It was John F Kennedy who pointed out that, when written in Chinese, the word ‘crisis’ is composed of two characters – one represents danger, and the other represents opportunity. It’s an observation likely to resonate strongly with Gary Palmer, founder and CEO of Paragon Lending Solutions, a second-tier lending solutions company that was birthed in the middle of the global credit crisis.
While most other businesses were focusing on battening down the hatches, Palmer pushed his boat out into the storm, going solo with a company he’d developed in-house while a director at Auction Alliance. “On the face of it, the year 2009 wasn’t a great one to be making plans to start a company, particularly one that needed a funding line to enable it to lend to other businesses.
But for Paragon, it was also the perfect year to be taking the first steps. The credit crisis had created a gap in the lending markets in which the banks weren’t willing to play, opening up an opportunity for a business that, if done well, could really make an impact,” he explains.
Emerging non-bank lenders
As a new breed of non-bank lenders, Paragon fills the void left by strict bank lending requirements. It offers short-term, asset-backed funding to high net worth clients who are either unable to meet the bank’s lending requirements, or who have time-sensitive cash flow needs and can’t afford to wait for the banks’ slow turnaround times in processing funding applications.
The company’s clients typically include owner-managed businesses, property investors and property developers who have unencumbered immovable property, need working capital or want to unlock equity in their properties. Loan amounts vary from R1,5 million to R8 million with loan-to-value ratios of a maximum of 60%.
Palmer explains how changes brought about in the banking industry as a result of the credit crisis created a ‘perfect storm’ situation for the emergence of second-tier lenders such as Paragon: “As a result of the credit crisis, banks have tightened their lending criteria. They have also changed their revenue mix, focusing their energies increasingly on non-interest income such as fees, forex and trading, moving away from interest-linked income like lending. And because many banks are carrying bad debt their focus is also more on recoverability than it is on new loans.
He points out, however, that second-tier lenders don’t compete with the banks. “We lend where the bank doesn’t have an appetite to, and a number of important things set us apart. We offer short-term funding, for a maximum of 12 months. We will fund clients whose assets are in residential property and who have residential tenants with short-term leases. The banks analyse the serviceability arising from the property to determine the amount of the loan that can be granted, and are looking for long-term leases with blue-chip tenants,” explains Palmer.
The result is that there are many perfectly acceptable clients who are having their applications declined by the banks at the moment. These are high net worth, asset-rich clients. “They are sophisticated borrowers who simply need working capital and we see them as worth lending to, even though the banks don’t have an appetite for this particular market.
We have a good relationship with the banks and in fact, they often refer deals to us when they feel we are in a better position to assist investors until such time as they meet the banks’ lending criteria,” he says.
A unique approach to lending
Paragon focuses on swift credit approval and funding — it is able to provide a credit decision within 36 hours and formal guarantees within ten days. “We can offer such a facility because we take a unique approach to lending. When we evaluate loan applications our decision is based on a more holistic appraisal of the borrower’s financial position.
To us, the value and potential of the property that is offered as collateral is the most important aspect of any deal we consider,” Palmer outlines. There is a global trend of second-tier lenders making a big impact on the property sector, and Paragon has been particularly successful in maximising opportunities created by the growing demand for flat finance.
“Many property investors are looking to acquire flats valued below R750 000, where rentals are between R4 000 and R7 000 a month. The gross rental returns from these flats can exceed 10%, in line with commercial returns, making them very attractive. We have financed many blocks of flats where there is a queue of tenants waiting to take occupation. The banks, however, won’t finance this asset class so it’s created an opportunity for our business,” says Palmer.
Overcoming challenges, building credibility
Paragon’s success to date proves the existence of a robust market, but Palmer’s journey has not been without its challenges.
“I started the business within Auction Alliance but realised that I couldn’t really do it justice because I was spread too thin, so I decided to go it alone and give it my all. Doing so inevitably came with challenges.
For one thing I had to work hard to establish an independant and credible brand. And although the National Credit Act has cleaned up the non-bank lending industry considerably, I still had to fight against certain negative perceptions associated with second-tier lenders,” he says.
Fortunately much of the negativity associated with the second-tier lending sector has dissipated in recent years, and Paragon has established itself as a leader among the many professional and ethical operators that have entered the industry. “This is an established and sophisticated market in both the UK and the US, and in South Africa there is increasing recognition of the pivotal role that short-term lenders play in the economy,” he concludes.
Second-tier lenders and the entrepreneurial market.
Entrepreneurs will be able to relate to the challenge of securing bank finance, and as Gary Palmer points out, even those business owners with good businesses are not currently likely to meet the banks’ criteria for a business loan.
“As banks become more selective with regards to financing, self-employed investors will need to seek alternative sources of funding,” he says. Asset-backed second-tier lenders may provide entrepreneurs with just such an alternative.
“While the banks will decline a loan to a small business due to past defaults and accounting data, other lenders — such as asset-backed lenders — will focus on the order book of the business going forward as well as the value of the unbonded property owned by the business or business owner. If the business is deemed to have good future prospects and can put the property up as surety against the loan, the probability of being able to secure a loan is relatively high,” Palmer explains.
He adds that entrepreneurs can increase their chances of securing funding by keeping accurate and up-to-date financial books. “This gives a potential lender an excellent picture of the security of the loan and should therefore not be overlooked,”