Access to funding is one of the key challenges that small businesses face. It’s true of countries across the globe,
but appears to be more of an issue in South Africa.
Yet, these are the very businesses that we need to boost our flailing economy and to expand new employment opportunities. For these reasons alone, we must make it far easier for businesses to obtain the finance they need to get off the ground or grow.
Traditional and non-traditional lenders
The poor state of the South African economy has a significant impact on the ability of entrepreneurs to access finance for their business ventures. “Banks and many other lenders have become increasingly cautious about extending business loans, particularly to entrepreneurs and SMEs,”explains Daniel Fig, Credit Analyst at Paragon Finance, which was founded by Gary Palmer in 2009. “Our slowing economic growth and increasing interest rates have, not surprisingly, resulted in higher credit impairment and the failure of numerous businesses, making it less attractive for banks to lend to this sector.”
An added factor that turns many SMEs away from banks as the source of credit is that banks tend to be bureaucratic, and can take a long time to approve finance – and these delays can be quite detrimental to the business which may lose out on great opportunities.
The non-traditional lenders take a different view. “Paragon Finance, for instance, looks for reasons to lend, rather than for reasons not to lend,” Daniel comments. “And so, if it’s clear to us that a business has an attractive opportunity that the finance will be used for, we will make it work so that the business can seize the opportunity. A more conventional lender won’t necessarily take a flexible approach like this; rather, they will want every one of their stringent criteria to be met.”
Three strategic pillars for lending
Paragon applies three strategic pillars, the first one being on balance sheet lending. “For this, we’ve got funding from FNB, Futuregrowth Asset Management and African Bank. Within this pillar, we offer bridging finance, which is generally short-term in nature,” Daniel explains.
“We then have medium and longer term loans, which are generally between four and 36 months.
Our second pillar is an advisory and structuring pillar. This is for where deals are generally larger than what we will fund off our own balance sheet and, where we are confident in them, we will originate them to our network of funders. So for anything greater than R15 or 20 million, we will run a competitive process. We’ve got over 200 funding relationships within South Africa and we will understand how the deal should be structured best. We can put together packs, exactly how funders generally like to see them because clients often don’t know how to prepare and present their funding requirements to the various lenders, and we will go out into the market and try and get the best deal for the client.
Our third pillar is what we generally call other investment opportunities, and this would be for property and private equity type deals, where they don’t fit within the first two pillars.”
Factors taken into account for a funding decision
In deciding whether to fund a business, Paragon considers a number of factors, including:
- The track record of the business
The credibility and capability of the business and its executive team or owner - What the funds are needed for
- The financial track record of the business – are they able to service the facility?
- The security that the business and/or guarantors can offer as collateral for
- the loan
- The financial position of the individuals offering surety or acting as guarantor – Paragon looks at the personal balance sheets of the people involved.
Through developing relationships with over 200 finance institutions in South Africa, Paragon is able to offer a range of types of funding geared to cater for the different financial needs of SMEs. According to Daniel, “Our view about transactions ties directly into our purpose which is to realise and support the potential of others through a solution-oriented approach to entrepreneurial business finance and advice. We see straightforward transactions; we also see transactions that are not 100% clear upfront but, given our expertise, we know how
to structure these deals and either place them or finance them ourselves.
“The bridging finance product is popular where property is in the process of being sold,”Daniel comments. “Circumstances relating to the sale of one property and the purchase of another one sometimes mean that a quick injection of cash is necessary to secure the second property, and that is where bridging finance can help.”
There are also loans available that have a repayment term of up to 36 months. Where the amount involved is relatively large, such as more than R15 – 20 million, a competitive process is used, meaning that the client can secure a more attractive
loan than would otherwise be the case.
Where funds are needed for large property deals or for private equity transactions, the lending takes the form of an investment in the business.
Daniel points out that the repayment of loans is approached with flexibility. “We won’t burden a client with the need to repay the capital and the interest on the loan all at the same time. So, we expect the business to service the interest debt every month, but the capital can be repaid at the end of the term,”he explains. ●
THIS IS How Paragon can assist: real-life examples
Paragon helps longstanding client regain full control of his business with R35 million funding solution – in just 10 days
At the end of December, a loyal client turned to Paragon with an urgent request: he needed R35 million within just 10 days to buy out two majority shareholders in his business.
These shareholders, who had contributed initial seed funding 14 years ago, held a commanding 75% of the company’s shares. Despite owning the majority, they had played no active role in the business since its inception – contributing nothing to its remarkable growth and success over the years.
Determined to finally take full control of the business he had built, our client entrusted Paragon to deliver a swift and strategic funding solution.
Working against the clock, Paragon successfully structured a tailored four-month term loan facility. This was secured by a General Notarial Bond over the business’s equipment, a cession of the client’s personal and business life insurance policies, and the shares in the business itself.
Thanks to this solution, the two dormant shareholders were paid their R35 million in full –and our client walked away with 100% ownership of the business he has nurtured from the start.
“This is more than just a transaction. It’s a story of empowerment, precision, and delivering results under pressure. And it’s what Paragon does best.” DANIEL FIG
Working capital facility: Client had an order, and needed the funding quickly. They had the security, so
we provided funding within 36 hours to fulfil an order.
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