Small business owners turn to pawnbrokers for financing

Due to the challenge of accessing traditional finance, many entrepreneurs in South Africa have turned to pawnbrokers for financial assistance.

These entrepreneurs usually use their valuable assets as leverage to secure capital.   

Charles Meyerowitz, CEO of Lamna Financial says many small and medium enterprise owners make use of assets such as trucks, vehicles, luxury watches, fine art, and high-end vehicles.

Alternative financing

Meyerowitz says pawnbrokers usually provide entrepreneurs with short-term solutions to fund projects.

“When an entrepreneur is working on projects, but during the interim period while the projects are being realised, they are required to pay out costs to see these projects come to fruition. This is where pawnbrokers come in,” he says.

He says many entrepreneurs struggle to meet the criteria set by mainstream financial institutions, leaving a gap in available funding. This situation is made worse by the economic fallout, making it more challenging for anyone to secure a loan.

“It’s no surprise to learn that 35% of all loans made to SMEs (Small and medium-sized enterprises) are in the form of personal loans or asset-backed loans, as these entrepreneurs find it too difficult to access funding as a business.”   

ALSO READ: Loan sharks and the curse of poverty

Beware of loan sharks

Another alternative financing method that people make use of is loan sharks. However, consumers have been warned about making use of loan sharks’ services.

Niresh Gopichand, director of risk at Atlas Finance, said while loan sharks are synonymous with exploitation, they, unfortunately, taint the image of all lenders including registered responsible ethical lenders.

“Loan sharks who demand upfront payment, charge excessive annual interest rates, make repayments overwhelming for borrowers and trap consumers in a cycle of debt, leaving them struggling to pay off the loan while amassing additional fees, are on the increase.”

ALSO READ: Consumers beware of these unsecured loans

Tips to protect yourself from loan sharks

• Unrealistic guarantees for approval are a sure red flag. Be wary of lenders who promise guaranteed approval without assessing your creditworthiness. Legitimate credit providers always evaluate a borrower’s financial standing before granting a loan.
• Requests for payment of upfront fees or hidden costs in the fine print is a trick used by loan sharks. Reputable lenders deduct fees from the loan amount or include them in the
• Ignore unsolicited loan offers via email, text, social media, or phone. Legitimate lenders do not use aggressive outreach tactics.