Short term lending - Fast money

The success stories however make far less interesting reading and so tend to go unnoticed.

But regardless of the misconceptions around the short term funding sector, it is an industry in its ascendancy.

Strong borrower demand fuelled by tighter economic conditions has opened up significant opportunities for brokers.

Brokers who have branched into the short term finance sector have not only boosted their bottom lines, they have also broadened their range of services and strengthened their value proposition with their clients.

THE RISE OF SHORT TERM LENDING

Short term and bridging finance has an identifiable place within both the consumer and commercial lending markets.

Since the GFC hit back in 2007, demand for short term finance increased markedly as banks tightened their lending criteria and many businesses looked for ways to quickly counter a lack of cash flow.

While rapid growth in this sector makes it hard to pinpoint the industry's exact size, a recent report by the Consumer Action Centre found that the short term finance sector has grown "explosively" since 2002, with an impressive 800 plus national outlets in high-cost short term finance alone.

And with over $2 billion worth of short term and bridging funding in Australia at present, borrower demand is clearly strong.

THANK THE BANKS

The driver behind short term and bridging finance has primarily been the reaction by many traditional lending institutions to the GFC.

As a result of the lack of liquidity and shrinking appetite for risk many banks have re-evaluated the credit worthiness of new and existing customers, and as Intellichoice broker Christopher Heneric puts it, traditional bank customers have increasingly found they are not bank customers anymore.

"Those who have been with banks for over 20 years are now being shown the door simply because they missed a loan repayment in the last six months," Mr Heneric says.

"This situation has become so common it's not even funny," he says.

Similarly, Independent Broker Network principal Scott Roberts branched into short term lending to meet the needs of customers being turned away by banks. Previously working as a state manager for a large aggregator, Mr Roberts often saw a large number of mortgages fall through the cracks. He's now been working in short term finance for over six years.

"I saw that there was an obvious niche for short term lending and that's why I decided to target that market," Mr Roberts says.

While there are many purposes for short term lending, much of Mr Roberts' business comes from borrowers who are short on commercial cash flow.

"The short term finance sector was primed for the GFC," he says. "When the GFC hit, many businesses suffered - and that's when short term finance applications really picked up, creating significant opportunities for brokers in that sector."

Principal broker David Carter of Northwest Financial also started offering short term finance to tap into client demand. Seven years ago, he realised that many borrowers had difficulty in obtaining a short term loan from a bank as banks rarely loaned money for very short periods.

"I entered the short term finance market because it was a ‘niche market' where clients could get loans repayable in one to three months, or six to 12 months," Mr Carter says. In addition to solving a cash flow crisis, he says short term finance can suit a number of other business needs.

Where a business is being sold, a fast capital injection can help improve the prospects of sale and maximise business profits.

Alternatively, money may be required by a business owner to pay suppliers and contractors in order to continue to operate the business as a going concern.

Short term finance can also be used to consolidate existing debts and bring repayments up to date, to enable a borrower to obtain a refinance through the same lender.

FAST AND FLEXIBLE

Obtaining fast cash through traditional lenders can be a problem for businesses, particularly SMEs, as lending conditions to small businesses is currently very tight.

For this reason, SMEs may have to wait six to eight weeks for funding, while a short term lender can provide funding more quickly.

Another problem for a number of businesses is income verification. When applying for a loan, SME's may want to rely on a future expectation of income to verify their borrowing capacity.

Michael Watson, operations and marketing manager of non-conforming lender MKM Capital says short term lenders are often more flexible than traditional lenders and for this reason they can be a popular option for business borrowers.

"Many applicants have a requirement which can't be met through traditional bank or near prime lenders for varying reasons," says Mr Watson, whose company offers clients six month loan terms or up to 30 years.

"If the applicants can demonstrate to us the validity of their requirement we are able to place them into a loan product for a term which suits their requirements in the shortest possible time."

With a clear borrower demand and a growing number of funders that are willing to lend it is easy to see why short term funding can have a huge impact on a broker's bottom line. In a market where housing finance can be patchy, most brokers can ill afford to see good business go begging when there may be a viable funding option available.

"The one or two opportunities each month that a broker may come across can represent revenue which would otherwise have walked out the door - and there's no reason why that should be the case," says Mr Watson.

However, not all situations are suited to short term finance solutions.

According to Intellichoice broker Christopher Heneric, it basically comes down to the broker's own ethics as to whether they accept or decline a client's request.

"There are some situations where I recommend against short term finance.

"I recently had a client who wanted finance, but after assessing her lifestyle and habits, income and expenses, I advised her that it would be best for her to sell her house, as she would be facing a debt spiral," he says.

But generally, he says there's no reason why brokers shouldn't steer toward the short term finance sector as a part of their diversified offering.

"Some brokers shy away from short term finance, thinking that it increases the risk of failing to lend responsibly.

But by offering short term finance you are actually helping people - you're giving them one last chance before they have to sell their house," he says.

BENEFITS FOR BROKERS

The fact that banks are increasingly turning away customers has indeed opened the door for brokers in the short term lending space.

According to Acquire Capital director Jon Pepper, one of the key benefits for brokers is that term funding can boost a broker's bottom line.

Not only do short term loans give brokers the opportunity to receive commission for a loan that they would normally reject - perhaps due to uncertainties around where to source funding or structure the deal - but commissions are paid faster, and are often up front.

"Brokers are attracted to short term lending because commissions are paid at settlement, they generally don't have claw backs, and usually aren't reduced by aggregator fees," Mr Pepper says.

But while there are clear direct opportunities for brokers in the short term lending space there are also valuable secondary benefits.

Short term funding can enable brokers to build new client relationships, thereby steering competition from the banks.

When traditional funders can't meet a client's required timeframe, brokers can achieve stronger client ties when they can offer a loan that can deliver on speed.

What's more, by creating a finance bridge for the client, brokers can position themselves to receive a further business opportunity when the time comes for the client to refinance - providing valuable repeat business for brokers.

"Short term finance gives brokers ‘two bites at the cherry'," Homesec Finance director Paul Stone says.

As well as strong revenue flows for direct clients there is also strong scope for referred business.

"You may assist a builder with a short term caveat loan to help out with a cash flow issue," Mr Stone says. "He then tells other builders and tradies, and they will call you if they find themselves in a similar situation."

CRACKING THE MARKET

So to successfully tap into the short term lending market, brokers should be mindful of a few simple rules, all of which are underpinned by responsible lending.

While the waters around responsible lending are still a little murky, the introduction of phase two of the NCCP next year will help clarify this in regards to short term lending.

Nevertheless, brokers can steer towards responsible lending now by sourcing appropriate short term funding and giving clients sound and ethical advice.

As ethical lending in the industry is paramount, it's important to find a funder who is fully compliant with the NCCP legislation.

In NSW, this means the funder must not charge interest at a rate higher than 48 per cent per annum, and there are interest rate caps in other states as well. It also means ensuring the lender doesn't charge unusually high application fees or fail to carry out a proper client assessment.

Most lenders fund short term loans off their own balance sheets, or raise the money from public investors and shareholders.

MKM Capital operations and marketing manager Michael Watson says it sources its funds through an institutional warehouse facility, which also cuts down time on the client's end.

"Most short term funders typically source funds from private sources or debentures and accordingly, they don't always have money available to lend. This is a differentiation of MKM Capital," Mr Watson says.

It's also advisable to look for a lender that is a member of an association that is bound by an ethical code. While this does not guarantee legislative compliance, it helps to identify those lenders who are serious about responsible lending in Australia.

There are two national associations in the short term and bridging finance industry, the Short Term and Bridging Finance Association (STBFA) and the Australian Short Term Lenders Association (ASTLA). Both associations have a code of practice that encourages responsible lending, as well as cautionary measures for members who fail to comply with those codes.

But as Mr Watson says, the most effective way to break into short term and bridging finance is for brokers to dip their toe in the water.

He says brokers who do so will reap the rewards of adding short term finance to their diversified product range. And by doing their own research, they will soon be able to position themselves within this sector, for the benefits of their clients.

"Short term funding should eventually become a familiar product a broker can recommend with confidence," he says.