Coming unstuck from a two-year debt holding pattern

Coming unstuck from a two-year debt holding pattern

  • Trends in lending are shifting in light of interest rates rising, as we come out of Covid-19’s darkest days
  • Banks and other lenders are looking to restructure or push the button on defaulting clients
  • There will be opportunities to get a good business deal if you’ve got the funding

Some banks and other lenders are demonstrating a reluctance to lend and are calling in loans as they deal with arrears and limited growth in the economy, off the back of the Covid-19 pandemic. However, banks are in the business of lending and with interest rates rising, they’re not going to sit on the sidelines forever. We are also seeing instances of a more creative stance towards quality deals, such as offering mezzanine funding or profit shares, to name a couple of strategies.

“We have come across lenders who are looking at unsecured deals, but they are also putting pressure on clients where needed,” says Gary Palmer, CEO of Paragon Lending Solutions, an asset backed funder and advisor for growing businesses and property investors.

Over the pandemic, banks and lenders have been generous with reduced fees or paused repayments and they have been cautious to liquidate unfairly while people and businesses were struggling. “This caution has been coupled with uncertainty around the resale potential of assets. But for some, it’s no longer possible to carry defaulting clients,” Palmer says.

“Overall, many banks are pulling back and even clients in good standing, who may have missed a payment are feeling the pressure, as breach of covenant is becoming the biggest issue for banks.”

Refinancing challenges

Palmer says that often once the deal goes into default, or the business into recovery, even if there are signs of a turnaround, the bank has had enough and opts to call in the loan.  “Lenders such as Paragon, would consider a positive improvement in a business as a case for relooking and potentially refinancing,” Palmer says. “We have funded clients who have dealt with business distress provided their business is turning around positively, despite having had hard times before. It really depends on the situation.”

Opportunities knocking

Some two years of a difficult lockdown period and only now South Africa is considering ending its state of disaster status, and sadly a lot of businesses have not survived. There are a lot of good businesses and good properties, as examples that have great potential, but they are just short of working capital. So that’s why if one is well funded, because of the current landscape, there are opportunities to buy businesses at a reasonable price.

“We are seeing people having access to deals that they ordinarily wouldn’t have, and there are businesses who are able to embrace these opportunities, or can motivate for the funding to do so,” Palmer says. “When a business shows real potential for growth, it is the best time to consider funding. It can open doors to develop a business to new levels, and even though there is uncertainty in the economy, there are opportunities to be had.”

Overextending yourself, however, or ‘robbing Peter to pay Paul’ by borrowing money to settle other debts, declaring dividends, or repaying loan accounts, for example, is where it becomes problematic – and is a slippery slope to a bad financial outcome. “Keep in mind that your growth rate must be more than the cost of borrowing money in order to grow. The balance is essential to get new funding in the first place,” Palmer adds.