The long and short of quick finance

Context is everything when it comes to money. A prime mortgage is the finance equivalent of a supermarket Coke. A non-conforming home loan is like a pub Coke. A short-term loan is like the restaurant Coke. The borrower pays a premium in part because the amount of paperwork and due diligence required for a six-month loan is similar to that for a 25-year mortgage, yet the return is not the same.

Most mortgage brokers sell supermarket Cokes. Many also sell higher-margin pub Cokes. But, very few offer the restaurant version as well. Clients who need money in a hurry understand they need to pay a premium. They’re not stupid: they don’t see short-term finance as a long-term fix; they see it as a way to solve urgent problems. That’s why brokers who sell short-term loans can build a reputation as the ultimate problem solvers.

Healthy commissions... and no clawbacks

Short-term lenders are a more diverse bunch than their banking cousins. The main banks are large organisations that tend to cover the entire country and offer the full suite of mainstream products. Short-term lenders, however, are much smaller, which means they are more likely to confine themselves to niches and particular regions.

That’s why it can be hard to describe a ‘typical’ short-term lender. Interest rates vary widely, but one common rule is that short-term rates start where bank rates end. Terms are usually three to six months, although they can extend for as long as 12.

Turnarounds within a week are common and can even be done as quickly as 48 hours. Funding comes from shareholders and private investors, which can range from institutional and wholesale investors to retail and SMSFs.

There are two main reasons clients don’t just go to banks. Often, they can’t qualify for a prime loan – but even if they can, they usually need the finance faster than the bank can provide. That provides an opportunity for brokers. Deals can be difficult to organise and clients are usually desperate to get their hands on the money.

That means they will happily allow the broker to add a one to two per cent margin on the loan – and even thank the broker for the privilege. Best of all, there are typically no clawbacks.

One thing short-term lenders readily concede is that there can sometimes be a funny smell about the sector. That goes with the territory when you lend out money at higher than-normal interest rates and occasionally attract hostile media coverage. But brokers, more than anyone, should be able to understand their predicament.

Just because a small number of sharks do the wrong thing and attract negative headlines doesn’t mean there is a problem with the industry at large. Ethical short-term lending solves problems rather than creates them.

Help wanted

That’s the best way to think of short term lending – as the answer to an urgent problem. People use banks to achieve long-term financial goals such as home ownership or planning for retirement with an investment property or two. But short-term lending is about overcoming an immediate issue so the borrower is better positioned for the years and decades ahead.

Short-term loans are often used to settle properties. One typical scenario involves the client who plans to sell one property to fund the purchase of another. But then disaster strikes – an unexpected delay in the sale of the existing property. Suddenly, the client doesn’t have the money to settle their new place. There’s no time to organise a bank loan, so the client turns in desperation to a short-term lender. They understand the interest rates will be higher, but are willing to accept that if it means being able to take possession of their dream home. Soon after, the sale of the first property is finalised, and they’re able to repay the loan.

Businesses also need loans. A man running a family restaurant may be just two weeks away from being wound up because of an overdue tax bill. Short-term finance will allow him to get the taxman off his back and give him time to restructure the restaurant into a sustainable operation. Or a successful printer may hear that a rival with an impressive customer list has just entered administration. The administrator is targeting a quick sale, so the printer will miss out unless he can find some money in a hurry.

Thanks but no thanks

Not everyone sees the need for short term lenders. The Adviser spoke to several brokers who fell into that category, including Virginia Graham from Model Mortgages. She says she has always been able to find a way around short-term finance whenever the possibility has arisen.

“Usually, if there’s a structural reason for it, there’s some sort of alternative we can think of, such as a relocation loan. We use different structures rather than a short-term lender, because although I’m not averse to having a short-term lender, usually another product suits better,” she says.

Some brokers feel uncomfortable with short-term lending as a concept, but Ms Graham is not one of them. She says there is nothing inherently unethical about short-term lending – or other forms of non-conforming finance such as low-doc loans – as long as the broker and lender put the client’s interests first. “If you act with integrity and use the products ethically, there are no problems with them,” she adds.

Fast, fair and flexible

GB Finance director George Boulos also rejects the idea that there could be anything wrong with short-term lending.

“People don’t understand it if that’s what they’re thinking, because it’s not loan-sharking. It’s becoming more and more popular as people understand what it really is. It’s just helping people out of a sticky spot,” he says.

A week before The Adviser called, Mr Boulos happened to send a deal to short-term lender DJ Capital that involved a client who was going through a divorce and had to pay out his wife. The property sale got postponed, but she was still demanding her money by the deadline, so he took out a short term loan while he was waiting for the settlement. Another scenario Mr Boulos sees is the client who makes an impulse buy at an auction and then needs to find money in a hurry to pay the deposit.

Credit Corner’s short-term lender of choice is also DJ Capital. Director Dolly Brtan says she refers about two clients per month to the lender.

Ms Brtan says DJ Capital chief executive Damien Simonfi makes sure that both broker and client are kept happy. “Damien comes out to meet the clients, he gets to understand their business, he understands my business, I understand his business, and we can move really fast because of that knowledge and relationship.”

Ms Brtan, like other brokers who use short-term lenders, says they are far more flexible than banks and much more willing to get to know the parties with which they do business. She also believes they offer borrowers a fair balance between cost and outcome. “People become concerned because the money comes at a premium, but the premium is really a privilege that you’re paying for, and there’s nothing dirty about it,” she says.

Acquire Capital Solutions claims to have about 700 brokers on its database, one of which is The Australian Mortgage Group. The brokerage’s owner, Alan Saye, says he is able to turn clients into long-term advocates when he solves their urgent problems.

The payoffs can be rapid, because sometimes the clients will want to organise long-term funding once their immediate difficulty is out of the way.

Mr Saye adds that this sort of work will also please partners like accountants and solicitors if they’re the ones who sent the client to the broker. “Short-term finance isn’t something that everybody deals with, so if you do deal with that particular form of finance, you can add some value to those referral partners.”

Affluent clients also need short-term loans

It would be a mistake to think that short-term lenders cater exclusively to more desperate borrowers. Finance on the Coast director Phil Riches says many of the clients he sends to lenders like Assetline own several properties and valuables such as cars and antiques.

However, they can often have limited incomes due to changes in their work or family situation, which means they may need a short-term loan while they sell one of their assets, Mr Riches says. “This is where we have seen a great niche for Assetline to assist, with another benefit being that the process is streamlined with a fast turnaround time.”

House & Home Loans managing director Rael Bricker also refers clients to Assetline. Indeed, he has a foot in both camps: he runs a very successful mortgage broking business and he also manages Assetline in WA. He describes Assetline’s model as a bit like pawnbroking for the rich, with his two favourite products being the equity release and the sale advance.

As a broker, he says he benefits from selling more products per client and pocketing an extra commission. Mr Bricker also wins the gratitude of those he helps. “The point of it is: it’s a happy client. Because Assetline doesn’t compete with traditional brokers, it allows the broker to ring-fence the client,” he says.

West Australian Finance Group has relationships with several different short-term lenders, including Quantum Credit. Commercial finance manager Rochelle Weinert practices what she preaches: she turned to Quantum when she wanted to take out a second mortgage.

Ms Weinert says there are positives and negatives for firms that offer short- term loans. On the one hand, deals can be lengthy and complicated. On the other hand, a bit of hard work today can lead to a lot of opportunity tomorrow.

“When you get someone out of a jam, you’ve got that client for life,” she says. “It comes back to you long term; it always does. You do the right thing by people and it always comes back to you.”

Scott Roberts, chief executive of IBN Direct: Alternative Funding Solutions, has also experienced the benefits of forging relationships with short-term lenders. The firm uses about 10 lenders, including Acquire Capital Solutions.

“You may only use them a couple of times a year, however in a broker’s working life they are certain to come across clients who need urgent funds. If you save a client short term, generally you will have them for the long term. The relationship works best when you know the lender’s business and they know yours, allowing the right client to be placed with the right lender. Getting on Google and looking for short-term lenders that you have never dealt with is a recipe for disaster.”

SME Commercial Finance happened to have two typical cases on the go with Interim Finance when The Adviser called. Both involved self-employed businessmen who needed to buy stock quickly, according to mortgage manager Mario Stepancic. This was just before the end of the 2013/2014 financial year, so the suppliers were willing to offer a discount in order to book some last-minute sales. The businessmen then expected to offload the stock for a “handsome profit”.

Both deals were turned around within a week and both clients were given six-month loans, although they had the option of repaying the money after three, Mr Stepancic says. “It’s an affordable way for them to purchase the stock. You’ve also got to look at banks – they just don’t accommodate these sorts of clients anymore.”

Lenders make their case

Short-term lenders are not anti-bank. They understand the value they provide. But fast and flexible is not something banks are good at. On the other hand, short-term lenders like Quantum Credit thrive on solving problems quickly.

Quantum director John Broadway says his firm can offer brokers “fast turnarounds in credit decision-making, good service and competitive rates”.

“The decision to lend in principle will be made in hours. The constraints to fast settlement are then factors beyond the control of the lender, for example securing a property valuation or settlement figure,” Mr Broadway says.

“We have worked with select brokers, who really understand short-term lending, for many years and settled hundreds of loans for their clients. In turn, many borrowers are repeat customers – their return indicates a good experience in working with us.”

Interim Finance has about 1,200 brokers on its database, according to managing director Andrew Littleford. “What the broker needs to understand is that there are credible and price-effective alternatives for clients. They don’t have to go ‘into the darkness’ to get an issue solved,” he says.

Mr Littleford says any transaction imposes obligations on both broker and lender. Brokers are responsible for managing their clients’ expectations. Most need money quickly, which means brokers may sometimes fall into the trap of nominating unrealistic turnaround times, he says.

As for lenders, they have a responsibility to make sure clients have an exit strategy from their debt – in other words, to ensure clients solve their problem rather than create a new one. The lender also has to be transparent and make sure there are no hidden clauses, he says.

Assetline co-founder Nick Raphaely says it is also important for the broker to do the right thing by the lender.

“Short-term lenders want to understand how they’re going to get their money back, and usually it’s through a sale or a refinance,” he says. Good brokers know that lenders will stop returning their phone calls if they organise deals in which their partner gets burned, he adds.

Mr Raphaely says another trait of good brokers is that they solve problems for their clients, which is where short term lending comes in.

“A good broker has a solution for every problem,” he says. Assetline can offer personal asset loans that are secured against the asset, so no income or credit checks are required.

DJ Capital chief executive Damien Simonfi says clients who need short term funding “will go to all lengths” to obtain it. However, he says DJ Capital “only lends to people who are moving up in the world, not down”. For example, DJ Capital can help clients improve their credit histories by ensuring that several months of repayments are made on time.

That provides brokers with the opportunity to play matchmaker, he says. However, Mr Simonfi believes it is something one too many brokers let pass by. He says some brokers miss out on the opportunity of serving their clients and making extra income because they’re unfamiliar with the ins and outs of the sector.

Advice for brokers

Acquire Capital Solutions lending manager Jon Pepper has a word of advice for brokers: make sure you choose your short-term lending partners carefully.

There are many good lenders, but also a few bad ones, so brokers can get burned if they don’t do their due diligence, he says. He advises brokers to ask lenders for references and to talk to brokers and borrowers who have used their services.

Mr Pepper says those brokers who choose wisely will boost their businesses – so brokers should actively research lenders before working with them.

“Every broker would get at least one deal every couple of months that would fit our policy, but they can’t see it because they don’t have a relationship, and I guess they don’t know how to sell it. We make the process as simple as possible. I’m looking for a five-minute phone call from the broker, we’ll discuss it over the phone, and if I’m happy I’ll issue a letter of offer,” he says.

“Education of brokers is a massive challenge. The industry has a reputation for having high interest rates and therefore a large percentage of brokers probably don’t pursue it, when in fact it’s a product that every broker should be able to offer their clients as an alternative,” he says.