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Short-Term Lending Solutions: The Private Lending Space

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

Homeownership is considered to be a sound investment, primarily because it can ride out market ups and downs and still show a profit (equity) over the long-haul.

But for the segment of the Australian population that is investing in real estate as an investment, whether through project development or commercial mortgages, the market is a much different game. And buying into that market is not always as easy as securing a direct first mortgage against one’s primary home. 

For those who are in the real-estate-as-investment market, financing options often need to be a bit more creative. Here, we look at some short-term and - for practical purposes - temporary financing solutions that can help you as you build your investment portfolio. If you prefer to speak with a live person for assistance navigating real-estate-as-investment opportunities, contact Acumen Finance and talk with a loan specialist, today.

When is a Short Term Loan Appropriate?

Short term lending solutions are ideal under a number of circumstances. But one of the most common situations in which a short-term loan might be to your advantage is if you are in commercial mortgage or project development space where you need an influx of cash to keep your current projects moving forward, or to prepare for your next opportunity.

It can be challenging to secure a loan from one of the major banks in this scenario. Even though the
APRA is relaxing some recent restrictions that were imposed in light of some questionable banking practices, many are still more conservative than ever, staying well within the stricter guidelines.

Why Consider Short-Term Lending?

From the bank’s more conservative stance, the commercial and residential property markets are risky. In many cases, there are no established books showing that the project will sell or rent, or that the business will, in fact, generate an income. The lack of hard evidence of income makes the banks nervous. Yet, these businesses need cash to operate and generate revenue. So what are your options? 

A short-term loan often solves the catch-22 of lending against income; it can provide the capital needed to complete project development or establish a business, buying time and allowing the borrower to decrease the perceived risk through increase cash flow. 

Generally speaking, a short-term loan has a term of anywhere from a couple of weeks up to a year. Credit Unions and Building Societies (Tier 2) and Private Lending (Tier 3) specialise in short-term loans. For a higher interest rate, Tier 2 and 3 Lenders are faster and easier to work with. Their documentation requirements are not as rigid, they can accept more loans, and they are often willing to consider special circumstances and higher loan-to-value ratios (LVR). Because of the higher rates typically charged by these lenders, these loans should be regarded as stop-gap measures, only. 

The two most common types of short-term loans are Bridging Loans and Interest-Only Loans. Let’s take a closer look at a couple of examples.

Bridging Loans

The Bridging loan is ideal for those who need emergency cash. The cash can be used to continue payments (mortgages, overhead expenses, etc.) or while completing projects designed to create income. A bridge loan buys time, so developers don’t lose momentum between projects and the deal doesn’t slip through your hands. 

Let’s assume you’re a property developer for just a moment. As an accomplished business, you are wrapping up one project, and will soon be placing the new homes on the market. Thinking forward, let’s say you’ve placed a rather large deposit on the property for your next project with the reasonable expectation - a promise, even - that the bank will back you, after all, you are just about to start selling the apartments and you should be rolling in the cash soon, right? 

Then the worst-case scenario happens. The bank rescinds their financing because the bank’s powers-that-be suddenly decided that they had “crossed their risk threshold” for commercial investments in your location. To make matters worse, they pull the loan offer just one week before the scheduled settlement date. Suddenly, you find yourself at risk of not only losing the deposit, but of facing a potential lawsuit for failing to complete work according to contracts with property owners, subcontractors, etc.

This is the perfect time for a bridging loan; a loan that keeps your momentum going. It pays your costs, your overhead, and it keeps everything moving on schedule. Most important, it buys you time to find another bank which is not bound by self-imposed “risk thresholds.” 

Do I hear you ask: “Why not just go straight to the new bank and skip the bridging loan?” Answer: Time. Securing a bank loan in the tens-of-millions of dollars takes time - patience and a good deal of paperwork to boot, too. A private lender has the flexibility to approve a loan in just days.

Interest-Only Loans 

Interest-only loans generally offer an initial low-payment period. After that period, however, the payments will jump significantly as you have not paid down any principal. AN IO loan is ideal for someone who needs time to repair credit or to show enough income to qualify for a more traditional loan. 
In this example, let’s say you are a manufacturing entrepreneur who just landed a big new contract - accompanied with big new “specifications.” The contract promises to be quite lucrative even though you will need to buy significant quantities of custom, high cost, materials in order to fulfil the agreement. You go to your bank and request a loan, but unfortunately, your books don’t inspire generosity from the Major institutions. Obviously, you don’t want to lose the contract - there’s money to be made there - so an interest-only loan might serve you well.
An Interest-Only Loan can help you buy time to generate the income necessary to breathe life back into your balance sheet. After a year or so, your balance sheet is healthier than a racehorse, and as a result, you can shop loans from any of the big four offering a lower interest rate. 
While Interest-Only and Bridging loans might sound like scary grounds to the average investor, it’s worth reiterating that these are short-term solutions to big-money matters. They are not ideal for long-hold investments, so it is important that you plan an exit strategy to settle these loans and, if appropriate, replace them with more suitable solutions for the long term. You need to crunch the numbers to determine at which point these higher-rate loans start to deteriorate your profits and/or equity and plan to exit before that point. 
The beauty of a good exit strategy is that it helps the borrower maintain objectivity about their investment goals while at the same time giving the lender an incentive and confidence, increasing the appeal of your loan request. (See our article on Exit Strategies and Collateral).

Which is Better for You?

That is a very good question and not one that’s easily answered here. To determine which is best for you, you need the help of a professional who can assess your situation and all the contributing factors. You need a professional who can help you create a comprehensive plan to accomplish your goals. 
Acumen Finance, a P2P Lending specialist, is qualified and ready to do just that. In fact, taking a page from the above examples, Acumen Finance had clients in similar situations. In the first example, Acumen Finance was able to secure a private loan to the tune of $33 million in just four days! The borrower was able to refinance with a major lender within 60 days. And to sweeten the deal, Acumen Finance was able to underwrite this deal with the interest rate capitalized over the loan term so as not to impact the client’s cash flow. And, they were able to do all this based solely on a visual inspection by the lender, completely bypassing the morass of paperwork required by the bank. As in many of Acumen Finance’s cases, “the cost of not doing this deal was greater than the interest with the net value created on completion of this project.” 
Contact Acumen Finance today to discuss how they can help you realize your investment dreams.