What you need to know
Customers are increasingly turning to short-term and bridging finance to cover their funding needs, we uncover what you need to know to connect your customers with short-term financing lenders
A plastering firm secured a big job by agreeing to a 90-day term with the project builder.
The sub-contractor had 13 other plasterers working on the job, but ran out of money to pay his workers about half-way through the 90-day period.
It was a union job and apart from upsetting the plasterers, he risked losing the contract.
A bottle shop owner did not have sufficient funds to purchase stock for his shop and hotel over the Christmas period.
Not only did he stand to lose business over the peak season, he risked damaging his reputation and ultimately, jeopardizing the future of his business.
A doctor needed $450,000 to buy medical equipment. While she expected money to come in from the companies she sold her last consignment to, it was not yet due. She stood to make a 300% mark-up inside of two months with the new consignment.
In a perfect world, no one would be caught short of cash.
But as the three real-life examples above prove, this utopia of consummate financial planning is far from reality.
Short-term finance companies have stepped up to fill this space.
Why not banks?
Bridging and short-term finance is generally considered to be a provision of finance for business or investment needs where the loan term is from one to 12 months.
Why have private lenders stepped into this space? The short answer is speed.
Clients typically need the cash quickly and can't afford to sit out the four to six-week loan application period for a standard major bank loan.
A lack of financial records can also be a problem. Some banks will organize an overdraft or business loan, but they require financial records showing a certain level of cash flow and profit results, and this can still take two weeks to organize.
Andrew Way, director of Commerce Credit, says banks are just not set up to provide short-term or bridge financing efficiently.
"People who need bridging finance need it quickly and to do that assessment requires a bespoke approach," he says.
Way says the bespoke approach (or a tailor-made approach) is "one where you try to help the borrower to identify the most appropriate route to achieving the outcome."
He adds: "Many companies struggle to get finance from banks because banks want to see current capacity to repay. They won't look at the growth trend of the business. In order to do that it takes quite a lot of skill. It takes an understanding of entrepreneurship; it takes an understanding of business strategies, cash flow projections and general business development. It also requires you take a great interest in the borrower and also in their business during the whole time of their loan."
A number of short-term finance companies are private lenders. Therefore, they don't need to source the money through investors and can resolve most transactions in a couple of days, and in some cases, less than 24-hours.
And business has never been better.
"It's getting a lot busier," says Merrick Malouf, director of Prime Finance. "My turnover on a monthly basis has gone from $3m a month to $7m a month on the short-term loan. The start of this year has been the busiest I've had and I don't know why."
While the drivers of this increased need for short-term finance remains a mystery, the product itself is fairly simple to understand.
Who qualifies?
Short-term finance loans are "essentially an asset-based lend," says Andrew Littleford, managing director of Interim Finance.
"It really has a very much low-doc style to its approach," he adds.
Short-term finance companies require clients to have a residential, commercial or industrial property that they can secure the loan against with a reasonable margin.
Most companies require that the loan is for a business or investment purposes and clients have a clear exit strategy for repayment.
The purposes for requiring this type of loan are varied: cash flow crisis, an opportunity to maximise business profits, an investment opportunity or consolidation are all common reasons.
Because time is of the essence for most short-term finance borrowers, Littleford recommends brokers familiarize themselves with lenders policies before.
"It's probably best if the broker knows something about the product first, so then if it does come up it's not a matter of reading through it and trying to understand it quickly. They can make the process a little bit swifter for everyone."
That said, each case is a little different, he says.
"There are always some things out of the box."
Jon Pepper, director of credit for DJ Capital Solution, also encourages brokers to discuss the customer with them first.
"We have a dedicated team of five lenders that are keen to discuss any scenario with introducers," he says
A number of private lenders require brokers to have a simple accreditation process. Some merely require brokers be members of the MFAA, while others ask brokers to complete an online application.
Paul Stone, director of HomeSec Finance Express, recommends brokers call their organisation and get accredited before they have a customer.
"We want to help brokers understand caveat loans, so it is always best to know the product first, and then go seeking the deals."
What's in it for brokers?
Brokers aren't faced with short-term financing requests every day, but a working knowledge of these products could prove valuable.
"It's quite lucrative for [brokers] - it doesn't take a lot of time to get set up and most of these transactions are resolved in three to five days," Littleford says.
He adds that a lot of brokers, particularly in NSW, are recognizing the value in diversifying their revenue sources.
And in a diverse market, "it's always wise to have a facility on tap so when [a request for short-term finance] comes about, it's there," he adds.
Commission varies from company to company, and many leave it up to the broker's discretion.
While these products may be a little different than what brokers are used to, "once the brokers understand the product it's quite easy," says Malouf.
Snapshot: Short-term Finance Lenders
HomeSec Finance Express
Min/Max Time: 1- 4 months
Min/Max Finance: $10,000 - $250,000
Broker Commission: Brokers can charge up to 5%, which is paid directly to them by HomeSec at settlement
Accreditation: application form
Application process: Online, fax
Main offices: Melbourne, Sydney, Brisbane
National: Yes
Oakland Finance
Min/Max Time: 2 - 12 months
Min/Max Finance: $50,000 - $5m
Broker Commission: Up to 2%
Accreditation: immediate Acceditation
Application process: Online or Phone
Main offices: Brisbane
National:Yes
Commerce Credit
Min/Max Time: minimum loan period is 1 month. The maximum depends on rate, use and ability to repay
Min/Max Finance: Will consider any commercially viable loan
Broker Commission: Commission limited to a maximum of 4% and must be disclosed. Not involved in commission chains
Accreditation: MFAA
Application process: Online questionnaire available, but mostly by telephone
Main offices: Sydney, Melbourne, Brisbane and Adelaide
National: Yes
Interim Finance
Min/Max Time: 1- 12 months
Min/Max Finance: $10,000 - $1m
Broker Commission: 3% (unless it's a small loan, then commission is higher)
Accreditation: not req'd
Application process: Online, phone
Main office: DeeWhy, NSW
National: Yes
DJ Capital Solution
Min/Max Time: 1-12 months
Min/Max Finance: $30,000 - $3m
Broker Commission: Brokers mandate their client and commissions are paid at settlement
Accreditation: Member of MFAA
Application process: Call or e-mail. Most of loans settled within 48 hours
Main offices: Bundall, Sydney
National: Yes
Ausec Finance
Min/Max Time: 1-12 months
Min/Max Finance: $30,000 - $3m
Broker Commission: Brokers mandate their client and commissions are paid at settlement
Accreditation: Member of MFAA
Application process: Call or e-mail. Most loans settled within 48 hours
Main offices: Bundall, Sydney
National: Yes
Prime Finance
Min/Max Time: 1 - 12 months
Min/Max Finance: $20,000 - $2m
Broker Commission: 1% - 2% on the loan and a trail of 1% - 2% a month.
Accreditation: Must be accredited to Prime Finance
Application process: Phone
Main office: Sydney
National: Yes
Short-Term and Bridging Finance Association
Short-term and bridging finance lenders have banded together to legitimize the so-called fringe-finance industry.
Ethically-minded providers have aligned with the Australian Finance Conference, who recently passed their constitution -- a code of ethics that encourages best practices.
Andrew Way, incumbent SBFA chairman, says that in order for the market to mature, there needs to be access to cheaper capital for lenders.
"That's only going to happen if there's consolidation in the market. To achieve consolidation the market is going to have to have a better image and it's going to have to have more volume," he says.
"The only way to achieve those two things is if we lend ethically and we gain the trust of brokers and borrowers alike, and exclude those people that don't care about those things."
Ethical lenders want borrowers to have a strong understanding of what they're going to get out of the bridging finance, because it is by nature risky and therefore costly, says Way.
"An ethical lender will say I can do this for you quickly, but I want to be absolutely sure you're going to get out of this quickly, I don't want to have to foreclose.
I don't want to cause you further financial hardship...I want you to be absolutely sure of your cost benefit by borrowing."
Non-ethical lenders, says Way, are just happy for loans to run at high cost and take the asset.
Andrew Littleford, managing director of Interim Finance, has been in the industry for 15 years and has noticed a lot more short-term loan operations come on board in the last five years. "The frustration is a lot of these people are calling themselves lenders, but they're brokers, who turn around and source the money from somewhere else," he says.
He's hoping that by building an association of ethical lenders, the high cost, unethical operators will be forced out. "It legitimizes us and the broker knows they can recommend this without it backfiring on him."
SBFA Code
Short-term Bridging Finance Association (SBFA) members must fulfil the following responsibilities:
a. To lend only in situations where the client can demonstrate an expectation of achieving a beneficial outcome by borrowing;
b. To have the highest regard for a client's capacity to repay and or refinance within the terms and time-frame of the loan contract;
c. To provide information that allows clients to make fully informed choices;
d. To ensure that clients are provided all necessary information to make a consideration as to the cost benefit of borrowing;
e.To provide accuracy of information and simplicity of language wherever possible in all documentation provided;
f. To treat client information with confidentiality to the highest standards of privacy;
g.To act in a courteous and professional manner;
h. To work towards maintaining and improving the reputation of the Association, its members and its market sector; and
i. To act in the spirit and intentions, actual or implied, of the Code of Ethics and to encourage others in the industry to do likewise.
