UNDERSTANDING ASSET-BASED FINANCING

Asset-based financing is a way for rapidly growing, cash-strapped companies to meet their short-term cash needs. In general, companies can tap their assets to generate cash flow through asset-based loans or through factoring.
The asset-based financial services industry has burgeoned in recent years, and small businesses have fueled much of its growth. Although a stigma is still associated with using your assets to get cash, this type of financing is becoming more popular.

Asset-Based Loans

When you apply for an asset-based loan, you pledge assets to secure a loan from a bank or a commercial finance company. You still own your assets, but if you don’t make good on your payments, the lending institution can seize them.
Asset-based loans are typically for companies with less-than-perfect credit. Interest rates and fees on these types of loans have fallen in recent years due to intense competition, but generally they are higher than traditional bank loans. As with all commercial lending, rates are negotiable. Lenders will look at your credit record, how long you’ve been in business and whether your assets are liquid.
Accounts receivable and inventory are common collateral, but any asset might qualify. When you use accounts receivable to secure a loan, you can expect to get about 60 – 75 percent of the face value of your fresh invoices. The loan-to-value ratio drops rapidly for older accounts.
When you use inventory to secure loans, your lender will most likely use a bonded warehouse — an approved warehouse used to store goods and monitor inventory — and pass the cost on to you. Loan amounts vary widely from about 30 to 80 percent of the value of your inventory.

Advantages and Disadvantages

The main advantage of asset-based financing is that small companies can usually get more cash more quickly than they could from a traditional bank loan. Also, asset-based lenders offer an array of services.

The drawback of asset-based loans is the expense. Using your assets to generate cash flow increases your cost of funds and cuts into profits. You need to weigh your situation carefully and determine whether this type of financing is necessary to expand your company or keep it afloat.

In Short

This product is for clients who have valuable assets, but are in need of short term liquidity. Funds will be advanced against the security of commercial property for a maximum period of twelve months, affording clients ‘breathing space’ to realise their assets without pressure or providing them with the time to secure long term financing from a commercial bank.

Minimum Requirements:

The Borrower must be a Juristic Person in terms of the National Credit Act

• Maximum transaction value not to exceed 60% of valuation
• Valuation of property to be done at clients’ expense.
• Minimum advance of R1 000 000 (no maximum).
• A first bond is to be registered over the property
• Maximum term of the loan of 12 months

If you’re looking for this type of financing, Please consult with Morne Prinsloo .

Please contact us if you require any further information or would like to apply for finance:

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011.327.4489 / 0861 1111 93

morne@mortgagepluscc.co.za

www.mortgagepluscc.co.za

Banks are no longer chasing market share. Now, after the financial crisis, it’s all about profitability and efficiencies.

This is reflected in the Reserve Bank’s BA900 returns for November 2010, which show a realignment of market share in total advances (a measure of total credit extension).

For the first time in 10 years, the top two of the big four, Standard Bank and Absa, are starting to lose their dominance in the retail market. It is especially pronounced in mortgages, personal loans and instal ments.

Standard Bank, for example, is not growing in personal and instalment loans, with Nedbank taking the lead in personal loans. Absa, once the leader in the mortgages market, has lost significant ground — from 33% a few years ago to 29,4%.

This trend started two years ago, after the financial crisis, when both banks put the brakes on lending criteria, especially on new and loan-to-value mortgages. The trigger: bad debts were shooting through the roof. In early 2010, Standard and Absa started relaxing some of their criteria, but uptake was slow as households were still heavily indebted. However, household debt leverage improved in the second half of 2010 with consumers taking out more mortgage debt but, by then, Nedbank and FirstRand, through First National Bank (FNB), had moved quickly to gain a big lead in that market.

Absa faces fierce competition from all sides in its mortgage business. The BA900 figures show that Absa’s market share in mortgages slipped to 29,4%, while Standard Bank upped its market share for the year marginally, from 26,36% to 26,95%. Standard has grown mortgage advances by 7 percentage points to R296bn, compared with Absa’s more pedestrian 2 percentage points to R310bn.

But Absa CEO Maria Ramos seemed oblivious to customers’ unhappiness over the bank’s reticence to lend. At a post- Davos briefing hosted by Ramos last Friday, a disgruntled Absa customer related how he, a long-term customer of the bank, was unable to obtain a loan for his small business, but a competitor was more accommodating. There are similar stories from other Absa customers, but Ramos denied the bank had curtailed lending, especially to small business. “But if we are not doing things right, we have to look at it again.”

Top management at Nedbank and FirstRand would not comment on the changing dynamics, saying they are in a closed period ahead of their results this month and in March.

Nedbank’s mortgage advances were 3,7 percentage points higher at R228bn, but market share dropped by 0,2 percentage points to 21,4%. FirstRand grew by 5,5 percentage points in the same market to R163bn, but market share improved only marginally, to 15,3% from 15,1%.

Smaller banks such as Capitec and African Bank are also making huge strides with advances and remain a force to be reckoned with. The smaller players present a big challenge to the larger banks in this segment, with African Bank growing loans 53% to R30bn. African Bank’s market share in loans is 5,6% from a previous 3,79%, while Capitec has improved its standing (see table).

Standard Bank is aware of the “increased competition” in the lower end of the market. “And, in some cases, we have deliberately shed business where the pricing is unacceptable or we were not happy with the risk,” says Standard Bank SA head Sim Tshabalala.

This might explain the 3 percentage point drop in its instalment debtors market share, as it divested from motor financing following a huge spike in bad debts.

In the private sector loans market, Absa and Standard Bank have been feeling the heat in both the lower and middle-income market.

Absa lost overall market share of 2,8 percentage points to 18% and Standard Bank by 1,86 percentage points to 19,8%, with Nedbank winning market share by 2,3 percentage points to 20,9%. Nedbank is the biggest player in the lending market, toppling Standard Bank.

But Standard is not overly concerned about the competition and its market share decline. “Market share is an important measure in any scale business such as banking, but it is not decisive,” says Tshabalala. “The ultimate measure of the outcomes of competition is return on equity (ROE). Where product lines are not generating the right levels of ROE given the risks assumed, then it’s reasonable to expect the shedding of market share.”

He attributes the loss to a combination of factors. “We hold large market shares in many asset and liability products, and customer and client segments. It’s natural, therefore, that when competition intensifies, we shed market share.”

Corporate banking is another area where the bank is taking a knock. Tshabalala says this sector has become more competitive because of international banks’ re-entry into SA and increased capital markets activity, where borrowers go directly to asset managers and insurance companies for savings and borrowings, thereby bypassing intermediation by banks.

“What we are seeing in corporate banking is also happening in retail banking,” he says.

But it’s about profitability and efficiency. Tshabalala explains: “If the business is not profitable or does not increase efficiencies, we’re not going to do the business. Beyond a certain size as measured by market share, declines in productivity and scale inefficiencies arise which result in lower profitability. In such cases, declines in market share are acceptable.”

Analysts say the market share changes are not surprising. In some cases banks took a specific decision to reduce lending. Indebted households and customers have also meant demand for credit products has shrunk.

Sanlam Investment Management banking analyst Patrice Rassou says, in the case of Absa, it is quite specific. “They have withdrawn from the commercial property market and are less aggressive in investment banking, especially with project finance. At the same time, FirstRand has more strongly focused on the commercial sector through FNB.”

FNB commercial head Michael Vacy- Lyle says there is a big commercial push from within the bank among smaller companies with a turnover of less than R10m. “Lending is important but we are mindful of the risks,” he says.

Faizal Moola of Avior Research says while Absa and Standard Bank have been adopting a more conservative approach with lending, Nedbank has grown strongly through aggressive pricing, especially mortgages. “A long-term approach is followed with the focus on cross-selling and winning primary clients through home loans,” he says.

It is evident that Absa and Standard Bank are more reluctant to resort to aggressive lending tactics due to losses experienced in the previous credit cycle, which led to mounting bad debts. Standard Bank, for example, is still trying to run down its old mortgage book, which is plagued by bad debt and nonperforming loans of more than R20bn.

Moola expects the conservative strategies of the two bigger banks to eventually change. “They have the capital to lend more aggressively,” he says.

In the short term, banking conditions are likely to remain subdued with muted advances growth in line with a recovery in domestic trading conditions. Impairment charges are expected to improve off the previous high base.

Given low inflation and below-trend economic growth, domestic interest rates should remain low in the short to medium term and continue to put pressure on banks’ interest margins.

Investors should, therefore hold on to their banking shares, say analysts.

Mortgage Plus offers a wide range of advice on different bond options and further advice on the above. Please call us for further information on:

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Call us on 011.327.4489

Email: morne@mortgagepluscc.co.za

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