Know your market

Each of the aforementioned offers something different, and together they represent the gamut of risk appetites a broker should have in their stable. But to employ these options, a broker needs to maintain knowledge of each entity’s products.

Any broker worth their salt will know that rate is not always the key determinant. Rate is generally relevant where borrowers have options, and where they don’t, rate is usually less important to finding a solution itself, and this may be predicated on other considerations such as security asset, location, LVR or time pressures. Of course, I am delving into the realm of the distressed borrower. For these clients, the fit of an appropriate lender is more important than rate.

Like a tie-dyed cloth, the richer segment is at the top and, in terms of lenders, the ‘richer’ offerings are made by the banks that benefit from the availability of cheaper money through diverse funding options. They can offer lower rates, but they are cherry pickers who prefer lower risk and lower capital adequacy-intensive loans to cleaner credit borrowers. They are high-volume, low-margin enterprises that have to be process-driven to achieve an economy of scale. Thus, they cannot always afford to think too far out of the square because this requires management time they can’t afford. The corollary of this is that their application processes are box-ticking exercises to determine a ‘fit’ of risk on a per-price basis. Hold this thought – ‘a fit of risk on a per-price basis’, because I will refer back to this later.

Next down the tie-dyed cloth of capital costs are credit unions and non-bank lenders such as Community Choice, People First, La Trobe and Pepper. Their funding options are wider than those below, but less than the banks, and therefore their cost of capital is usually higher (depending on the risk envelope in which they play). Their delivery rates to clients have to be correspondingly higher because they have to pass this on to maintain a margin for provisioning and stakeholder profits, but this also means they have to seek an alternate niche for risk on a per-price basis. If they were to go head-to-head with the cheaper banks, of course they would fail, so they have to accept a correspondingly elevated risk profile either by LVR, borrower credit history, type of asset or a combination of these. If your borrower is one step from the banks in terms of risk, then this is the market you need to look at. These lenders are still process-driven, but more hands-on in terms of credit profiling, so if you get a rejection, make sure to ask why. They are more likely to tell you than a bank is, and it may be for a reason that you can solve by tweaking the loan application or asset structure, but you won’t know unless you ask.

Next are traditional finance companies, for some of whom Semper Capital manages risk. They raise funds by way of issuing a debt of equity scrip to retail and/or wholesale investors by prospectus or information memorandum (IM). They are regulated by ASIC and not APRA, which has its benefits to you as a broker, especially in terms of clients with difficult security assets such as rural or commercial/industrial properties that are owner-occupied. Unravelling the mysteries of banks’ capital adequacy and risk-weighted ratios is not the purpose of this missive; suffice to say their cost of capital is not tied to APRA’s regulations by asset class, so they are freer to lend against these from a portfolio perspective. However, they do have restrictions imposed on them by their trustees, and these include LVR and anti-concentration limits, so you will find their sweet spot to be in the $1.5 million to $2 million loan range. Semper operates on the CapMX Platform, which enables syndications and allows us to play in a much larger loan space using our funds and theirs. This is beneficial to you as a broker where you have a $2 million-plus loan for which you want a longer-term facility cheaper than private lending rates.

These lenders are very flexible, they are hands-on credit managers and solution-focused. Their cost of capital is higher than the previous two sectors, but their approach is much more likely to work on ‘a price per risk-fit basis’ as opposed to the banks’ strict ‘risk on a per-price basis’. So for brokers with clients who have limited options and for whom the motivating factor is a financial solution rather than price, this is the group most likely to offer that solution at a reasonable cost.

At the poorest end of capital cloth (at the risk of strangling my own cliché) are private lenders, because they are funded largely by equity, though some have wholesale funding to gear up their portfolios and lower their cost of offering to borrowers. This group is definitely flexible on risk by applying a corresponding premium to rate. But you have to be careful who you deal with. Many are ruthless and inflexible in default because they rely on the higher rates default attracts to meet their internal rate of return. Also, there are many fee-fishing entities intent on making money from charging clauses in signed offers, with no intent to lend. The secret here is to do your research.

Lastly, there are the newly emerging peer-to-peer platforms offering consumer and commercial facilities. While they claim to compete with the banks, thus far the rates they are achieving (determined by appetite for risk by collective investors) puts them in direct competition with private lenders. It is too early to tell how effective or reliable this form of lending will be, and I suspect much of these entities are fintech plays aimed at attracting a sale to banks who will seek to purchase their investor and distribution networks. In any case, they will enjoy a halcyon period during which defaults remain low but, as they grow, they will struggle to maintain credit integrity and defaults will drive up their cost of capital on a per-risk basis. Only time will tell.

So the open secret for brokers is to widen their lending options and get to know specific players in each sector. From our own experience, we have preferred introducers that understand our offering and with whom we gladly work to provide out-of-the-square options, because we know we can get to an understanding of risk quickly due to their client knowledge and ability to translate to our risk appetite. So, get wise and get wealthy!

Andrew Way, director, Semper Capital

Andrew Way is a director of Semper Capital, a non-bank property-secured lender specialising in short-term and replacement finance. He was the founder, and former chairman, of the Mortgage and Bridging Finance Association, a role in which he played a pivotal part in changes to consumer regulations for bridging finance. He continues to be an advocate and campaigner for the introduction of responsible lending regulations in the currently unregulated private commercial finance sector.

“The key to being a strong lender in our space is to be able to provide consistently and competitively priced funds with a rapid capacity to draw down. Clients who need bridging or replacement funding usually have time pressures because they want to take advantage of opportunity, or are forced to refinance by a bank keen to exit. What they require is absolute surety during what is usually a very stressful time, and this is what we provide.”

For more information on bridging and replacement finance visit www.semper.com.au.