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The GFC created an overwhelming number of losers, but it's good to know there were a few winners as well. 

Sydney-based Interim Finance was one of the few to come through in good shape, thanks to the culmination of several factors - reduced competition in the short-term lending space, tighter credit policies and increased business need.

Overall the effect of the GFC on his business has been positive, explains director Andrew Littleford.

"To be frank the GFC has provided this company with a greater level of business activity than experienced in previous years. Regardless of the economic environment businesses need credit - it is the life blood of enterprise. Fewer lenders and a return to a more rigid credit assessment by banks has opened the door for alternative credit sources."

The GFC has not only reduced competition from non-banks, many of which fell into hibernation at the onset of the crisis, but it also made banks more risk-averse.

"Demand for credit remains strong but supply is certainly limited," Littleford says. "With the demise of some of the more prolific low doc lenders and the more cautionary approach taken by the major banks our transaction numbers have increased."
 
But tightened credit policies in the lending industry are a good thing, he stresses, for both borrowers and lenders.

While people talk in terms of tightened credit policy, what they really mean is that we are now subject to more responsible lending guidelines, Littleford says.

"These guidelines were in place before the advent of cheaper alternative credit. In balance I feel it is a good thing. Naturally everyone is wise to the event in hindsight but there is of course something fundamentally wrong when a borrower can self-certify an application of $500k plus without demonstrable serviceability."

Rise up

Interim Finance opened doors in 1994. It started off as a small operation that basically supplemented cash flow for Littleford's development projects. But Littleford says it became clear that lending had less headaches "most of the time" than property development.

The company's focus on short-term lending was not a specific strategy in the beginning.

"At the time I don't think there was any grand plan - it just evolved. Today it is an area of business that we are comfortable with and one that we have a degree of specialisation and experience."

And it's an area of finance that's never short of clients.

"So long as the current regime remains in place the need for supplementary credit should remain quite strong," he says.

While the clientele is always there, the number of service providers is constantly changing. Littleford says that as soon as one lender vacates the space another takes its place.

"Having said that not too many seem to last too long. I think that many new lenders get hijacked by the perceived rate of return. High risk borrowers pay high risk rates - unfortunately there are casualties with those type of transactions. In that environment some promoters can get cavalier when using investor's money." 

The secret of Interim Finance's success has been to look at the value of the asset and its location and price competitively.

" That and the fact that I am probably known for asking brokers a few too many questions. Pricing of the asset is vital and the borrower's method of repayment must be plausible. Confidence in your valuers and legal support is paramount. To that end we are well serviced. Our relationship with our lawyers is now entering its 10th year. Our key valuers have similar longevity."

Littleford also looks at every transaction himself to verify that it has merit.

"Losing money is not a good feeling. I choose to avoid it wherever possible."

Unlike other companies, Interim Finance doesn't price for risk - if it's a high risk transaction, Littleford says they simply won't write it.

"I have never really understood the mentality of charging a borrower a higher interest rate if you feel the principal is in jeopardy. Over the past 12 months we have made a decision to put downward pressure on our pricing. I think this is one of the defining differences in our business."

The proposed National Consumer Credit Protection rules will significantly affect short term finance providers, Littleford says, adding that the trend is toward far greater accountability, as
rate, fees, benefit, exit strategy, security type all must stand up to audit and lenders who engage in grey processes will find themselves under far more scrutiny.

On brokers

Interim Finance doesn't have a formal accreditation process. While it has a database of well over 400 brokers, less than 20% would be classified as highly active. Its business is metro-based and concentrated on the eastern seaboard. However, Littleford says that the company considers itself as an accessible lender and he encourages brokers to pick up the phone and discuss the transaction.
 
According to Littleford, a number of brokers have been forced out of the industry because they "quarantined" themselves to writing residential transactions. The best way for brokers to spot appropriate short term finance clients is to ask a few simple questions: Does the deal have merit to the lender; does it have a benefit to the borrower; and is the exit strategy plausible?

The last point is critical, as it's up to brokers to discuss exit strategies with clients. Littleford says this is one of the areas that the company has really tightened up on over the last two years.

"Refinance options are not as plentiful so the proposed exit strategy must make sense. At the end of the day we are lenders not real estate agents. Unless contemplated at the commencement of the process, the sale of an asset needs to be avoided."

Typically Interim Finance deals with valuations and loan documents within a few days, but the flow of supplementary information will depend on the client/broker. The biggest hurdle it faces is extracting information from banks, Littleford says. While a first mortgage can be done in a few days, caveats and second mortgages take five to 10 days.

Littleford stresses that both brokers and Interim Finance are in a service-based business.

"As much as you would like you can't - or don't want to - write all the transactions presented to you. Honesty and full disclosure by all parties is essential. As a lender or broker there will always be another transaction - the loss of a reputation is harder to replace."

[subhed] 2010

Littleford expects 2010 will play out quite similarly to 2009 with the continuation of firm credit policy from the major banks and the absence of alternative lenders.

His medium term goal is to stay the course.

"We intend to be the preferred supplier of bridging and cash flow finance. Our focus will be on delivering a competitively priced product nationally. If a broker is considering obtaining a short term loan for his client we want our firm to be the first point of call."

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