Short-term lending can lead to lifelong relationships with clients. Two industry leaders share what you need to know about the sector
As a category of specialist finance, short-term may be one of the more maligned and – perhaps – most misunderstood. But for the right clients, short-term finance can provide solutions to urgent needs. Interim Finance director Andrew Littleford and Semper Capital director Andrew Way are two of the sector’s most high-profile leaders. They say brokers need to be discerning when venturing into short-term deals, but that the sector can also offer significant opportunities.
CLEARING THROUGH THE MISCONCEPTIONS
When it comes to misconceptions about the short-term market, Way is blunt in his assessment.
“I don’t think there are many misconceptions. If it is thought of as bandit-country with potential highwaymen lurking at every corner then that’s a fairly accurate description. Every market has its rogues, but the commercial short term space being largely unregulated is full of them. From those willing to charge large fees without any intention to lend to others whose rates and fees don’t accurately reflect risk but take advantage of a borrower’s vulnerability, and until there is some form of policing it will continue,” he said.
Way pointed out that the rogue operators in short-term lending tend to be “not lenders but brokers masquerading as lenders”.
Littleford agreed, but said research could help brokers avoid unscrupulous operators.
“There remain a few operators in this space whose business model and ethics could at best be described as questionable. With some research, brokers can be assured that loans written in the short-term sector will be compliant based on the established processes [and] regulations now applied as an industry standard,” Littleford said.
But in addition to this, Littleford said there were some misconceptions surrounding the industry. For one, he argued that the short-term industry is often painted as carrying excessive interest rates. Littleford said this was because home loan rates should not be used as a point of comparison, as the timeframes and risk profiles involved were completely different.
“There’s an increasing expectation that rates don’t exceed 1-2% per month in a typical short-term loan period of 1-6 months. Striking a balance between the risk and providing the best solution for a client’s need at a competitive rate is the correct approach,” he said.
Another common fallacy is that short-term deals are too difficult and labour intensive, Littleford suggested.
“Short-term lending creates an alternative income stream that can be highly profitable. A short-term loan has a significant return on the time invested. Transactions are generally dealt within 3-10 days, with the broker paid on the day of settlement. There are no clawbacks,” he said.
And while some expertise is required for any niche market, Littleford argued that Interim had hit upon a solution for brokers looking to get involved in short-term lending.
“Interim Finance has addressed this obstacle by offering a complete back-end support service, where brokers can elect to have the loan written and managed on their behalf at no cost. This has been popular for those who are time poor/ under-resourced, and seek the assurance that the loan is compliant. Commissions aren’t affected and the client relationship is maintained,” he said.
THE SIZE OF THE OPPORTUNITY
Littleford described short-term lending as a “rapidly expanding market” with an “ever-increasing client base”. This is due to the volume of clients being pushed from the prime to specialist space by tightening credit rules, he said.
“Post-GFC, banks have generally tightened their loan qualification criteria. This cautionary approach and general lending stringency has pushed the volume of traditional bank clients into the specialist sector. In particular, SMEs have been a core market which seeks short-term loans to quickly counter a lack of cash flow. This sector continues to evolve rapidly throughout Australia,” he said.
But Way said it’s difficult to measure the market’s temperature due to the lack of available statistics. Not to mention, he said, the fact that some operators jump into and out of the sector.
“I don’t know how this can be measured accurately because there’s no ‘official market’ and no collection of statistics. But certainly there’s always new lenders hoping to make a quick buck and this might give the illusion of ‘growth’, but these tend to come and go, learning that the reliable sources of introduction know where to find a good lower-cost offer with which they can’t compete so they take risks they shouldn’t in return for high rates but lose their shirts,” he said.
Nevertheless, Way identified a variety of clients who would normally seek out short-term lending solutions.
“I suppose there are four types of client: firstly, those needing to bridge a buy and sale chain or pending sale of an asset; secondly, those that need funds the banks won’t or can’t give them for a period of time during which they prove their case or improve their financial strength to the bank; thirdly, those the banks want out and who need to deleverage before getting back to a bank; and finally, those that want to release equity for some purpose before they can refinance. Applicants that are not suitable are those looking for a lender of last resort and with no options to exit,” he said.
Typically, Littleford said short-term products provided solutions for clients seeking working capital, bridging capital, looking to pay creditors or business expenses of those needing assistance with the ATO or BAS. Additionally, clients undertaking joint ventures, business investments or expansions or commercial or residential construction may be in need of short-term lending solutions.
“It’s also worth noting that at the end of the short-term loan period, refinancing is often required, providing ‘two bites of the cherry’. In short, tapping into short-term lending enables a point of difference through a broadened solutions/service offering, which equates to a greater revenue stream,” he said.
“The primary market is SMEs who require an often crucial cash injection to enable businesses to expand and/or bypass cash flow issues, to include paying creditors, purchasing stock, paying the ATO and GST, providing working capital or bridging finance,” Littleford added.
WHAT’S ON OFFER
When it comes to the types of products available, short-term lending can sound confusing. But Way said the types of products break down into a few basic customer needs.
“I don’t know about others but we cater to the $1m to $10m space and our clients fit one of three general types:
- Deleverage clients needing to sell assets to achieve bank serviceability – many are in the hands of external administrators and need us to take them out.
- Developers looking to fund an option and start development while they achieve the pre-sales necessary to secure bank funding.
- Companies in the process of refinance that need funds while they wait,” he said.
Likewise, Littleford identified a few customer needs his product line fulfils. Caveat loans, he said, are available to clients who wish to retain their existing first mortgage but require a short-term line of funding beyond their current credit provider’s capacity. Second mortgages are for clients who wish to retain their existing first mortgage but require a medium-term line of funding beyond their current credit provider’s capacity. First mortgages fulfil the needs of clients who offer unencumbered security and require a line of funding for the short to medium term.
TIPS FOR PUTTING TOGETHER A DEAL
Like any niche market, Littleford said brokers needed some understanding of the short-term market. But Littleford again pointed to Interim’s back-end support service for brokers who were time-poor. Aside from this, he said there were a few things brokers needed to keep in mind.
“To ensure a smooth and streamlined process, we encourage brokers to do their due diligence and extract all relevant information about the deal as soon as possible. Furthermore, we urge brokers to make sure they’re getting the best-in-market rate and offer optimal solutions that best address a client’s requirements.
Be sure to ask the hard questions upfront, choose a professional lender and be realistic. Be mindful of the commission expected. Large commissions seem attractive but are often met with resistance by the borrower and can result in a deal not proceeding,” he said.
Way offered three main tips for brokers looking at short-term deals.
“Only three things matter: a property valuation to determine LVR and available equity, proof of use of funds and benefit by borrowing, and a trustworthy and definable exit. Everything else is waffle,” he said.
Also, brokers need to understand the needs of their clients and be discerning in their choice of lender, he said.
“All they need to recognise is the need that fits the short-term product. The most important skill is in knowing your lender to avoid a bad borrowing experience. A broker only needs to know three short-term lenders to meet all their needs satisfactorily. They just need to identify who they are,” Way said.
This feature is from Issue 11.14 of Australian Broker. Download the issue to read more!