What are some of the common misconceptions surrounding short-term lending?
a. Generally, short term lending is associated with fringe lending activity such as Chattel loans, Caveat Loans, Payday lending and Personal Loans that are often unsecured and attract very high interest rates that can reach as much as 36% to 48% per annum and terms are usually 3 to 12 months. These loans are often only a few hundred dollars to tens of thousands in size. When most specialist lenders like Eastwood Securities talk about “Short Term Lending”, they plan for loans in the magnitude of a hundred thousand dollars to several million dollars, terms from six months to 24 months and expect security via a mortgage over real property.
b. Many people also see short term lending as low doc and not requiring the same amount of due diligence effort as longer term loans. Most Specialist Lenders offering short term funding will require almost as much due-diligence as any full doc loan will require and the documentation to establish terms and security are equally significant.
c. Furthermore, with the current requirements of responsible lending, there is just as much work in documenting short term loans under the NCCP as there is in setting up a longer term loan.
Describe the current market for short-term lending. Is it growing? What kind of clients are typical short-term lending clients?
d. Short term lending or bridging finance received its growth spurt as the GFC bit hard and banks tightened credit. Basically the market for loans in the 6 to 12 month or so term is driven by borrowers who are in need of “Financial Repair” in order to present themselves as “ready for bank finance” again. The introduction of new working capital is critical to achieve their short term business objectives. While this specific market segment is not particularly transparent and is not well audited it is believed to be in the order of A$10bil in size. It is greatly backed by private funding through an array of Registered Management Investment Schemes and Mortgage Funds.
e. I don’t believe there is a “typical” short term borrowing client. Basically it could be any individual or business who has found themselves unable to obtain or maintain their line of credit from a bank. Eastwood Securities which is a fairly typical specialist lender providing short term finance has a list of borrowers that include, retailers, manufacturers, farmers, market gardeners, entrepreneurs, property investors, self-employed and contractors, restaurant owners to mention a few.
What tips should brokers keep in mind when putting together a short-term deal?
f. Don’t underestimate the time really required for the loan. The most common trap is to set-up a facility for a period that does not allow completion of the objectives for the finance. It can then be difficult and more costly to extend a short term loan rather than set it up for the optimum period at the outset.
g. Exit Strategy is a major concern for most providers of bridging finance. It is critical that a clear and viable strategy is provided by the borrower indicating how the loan will be paid out in full at the end of its term.
Are there any special skills brokers will need to put together short-term deals?
h. Flexibility – no two borrowers’ circumstances and requirements are the same leading to the need for lateral thinking in regard to how each scenario can be assessed.
i. Forensic skills – quite often the broker needs to be able to dig below the obvious issues to really understand what is going on with certain borrowers. It might be something as simple as where funds to service a loan a really coming from and on what basis the borrower has legitimate claim to those funds or whether or not a Trust or company has the authority to borrow money.
j. Patience and a Common Sense Approach – most importantly a broker may need to be patient as they work with the borrower to explore what formal information might be available to assist the lender verify credit background and what really transpired and serviceability of the short term borrower. If certain information is not available, we need to consider how else the background and credentials of that borrower can be determined.
What are some of the different types of short-term products, and how do they differ? What kinds of clients does each cater to?
a. Caveat Loans – may be a sound option for borrowers that need money fast and for a shorter period of months rather than a year or so. However, interest rates are going to be in the range of 30% pa or higher.
b. Personal Loans – can be an option for people and businesses requiring smaller fund amounts and that have the time to work through the bank system in order to take advantage of a lower interest rate than would be achieved via Caveat and specialist lenders requiring mortgage security. A limitation here would be loan size and the issue of banks not accepting the purpose for which the funds are required.
c. First Mortgages – cater to people who have fallen outside the bank funding environment and need a year or two to undertake “Financial Repair” before going back to the bank sector for refinancing. Flexible terms are available and interest rates, while higher than bank rates, will still be manageable for an extended period of one to two years. Borrowers in this category need to have a suitable level of equity in the property that is to be used as security.
d. Second Mortgages – provide the benefit of leaving in place an existing first mortgage bank loan at lower interest rates and just topping up against equity. It can, however, be difficult finding lenders that are happy to take a second behind another lender at an acceptable interest rate. Rates for second mortgages could be in the range of 18% to 24%.