New ways of raising capital could unlock local growth

01 Apr New ways of raising capital could unlock local growth

Posted at 21:08h in 2016 by

Tighter controls and a lower risk appetite at local banks have put a serious roadblock in growing the private sector. However, following the international trend of using alternate lenders could be the answer to securing the capital to unlock growth.

In the US, almost a quarter of the loans to small and mid sized companies now come from alternate lenders which have raised around $65 billion from equity investors and debt markets to make subordinate loans to smaller companies.

“The concept of alternate lenders and financial brokers is well known in the US and UK markets. However, local business owners remain either unaware or wary of alternate lenders. The lack of access to capital, however, is having a significant impact on potential growth in the local economy,” says Gary Palmer, CEO of Paragon Lending Solutions.

Paragon Lending Solutions is an independent lender, supported by one of the big five banks in SA. Paragon has an extensive network of funding partners, which include banks, asset managers, funds and working capital specialists. It uses its diverse portfolio of lending products and relationships as well as its own balance sheet to address its clients’ financial needs.

Before the 2008 crash, most business owners (and many individuals) had a trusted bank manager, who was able to guide customers and structure finance based on their insight of the individual or business and who were able to suggest any number of options offered by their organisation.

Banks then moved into silos with advisors focusing on only their specific area of expertise, such as commercial property finance, and are now even remunerated solely on their area of expertise.

Added to this, the ever increasing regulations and a significant lack of appetite for risk has seen clients cut off from a raft of financial vehicles which could address their financing requirements.

“The average South African business owner would be hard-pressed to name more than five or six lenders. Looking out of my Cape Town office window I can see four companies who specialise just in equipment finance. When it comes to bridging finance, there must be upwards of ten companies a business owner could turn to. Business owners are cutting themselves off from a huge network of specialists lenders, not to mention some innovative ways to structure a deal which actually works for them,” explains Palmer.

While traditional banks still offer some of the cheapest capital around, Palmer says they are focusing their attention on an ever-shrinking client-base.

“Complex compliance requirements are holding the banks back. People are looking to access money quickly, and these layers of requirements make for a very slow process. The fact is, there are still good deals to be had out there, but people need to work with a company who is able to leverage existing assets – leverage their full balance sheet.”

Paragon has assisted a number of clients who would not fit the traditional banking risk profile, are self-employed, or who needed short-term access to finance. One such client was a 71-year-old business owner who clearly didn’t fit the banks’ age risk profile. Similarly, a client with a balance sheet of over R100 million needed access to R5 million to quickly move on a property deal. Again the banks were not able to assist.

“We have structured deals which include a host of lending products, from long-term origination to short- to medium-term first bond finance off our own balance sheet. We had a client call us on Tuesday saying she needed R13 million as a small part of a much bigger transaction. By Friday afternoon, the money was in her account. Traditional lenders are just not interested in short-term credit.”

While the agility open to independent lenders works in their favour, Palmer says he is aware that many potential clients are wary of these institutions.

“We are still bound by consumer regulations, but I believe our industry could do with more compliance and even an oversight body for the independent lenders. A company with a bad reputation will tarnish the whole industry, and this doesn’t do us any favours.”

That said, Palmer is adamant that it is the independent lenders who could hold the key to economic stimulation.

“Access to finance remains one of the biggest challenges for local business. The big banks’ ability to lend is going to continue to be constrained for the foreseeable future. You can only grow by leveraging what you have at your disposal. But that requires someone who is willing to look at each situation holistically rather than retreating into a risk-averse comfort zone.

“Clients should give themselves the best opportunity to access the correct funding in the quickest timeframe. How they do this is not just by speaking to their current banker, but rather to speak to an independent financier who has the network and balance sheet to offer them the full array of solutions.”

About Paragon

Paragon Lending Solutions is an independent lender, supported by one of the big four local banks. It helps established entrepreneurs grow their assets by structuring and accessing the right financing. Clients often lack the understanding, experience and knowledge of funding structures and product options that are available for the best, quickest and most effective path to growth. Paragon uses its diverse portfolio of lending products, extensive network of funding partners, and own balance sheet to address its clients’ need for property or bridge financing and working capital. Founded in 2009, it has financed deals in excess of R1.5 billion for a diverse portfolio of clients with varied financial requirements.

Read more at www.paragonlending.co.za or follow @Gary_Paragon on Twitter or Paragon Lending Solutions on LinkedIn.

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