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First off, we’re talking here about property-secured commercial short term loans needed by business or investment borrowers in situations where their need is urgent, temporary and (often) ‘complicated’.
Short term loans – bank vs non-bank – what’s the go?
25 May 2016
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3 minute read
Why not just go to the bank?
The mindset of your typical accountant or adviser to an SME is that they should simply go to the bank for a short term loan. Surely this has to be the cheapest option?! In fact though, and very often, the bank cannot provide the solution – and the reasons why are pretty straight forward.
Mainstream banks don’t handle these situations well. In business lending, they take a share-of-wallet, long-term relationship approach, not a ‘platform’ that your typical urgent short term borrower requires. Their funding need is ad-hoc, situation unique and always unexpected. It arises out of either an immediate crisis or a present opportunity, and very seldom will they have an established bank credit facility unused and available to them at short notice.
Banks are by nature conservative (they can afford to be), and for them short term loans:
- have high costs of acquisition and management
- do not fit ‘standard’ credit requirements
- cannot be priced properly for risk and capital, and
- cannot be processed as fast as borrowers require.
For these reasons, and despite a very real demand for urgent short term business lending solutions, the banks simply don’t position to meet the need. They prefer business-as-usual, not ad-hoc. This means that the alternative lending market, where specialist short term lender Quantum Credit operates, is large and active.
Where do alternative lenders come in?
Alternative lenders advance funds to borrowers either to enable them to take-up business opportunities quickly, or to help them out in difficult, time-critical situations. For most lenders, including Quantum Credit, the majority of applications are for property related projects, with the balance being for a wide variety of other purposes. However, irrespective of the purpose and with loan amounts greater than $100k, the security in every case is going to be a first or second mortgage over property at a realistic loan to value ratio.
What about the cost?
In the alternative lender space, there is a premium for the speed of the credit assessment and the loan settlement process, and for the degree of customisation of loan solution. For the borrower, this premium is worth paying:
- if (cheaper) mainstream bank options are simply not available or funding cannot be secured in time
- because the loan is only intended short term and therefore total costs are not high in absolute terms
- if an assessment of the opportunity cost of not borrowing short term shows that it outweighs the cost of borrowing.
Reputation and specialisation is key
Reputable and specialist short term lenders are absolutely not lenders of last resort! They take responsible lending seriously and will simply not knowingly advance funds to a borrower that will get them into financial trouble. As evidence, about half of all loan exits are through bank refinance and the rest are via the (intended) sale of the security properties!
June is always a busy time of year for non-bank lenders because of pressures to borrow urgently before year end. If you have a client who could do with funding quickly but you’re just not sure what’s possible, give us a call on 1300 135 212 and let’s discuss it – you’ll be surprised at how easy we are to deal with and how flexible we can be!
