pay the self-employed individual a justifiable salary, in order for the individual to have enough cash flow to repay the loan.”
Palmer advises that self-employed individuals looking to apply for finance have the following documentation in place:
- Six months' bank statements;
- A comprehensive income/expenditure statement for the business;
- The latest business and/or personal financial statements; and
- Management accounts for the current year, all verified by a qualified professional.
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