A Brokers Guide to Short-Term Finance
As the funding markets continue to evolve and timeframes to fund scenarios become more uncertain, many brokers will need to turn to short-term finance to bridge the gap.
Our experience is that brokers who previously had never had to broker a loan in this space are largely unsure of where to start the search for solutions.
The brokers we have spoken with advise that the process is daunting, with the market not an easy space to navigate. Hence why Secured Lending has now provided a Brokers Guide to navigate you through the world of private lending.
The 5 Questions You Need to Ask Your Clients
1. How do you know whether your client needs short term finance?
There are several signs that can indicate that a client may need short-term finance. Some of these signs include:
Cash flow issues: If a client is struggling to meet their financial obligations, such as paying bills or employees on time, they may need short-term finance to manage their cash flow.
Lack of working capital: If a client is unable to purchase inventory, pay suppliers, or invest in new equipment, they may need short-term finance to increase their working capital.
Unexpected expenses: If a client has experienced an unexpected expense, such as a natural disaster or equipment breakdown, they may need short-term finance to cover the costs.
Seasonal fluctuations: If a client operates in a seasonal industry, such as retail or tourism, they may need short-term finance to cover the costs of preparing for peak seasons.
Growth opportunities: If a client has an opportunity to expand their business, such as opening a new location or launching a new product, they may need short-term finance to take advantage of the opportunity.
Credit history: If a client has a poor credit history or lack of collateral, they may find it difficult to qualify for traditional long-term loans and may need short-term finance as an alternative.
By identifying these signs, you can help your client understand whether short-term finance would be a suitable solution for their needs. It is important to have a conversation with the client to understand their financial situation and business model to help them make the best decision.
Most short-term solutions by their nature are not cheap compared to traditional banks.
So it’s not surprising that borrowers don’t wake up one day and say “wouldn’t it be nice to pay a rate 3 or 4 times more than my current bank rate”.
In fact, what typically happens is borrowers try to get a loan through cheaper means and learn that either the timeframe to funding or other reasons mean this is currently not possible.
Short-term loans are used by borrowers to meet funding needs where a mainstream lender simply cannot meet the funding timetable or will not fund the client for the current purpose or in the current circumstances.
- SPEED MISMATCH – An opportunity to acquire an asset/ business requires a speedy finance solution which many lenders simply cannot meet.
- SERVICING MISMATCH – The borrower is unable to demonstrate servicing of the loan to meet the requirements of mainstream lenders.
- PURPOSE MISMATCH – A borrower has outstanding ATO debts, a winding up application, default notices, bad credit ratings and many lenders will not provide funding for these purposes.
DOCUMENT MISMATCH – The borrower has not undertaken all their tax returns and mainstream funders are seeking such returns before they will fund.
2. What securities are being provided?
Short term lenders require some form of real property as security and their loan to value ratios are dependent on the risk, scenario and location of the proposed security.
Most short term lenders will obtain a valuation report to support the assessment values of the proposed security.
It is important for brokers to take into consideration the timing of such requirements from short term lenders as a valuation report can take up to 3 to 5 working days to complete, sometimes even weeks, when the property is more complicated.
3. Is the short term loan for business purposes?
An assessment of whether the loan is subject to the National Consumer Credit Protection Act (“NCCP”) is required by most short term lenders. A business purpose declaration and corporate borrowing entity will generally be the minimum requirement.
A large-portion of short-term lenders only lend to corporate borrowers.
4. How urgent is urgent?
Although short term loans are easier to get funds than from the Bank, there are a number of factors that can delay funding / settlement and it is important for a broker to understand the specific requirements of the short term lender and the timing implications of same. Examples of circumstances that can delay funding are:
- Valuation Reports
- Negotiation and obtaining a Deed of Priority with the first mortgagee
- Collating documents to support the application (financial reports, birth certificate, tax returns etc)
Credit Information Memorandums, which are prepared by some short term lenders that are raising capital and seeking funds from their investors.
5. What term does the client need?
Term of the loan is a critical consideration. Most borrowers will try to get the best of both worlds being surety of a longer tenure of a loan but with the flexibility to repay the loan earlier.
All short-term lenders have different requirements relating to term. From the lender’s perspective the lender is also looking for certainty and wants to be able to plan their funding around repayments of loans. The longer the term the borrower seeks may impact the LVR the lender is willing to provide as the lender is being asked to take a longer-term view on the value of the assets being offered as security.
Some lenders have minimum terms of 3 months so if the borrower only needs a 1 month loan this can be very expensive. Some lenders will allow the borrower to take a 6 month loan but the minimum term is a lessor period which allows an earlier payback without penalty.
Our advice is to build in a time buffer of 1-2 months into any loan. In this market timeframes are blowing out and it is getting less and less predictable as to how long it takes to get a refinance or asset sale away.
The obvious question that follows is what happens if the borrower gets to the end of term and can’t repay the facility? Can the borrower build in safety by way of a rollover of a further term?
Our advice is do not leave this to chance as some lenders in this space will use this end of term to put your client into default. If promises have been made as to extensions, then make sure the legal documents reflect this. Don’t let this be at the lenders’ discretion if you can avoid it and instead seek to have any extension you think you might need approved subject to a pre-agreed rollover fee and no default in the loan.
5 Tips for navigating the short term loan space
Find out if the Lender has their own funds
There are a number of lenders out there that rely on the backing of investors to fund their short-term finance product. Although there is nothing wrong with the concept, their cost of capital can be high and BEWARE, some lenders rely on default interest, fees and charges to make an earning.
Furthermore, a key concern is that the lender is required to prepare a credit submission report for their investors to consider prior to funding. It can sometimes take a considerable amount of time to complete the due diligence and circulate and it will not always provide a guaranteed “Yes” to funding.
By then, your client would have lost weeks, and their backs are against the wall.
Always read small print, find out the hidden default costs and don’t get too engrossed on the lower rate of interest. It might be a trap!
Find out the costs outlined in the term sheet if the loan doesn’t proceed
Be careful with this one as some lenders have been known to chase borrowers for significant costs in deals which never funded because the valuation obtained by their instructed valuer didn’t stack up. Where possible insist on paying for the valuation and don’t sign the term sheet until all condition precedents to the loan are gone or that such costs only become payable if you pull out of the loan.
If a lender won’t let you do that then ask yourself why?
Determine what kind of documents will a short-term funder need
Most lenders will need up to date rates notices and where a second mortgage is being sought, up to date loan confirmations and direct contact with the 1st mortgagee.
To prevent any delays, obtain a list of documentation that the short-term lender requires to assess the scenario.
Speed, Speed, Speed!
The two things that slow down a short-term loan that are outside the borrowers’ control are; Valuers and 1st mortgagees, so you need to know the lender’s process for each.
In terms of valuers, many lenders say they can fund in 24 hours but if their process is conditional on external valuations, this is virtually impossible.
Many lenders will blame the valuer as the person slowing the deal down when the real reason is that the lender is waiting to get the money to fund the deal.
Additionally, if you are seeking a second mortgage then you need to know if the lender will settle with a caveat or requires settlement with a priority deed with the first mortgagee. If it is the latter then this process can take weeks waiting for the 1st mortgagee to agree to terms, all the while you are trapped into a term sheet you have signed.
Check out this Short Term Finance Scenario where Secured Lending funded in 24 hours.
Pick the Lender wisely
Before you pick the lender, ask around to other brokers and do some searches so you know who you are dealing with. If it isn’t obvious who is behind the lender then ask yourself why are they hiding?
Don’t get caught signing a term sheet with an unscrupulous lender.
The short-term market is a relatively small market so completing a few searches and asking brokers should uncover who you are really dealing with and their history.
The 5 Key Takeways
- Pick the right lender who has shown themselves as being reputable in the industry. Do your homework here.
- Negotiate what your client needs upfront and make sure these requirements are explicit in the loan terms, not promises to you or contingent on ‘it will be ok’ comments provided at the time of signing the term sheet.
- Don’t let your clients sign things which have large costs you will be obligated to pay for conditions that you don’t control.
- When you need a fast funding solution ignore the hype and focus on the lender’s that will tell you realistically how quickly they can assist you.
- Don’t let lenders slide in new costs between term sheet and loan doc Make sure you understand the cost implications of going into default by reading the fine print.
The Secured Lending Difference
This is what sets Secured Lending apart from other short- term lenders in this space.
- We have our funds;
- We have an internal team of property experts to assess every deal;
- We have the capacity to execute and fund in 24 hours;
- We do what we say we are going to do.
Keen to know more, check out our short term finance products