Bridging South Africa’s R350 Billion MSME Funding Gap with Structured Finance

● South Africa’s fintech and alternative consumer lending sectors are rapidly expanding due to high mobile penetration (with over 95% of South Africans owning a mobile phone) and a large unbanked population (around 9% of the population remain unbanked or underbanked)^[1].

● As of Q1 2024, the local credit market is dominated by banks accounting for 79.5% of new credit issued compared to 83% in 2018, with non-bank financiers issuing 6.9%, retailers 6.5%, and others 7.2%, indicating growth in non-bank sectors.

● The credit landscape is served by over 8100 registered credit providers who fall within the category of “short / long-term and others”, highlighting the diversity of credit provider types within the financial system^[2].

A staggering 85,6% of all funding applications came from micro-enterprises, businesses with a turnover of less than R1 million per year. Despite these businesses creating 80,5% of the jobs in the country, they are routinely underserved as many traditional lenders still use consumer-grade credit scoring models for business loans, misreading the realities of micro-businesses and this often disqualifies viable applicants^[3].

● According to the 2025 South African MSME Access to Finance Report^[4], there has been a broad increase in SME lenders in South Africa, with over 10 000 SME funding requests submitted between September 2023 and August 2024, covering 605 financial products from 315 lenders.  This has been driven largely by fintech and alternative lending platforms addressing gaps left by traditional banks.

September 2025: In our current economic climate, many micro, small and medium (MSME) South African businesses are facing a harsh reality.  Although the market is awash with money in the market, access to traditional credit is becoming scarce due to regulations like Basel III, requiring banks to hold more capital and tighten their risk assessments.  Often the timeframe for approving loans is extended due to all the necessary compliance restrictions.

In addition, with South Africa being grey listed by the Financial Action Task Force (FATF), this signals to international markets that South Africa has deficiencies in its anti-money laundering and counter-terrorism financing (AML/CFT) regime. This has led to increased scrutiny, higher compliance and transaction costs and reduced foreign investment.

Grey listing damages South Africa’s reputation globally, as it raises concerns about potential risks of money laundering and terrorism financing within the country. This damaged reputation can result in credit rating downgrades, making it more expensive and difficult for South African entities to borrow funds internationally.

We all know the vital role these MSME businesses play in creating jobs, driving innovation and economic growth, but they are struggling more than ever to get the finance they need, when they need it most.  In the first quarter of 2025, data shows that just 28% of business loan applications were approved by traditional banks, begging the question of who helps the remaining 72%? 

Sadly, this statistic paints a rather bleak picture for businesses who rely on funding to survive, to grow, and of course, to scale. This delay in the approval for traditional lending has created a financing gap, especially for borrowers needing customised loan structures, non-standard repayment schedules, or faster funding. All of this takes place against the backdrop of a R350 billion funding gap for MSMEs. One might call it a crisis, but it’s also an opportunity for creative financing models to step in.  

According to the 2025 South African MSME Access to Finance Report, the SME sector has increasingly shifted towards technology-enabled lending solutions due to their ability to provide faster approvals, personalized loans, and greater accessibility compared to traditional bank lending, which remains constrained by conservative credit scoring models. 

Structured finance is essentially a toolkit of non-traditional funding instruments that allow companies to create custom flexible funding solutions to suit their unique needs at different levels of their finances.  It provides a flexible approach that gives access to capital, without businesses being forced to give up equity or constrained by rigid bank criteria.

These complex structured financial deals combine different types of funding methods such as 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), partnerships between businesses (joint ventures), services to raise funds (presale facilitation), funding holding company structures (where the 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 these structured finance strategies.  With a growing number of small and mid-sized businesses seeking capital, private debt offers the flexible, nimble solutions that potential borrowers need.  Let’s look at a few 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. The team came up with a solution where they formed a joint venture (NewCo) to acquire the property, structuring a 10-year lease with the client’s operating company, while raising third-party funding.

Paragon 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 their option and now owns the property outright.

In this example, Paragon Finance ran a competitive process to raise the senior debt from the six institutions, on a competitive basis, offering the Mezzanine funding themselves.

Case Study 2: Turnaround funding during a crisis

Following the death of the business owner, the client (under the management of a corporate advisor) required a working capital loan to pay a key supplier. The company owned a commercial property, but the banks declined funding to avoid the complexities of a deceased estate. Paragon stepped in with a tailored solution: they sourced the capital for the property through a sale-and-leaseback and, together with a working capital loan, provided a bridging facility to the client.  This enabled the client to move quickly to pay back the supplier before the transfer of the property took place. 

A call option allowed the client to repurchase the property after loan repayment, at a predetermined price. The result? The business was able to preserve their supplier relationship during a difficult transition. And after repaying the loan, they regained full property ownership within six months.

Structured Finance offers significant benefits

In the mid-cap space especially, funding needs are becoming more complex and sophisticated, requiring bespoke solutions compared to those offered by traditional financial institutions, which are often focused on standardised “vanilla” lending.

Discussing the need for complex custom solutions, Gary Palmer, Founder and CEO of Paragon Finance says that “In practise, this means that non-bank lenders need to be a lot more creative when it comes to 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.” 

“At Paragon Finance, we’re a high-touch, tech-enabled business where the deals we negotiate are complicated, typically non-standard.  We’re deal-makers, often requiring our team to approach a problem from a different angle, coming up with a creative solution for our clients,” Palmer explains.

Looking ahead

Over the last decade, South Africa has seen significant growth in private debt, reflecting a broader shift toward alternative financing sources.  This growth reflects major changes in the global financial system, evolving regulations, and a rising demand from borrowers for financing that is more flexible and tailored to their specific needs. Private debt, in particular, has become a key source of funding, especially for mid-sized businesses and real asset projects.

“What makes private debt appealing is its flexibility, and the speed in which it can be processed. Unlike public credit, which is standardised and traded openly, private debt deals are individually negotiated. This allows both lenders and borrowers to customise terms, conditions, and repayment schedules, often benefiting both parties,” adds Palmer.

Taking a step back and one can see that the ripple effect of smart, accessible capital is profound: job creation, business continuity, property development, and community upliftment. Structured Finance isn’t just about numbers. It’s about South Africa’s future.

Traditional finance might not be meeting the needs of today’s MSMEs, particularly in high-growth sectors or those without hard collateral, however, there’s a flux of alternative financing sources who can help. If your business is being held back by traditional financing, it could be time to change tack and find out who to present to and what options there are available for your business.

For more information about our Structured Finance solutions, visit https://paragonfinance.co.za