Gary Palmer | CEO | Paragon Lending Solutions | mail me |
In our current economic climate, many Micro, Small and Medium Enterprises (MSMEs) are facing a harsh reality. Although the market is awash with money, access to traditional credit remains limited. This is largely due to regulations like Basel III, which require banks to hold more capital and tighten their risk assessments. As a result, the timeframe for approving loans has extended because of all the necessary compliance restrictions.
Recently, South Africa achieved a major milestone by being removed from the Financial Action Task Force (FATF) grey list. This development signals to international markets that the country has strengthened its anti-money laundering and counter-terrorism financing (AML/CFT) regime. The grey list removal is expected to boost investor confidence, attract foreign capital and ease some of the reputational challenges that previously constrained international lending. However, even with this progress, access to credit for MSMEs remains challenging.
Relying on funding to survive
Traditional lenders continue to apply conservative credit scoring models and lengthy approval processes. Many businesses still struggle to secure funding quickly enough to support their operations and growth.
We all know the vital role MSMEs play in creating jobs, driving innovation and stimulating economic growth. Yet, these businesses are struggling more than ever to access the finance they need when they need it most. In the first quarter of 2025, data shows that only 28% of business loan applications were approved by traditional banks. This statistic raises an important question: who helps the remaining 72%?
Sadly, this paints a bleak picture for businesses that rely on funding to survive, grow and scale. Delays in traditional lending approvals have created a financing gap, especially for borrowers seeking customised loan structures, non-standard repayment schedules or faster funding. All this takes place against the backdrop of a R350 billion funding gap for MSMEs. One might call it a crisis, but it is also an opportunity for alternative financing solutions and creative funding models to step in.
Non-traditional funding instruments
According to the 2025 South African MSME Access to Finance Report, the SME sector has increasingly shifted toward technology-enabled lending solutions. These options offer faster approvals, personalised loans and greater accessibility compared to traditional bank lending, which remains constrained by conservative credit scoring models. This shift demonstrates the growing relevance of alternative financing solutions in meeting evolving business needs.
Structured finance provides a toolkit of non-traditional funding instruments. It allows companies to design custom, flexible funding solutions suited to their unique financial needs. This approach gives access to capital without forcing businesses to give up equity or meet rigid bank criteria.
Structured financial deals often combine different types of funding methods. These include loans that sit between traditional debt and equity (mezzanine funding), arrangements where an asset is sold and then leased back to generate cash (sale and leasebacks) and partnerships between businesses (joint ventures). They also involve services to raise funds (presale facilitation), funding through holding company structures where senior debt in the underlying company is originated and structured, and options allowing one party to buy or sell at a set price in the future (call/put options).
Private debt, sometimes called private credit, is a key component of structured finance strategies. With a growing number of small and mid-sized businesses seeking capital, private debt offers flexible, nimble solutions that borrowers need. To illustrate, consider two case studies from Paragon Finance, a leading South African non-bank lender.
Case study 1 – securing property without upfront capital
A client needed to purchase the property they had been renting for years but lacked the liquidity to do so. The team formed a joint venture (NewCo) to acquire the property and structured a 10-year lease with the client’s operating company while raising third-party funding.
We financed the remaining balance and gave the client a call option to purchase the NewCo shares in the future. A few years later, the client exercised this option and now owns the property outright.
In this case, we ran a competitive process to raise the senior debt from six institutions, ensuring the client secured ownership without upfront capital.
Case study 2 – turnaround funding during a crisis
After the business owner passed away, the client, managed by a corporate advisor, needed a working capital loan to pay a key supplier. Although the company owned a commercial property, banks declined funding to avoid the complexities of a deceased estate.
We stepped in with a tailored solution. We sourced capital for the property through a sale-and-leaseback arrangement. Along with a working capital loan, they provided a bridging facility to the client. This arrangement enabled the client to pay the supplier before the property transfer occurred.
A call option allowed the client to repurchase the property after repaying the loan at a predetermined price. The outcome was positive: the business preserved its supplier relationship during a difficult transition. After repayment, the client regained full property ownership within six months.
Structured finance offers significant benefits
In the mid-cap space, funding needs have become more complex and sophisticated. These needs require bespoke solutions that differ from traditional financial institutions, which often focus on standardised or “vanilla” lending.
Non-bank lenders must be creative when providing unsecured credit or senior debt for anything non-standard. It’s time to think differently, and this is the space to be creative. Our smaller, more agile teams and funding structures are well-positioned to deliver tailored, flexible financing structures.
Over the past decade, South Africa has experienced significant growth in private debt. This reflects a broader shift toward alternative financing solutions and other non-traditional funding sources. The growth mirrors major global financial changes, evolving regulations, and rising borrower demand for financing that is flexible and tailored to specific needs. Private debt, in particular, has become a key funding source for mid-sized businesses and real asset projects.
Private debt appeals because of its flexibility and speed. Unlike public credit, which is standardised and traded openly, private debt deals are individually negotiated. This structure allows lenders and borrowers to customise terms, conditions and repayment schedules, benefiting both parties.
In conclusion
When taking a broader view, the ripple effect of smart, accessible capital is clear. It supports job creation, business continuity, property development and community upliftment. Structured finance is not just about numbers; it represents a pathway to South Africa’s future.
Traditional finance might not meet the needs of today’s MSMEs, especially in high-growth sectors or those lacking hard collateral. However, alternative financing solutions can bridge this gap and help businesses achieve their goals. If traditional financing is holding your business back, it might be time to change direction, identify potential financiers and explore available options suited to your business.
