Short-term lending sorted

Short-term lending by nature is highly flexible, quick and tailored to reflect the needs of individual clients. General market confidence coupled with continued industry support for SMEs is shifting the type of finance solutions required.

This fluid, real-time style of finance provides a useful alternative to the broker/borrower when the more prosaic style of funding is not available.

“The upshot is this: there will be an increasing number of clients who are already on your books or who will approach you that will benefit from this style of product,” says Andrew Littleford, managing director of Interim Finance.

“As short-term finance isn’t a stock standard solution, then next question usually is ‘Where do I go now?’”

THE PLAYERS

A key point of diversification is understanding the sector and its players. There are scores of specialist lenders of all sizes, structures and reputations, and knowing where to best place your clients is critical.

“The first hurdle for most brokers, if they don’t know the market, is to determine who’s who, and who is reputable and committed to responsible lending,” says Jon Pepper, managing director of Acquire Capital Solutions.

Mr Pepper further advises that it’s vital to research lenders’ capabilities and credibility, obtain competitive quotes and avoid committing clients to unnecessary fees (particularly fees charged before a loan is provided).

“An experienced lender should be able to determine quite quickly whether or not an application is viable and that this shouldn’t attract large commitment fees,” comments Andrew Way, managing director of Semper Capital.

It simply comes down to the value of the security and the viability of the method of repayment, or the ‘exit’. Verifying these is part of the initial assessment. Lenders agree that the most important information is the:

• value of the asset and proof of any existing debt on it
• use of funds and term required
• intended means of repayment.

We’ve asked three lenders to demonstrate how short-term finance can be used to meet a client’s immediate needs and asked them to share tips on how to navigate the short-term lending space. Whether a loan sum is as little as $50,000 and for one month, or as much as tens of millions for a year, it is clear there is a lender for each scenario.

Interim Finance

Interim Finance provides short-term/bridging financing facilities with a preference for loans in metropolitan NSW and Victoria (though the group extends its portfolio nationally). Loans are usually $50,000 to $500,000 for caveats/ second mortgages, and $50,000 to $1,500,000 for first mortgages.

Borrowers typically require short-term financing for classic business requirements, including cash-flow issues and increasingly to enable business opportunities and expansion.

“Unlike traditional funders, we are not tied to a particular lending matrix,” says Mr Littleford.

“In an era of centralised credit policy and algorithm-based lending, our ability to problem-solve and act quickly and decisively sets us apart. Brokers are encouraged to troubleshoot a particular deal or bring the client into our CBD offices where solutions can be provided and the loan process can be initiated on the spot.”

Principal: Andrew Littleford Main loan locations: Metro NSW and Victoria (though lends nationally)

Sweet spot: $50,000 to $500,000

Known for: Caveat/ second mortgages to SMEs and developers

Typical loan: Property developer needs urgent cash flow to complete subdivision

Example: A developer required $350,000 to complete a four-lot subdivision. The project was sound and the gross realisation favourable, but the first mortgagee was limited within their credit policy to advance any further funds (odd, considering it was presented as a subdivision site from the getgo). The applicant’s original broker had ‘sat on’ the application for a number of weeks. By the time the borrower approached Interim Finance, they were under significant pressure from contractors who were well advanced with the civil works and were pressing for payment. The site was valued, priority amounts established and costs to complete quickly ascertained to provide the necessary funding and maintain contractor relationships.

Why it’s interesting: Short-term financing enabled the continuation of works at a vital stage of construction that prevented significant losses associated with the project delay. The quick processing and loan flexibility converts what may ostensibly look like a possible bank deal to a favourable short-term solution. In the process, the broker consolidated the client relationship whilst earning an alternate source of revenue.

Acquire Capital Solutions

Acquire Capital Solutions provides short-term bridging finance predominantly in Queensland, specialising in first and second mortgages from $250,000 to $3,000,000. Typical clients include borrowers that require a commercial financing need for purchase, sale, development, cash flow, and bridging or construction purposes. The funds are typically required for less than 12 months and a clear exit strategy must exist.

“A short-term/ bridging finance lender is a great option to get fast property finance,”

“Short-term lenders are flexible in their approach and tailor a solution to a client’s exact needs. Liaising with the funder directly enables immediate access to decision-makers, which also cuts additional administration.

“This process is expedited if the lender meets the client and inspects every security, rather than relying on registered valuers.”

Principal: Jon Pepper

Main loan location: Queensland

Sweet spot: $250,000 to $1,000,000

Known for: First mortgages and bridging finance, especially in southeast Queensland

Typical loan: Classic bridging loan solution – opportunistic retail expansion

A client in Brisbane owned and operated a small business with his wife, which had been in the family for the past 80 years. The landlord then sold their property to developers. They had the chance to buy the block next door, providing the opportunity to expand the family business. They signed a cash unconditional contract on the block, but the bank was taking too long and with only three days until settlement and an extension knocked back by the vendor, they needed a solution fast. Acquire Capital was able to swiftly provide a first mortgage on the land as well as a second mortgage on their principal place of residence, which provided the full amount of $950,000 required to settle three days later. The client was ecstatic and three months later they refinanced the total loan and settled with their bank.

Why it’s interesting: The client was able to retain business in the same area, preserve brand equity and good will (which equated to trade). For the broker, Acquire Capital took control of the situation and managed the entire process, which was resolved in three days (with commission also paid at settlement i.e. third day of the transaction). In this instance, refinancing also equates to ‘two bites of the cherry’ (aka a double commission).

Semper Capital

Semper Capital specialises in commercial and bridging finance throughout Australia, generally of loans greater than $1 million. Typical clients include companies seeking to take advantage of opportunity or that are under financial stress, with the latter faced with the appointment of receivers or liquidators.

“Bridging finance provides an invaluable solution to an immediate need pending an alternate arrangement,” says Andrew Way.

He continues by saying that the non-bank commercial lending space is quite broadly represented and it takes a specialist lender to be able to determine a short-term risk under the time pressures they usually present with.

In the post-NCCP market, brokers can readily protect clients while opening up an entirely new and lucrative commission stream.

Principal: Andrew Way

Main loan locations: Metro NSW and Victoria (lends nationally)

Sweet spot: $1,000,000-plus

Known for: Large commercial and bridging  finance loans

Typical loan: Distressed client – $4.6 million loan as a first mortgage for eight months

A manufacturing business suffered a three-year downturn in pro ts when it lost a significant distributor. Its $4.3 million commercial facilities had matured, the bank sought recovery and appointed liquidators. Fees accrued at $150,000 per month for four months as the liquidator employed a strategy to sell the company’s plant and equipment, which would effectively end its ability to trade. There were commercial and residential real estate assets exceeding $7,500,000. Semper settled the bank loan and creditors, which retired the liquidator and retained the plant and equipment. Through an orderly sale of non-productive real estate, the loan was reduced to a 50 per cent LVR, and serviceability ratios allowed the business to make a turnaround and return to a bank within in eight months.

Why it’s interesting: For situations where clients need funds rapidly, there are viable solutions. Bridging finance buys the time necessary to enable the actions that help clients to resolve outstanding issues while allowing the broker time to organise a cheaper long-term solution. This helps the client and provides a broker an alternate source of revenue.

THE CURLY QUESTION ON RATES

Let’s take a quick look at the alternative, keeping in mind it’s not a like-for-like comparison to equate a specialist lender with traditional financing, as both serve specific and different purposes.

With access to funding between 0 per cent and 2.5 per cent, larger finance institutions will always be cheaper. However they are slow: credit policy is centralised and restrictive, and they are somewhat indifferent. And the truth is, they can afford to be. If clients are not in a hurry, and it is a straightforward transaction, banks provide the obvious solution.

In comparison, short-term lenders (who are predominantly private) can provide letters of o er within the hour, documents within 24 hours and valuations within 48hours. There is a modest premium for this speed and autonomy, but there is no reason for it to be outrageous.

“Flexibility and autonomy without the need for price gouging is the cornerstone behind quality short-term finance,” says Mr Littleford.

Mr Way concurs, adding: “As long as a client is able to derive a financial benefit by borrowing, and that it’s a fair and competitive rate, then the rate for risk for the lender and the rate versus return for the borrower will make the transaction sensible.”

“People who require short-term funds have usually left it to the last minute in the hope of making alternate arrangements, so a lender needs to be able to move quickly,” concludes Mr Pepper.

“This is perhaps where many borrowers fall into the fee trap: under time pressure and they may agree to unnecessary fees in the offer contract.”

There’s no doubt that diversification into the sector enables access to an alternative income stream that can be highly profitable, aid client retention and promote a competitive advantage. We encourage brokers to realise the potential of this growth market and its lucrative opportunities with confidence.