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Alternative Lending Solutions: The Private Lending Space

The big four banks in Australia. Westpac, Commonwealth, ANZ, NAB.

Sometimes a deal is just too good to pass up. An opportunity knocks, you check out the investment and with some thoughtful planning, its promise far outweighs the risks, so you’re motivated to move on it. Or, perhaps, it’s just time to restructure some existing debt - maybe to decrease costs or to avoid a looming balloon payment sitting on the horizon. 

In today’s climate, it may be difficult to find a bank that’s willing to help you. This doesn’t mean the death of the deal. You do have options. Whether it is to restructure a loan suite, or to help finance business growth, there are several short-term lending solutions that can help you realise your goals - because, sometimes the most important aspect of the deal is just getting it across the line. 

Lending Alternatives

When talking loans, most people think of banks. But the Big Four have gotten pretty conservative with their lending. So unless you’re applying for a first mortgage and have great credit, you may need to think outside the box. For example, if you have less than stellar credit or you are self-employed and lack Australian PAYG slips, you can consider a loan from a credit union or building society. They tend to be more risk-tolerant and flexible. As these Tier 2 lenders still have regulatory authorities monitoring their activities, they can take precious time to process loans and are still restricted by certain parameters. So this is not likely the quickest option, and as often as not, time is money.

There are, however, other alternatives. A direct private loan will give you the maximum flexibility and the quickest turn-around on your loan request. As a borrower, a direct private loan means that you are dealing directly with the lender through a trusted broker who matches you based on the merits of your proposal.
Acumen Finance is one such trusted broker that can assist in securing a loan package that falls outside the mainstream lending abilities of major banks and financial institutions. Contact the team of experts at Acumen Finance to discuss exactly what lending options may work best for your situation. 

In the interim, here is a quick overview of some alternative lending solutions that may solve your financing woes today:

Second Mortgage Lending

One of the most common loans, a second mortgage is secured against property. The second mortgage is subordinate to the “senior” first mortgage, meaning that in the event of liquidation or default, the direct first mortgage is paid off first, and any remaining balance is then used to pay off the remaining liens, including the second mortgage.

Historically, banks would typically write a second mortgage provided that you have paid on time and there is sufficient equity in the property to mitigate risk. But as their regulations have gotten more strict and their risk-tolerance thresholds have dropped, many banks are now deferring this business to others. And if you need the money in a hurry, you should consider a direct private loan or P2P loan as they are often quicker to secure and have much more underwriting flexibility.

While the interest rates are typically higher for private lending, the approval process is often quicker, allowing you to close the deal, and with the funds secured, you can then work toward repairing credit, bolstering the bottom line, or restructuring existing debt. With everything in order, you can then pursue traditional financing at the snail’s pace banks force you to endure.

Caveat Lending 

One of the easiest ways for a borrower to make his or her loan application appealing to a lender is the caveat loan. As the borrower, you can secure a caveat loan up to 100 per cent of a property’s value. A caveat loan is an official note on the property title. In exchange for the money, the lender receives an equitable interest in the collateralized property which ensures that the holder of the note (lender) receives priority in the distribution of money from a liquidation event. A caveat loan subordinates all other existing liens, and prohibits the property from being further leveraged in future transactions until that time the caveat loan is settled. Through the help of a broker interfacing with a private lender on your behalf, you can secure a caveat loan in a matter of days.  

Mezzanine Lending

The mezzanine loan is intended for small-cap, medium-sized businesses who need cash infusion for a short period. It is an ideal stop-gap measure for businesses that are looking at growth projects, expansions through acquisitions, or planning an IPO (initial product offering) in the near future. 

Mezzanine loans are highly flexible in nature, rarely requiring any lender due diligence or collateral, and thereby appealing for SMEs that don’t have long-standing relationships with lending institutions. Depending upon the terms, the payback can be structured similarly to that of an interest-only loan to help with cash flow - and the interest payments are tax deductible. The catch, however, is that the principle will come due as a balloon payment, so you must be prepared to restructure, refinance, or exit the investment. 

Mezzanine loans are unique in that they are a hybrid of equity and debt finance. They give the lender incentive through the right to convert to an equity interest in the case of default. As such, the mezzanine loan has an additional benefit for the borrower: Tier 1 lenders consider mezzanine loans to be equity (similar to preferred stock), meaning that if you have one in your business-finance structure, it increases your credibility with the banks and they may be more willing to lend at a higher debt-to-value ratio. They see this as a good-faith investment in the business, and they understand that their loan retains priority over mezzanine financing, so they have a greater chance of recouping their investment.

As you’re dealing with private lenders, mezzanine financing can be very quick and is highly flexible. However, since the lender has greater risk exposure (lower in the line of pay out), there are a couple of disadvantages to keep in mind.

First, lenders may build in safety measures to mitigate their risks, such as warrants, options, partial ownership or they may even restrict further lending. Second, interest rates are often higher, so mezzanine loans should be considered a short-term solution and should be backed with a solid exit strategy, such as generating enough cash to repay the interest plus principle, a change-of-control sale, or recapitalization of the company. When used wisely, the mezzanine loan is a sound solution. And if it means closing the deal, these parameters can easily be dealt with to make the added cost and restrictions worth the effort.

At Acumen Finance, we are the credit specialists who understand the capital stack. With our advanced finance modelling and loan calculator tools, we create bespoke direct mortgage investments. We specialize in syndicated loan facilities, Deeds of Priority negotiations and intercreditor deeds. Having reviewed over 10,000 transactions, we understand most complex commercial situations in a matter of minutes and can offer competitively priced mezzanine financing, caveat and second mortgage loan solutions. Contact us today to see how we can help you with you short-term capital needs.