“Some local banks are beginning to take a more relaxed approach to surety, sometimes only asking you to sign for surety for 50% of the loan. However, this leeway is still largely only extended to high net worth individuals able to provide ample security. Signing surety for 100% of the debt sets South Africa apart and is not required in the UK, US or Australia - possibly because in South Africa local banks are backing the individual, not the transaction,” explains Gary Palmer, CEO of Paragon Lending Solutions.
Leah Darley, Partner: Commercial at Bernadt Vukic Potash and Getz Attorneys, explains the difference between independent guarantees and suretyships:
“Guarantees are primary obligations and not accessory in nature as is the case with suretyships. This means that, for example, in the event of a payment default, the lender can (after complying with the conditions of the guarantee), immediately and directly approach the guarantor and claim payment under the guarantee. In the case of a party signing a suretyship, the liability of the surety depends on the validity of the underlying contract (any disputes in this regard must be resolved first) and generally the lender is required to first try and reclaim defaulted funds from the debtor, before they approach the surety”.
Independent guarantees thus give banks and other lending institutions a direct line to recoup their loans, rather than going through the much lengthier process of pursuing the debtor first – who is clearly already in financial trouble. Moreover, the defences that can be raised to a claim under a guarantee are quite limited, for example fraud. This logically puts a lender in a much stronger position.
Palmer says lenders will, understandably, do whatever they can to protect their loans and believes it’s vital that any person entering into either a guarantee or suretyship examine the contract closely. Advice for when signing surety includes:
Despite the pitfalls, there is no doubt that in some cases surety can be beneficial. If a person can’t get a loan based on their personal balance sheet, but has a high net worth person willing to stand behind the deal, then the deal may work. An example of this would be a business owner trying to increase the bond on his house to invest in his business, but the deal is too big for his balance sheet, so a high net-worth individual backer signs the surety and the deal goes through.
“When looking for deal finance, lenders will insist on securing their loan. Working with an independent lending partner who will structure the deal with you, means you can rely on expert advice that protects your business and your most precious asset – your close network of supporters who are willing to financially back you and sign security,” concludes Palmer.
Gary Palmer is the CEO at Paragon Lending Solutions, which he founded in 2009 and has grown into a successful provider of finance to established entrepreneurs. A Chartered Accountant with more than 18 years’ experience, Gary has a comprehensive understanding of the financial levers for business growth. During tenures at Ernst Young UK and Investec SA, he specialised in corporate finance, focusing on financial structuring for institutional high-net-worth individuals. In 2007, he established a finance business that became Paragon. Today, Paragon helps clients get the right financial structures in place in the quickest and most effective way to optimise their financial affairs for wealth creation.
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.