Money is a valuable commodity and like all commercial matters the more research undertaken and questions asked the better informed you will be.  Quality lenders will have no difficulty in providing you with accurate information with regards to rates and costs.

If you feel uneasy with the lender or broker you are dealing with, there is probably good reason for it!

What sort of security do I require for a small business loan?
Some lenders may promote the idea that a small business loan can be unsecured or, at the very least, secured by way of a charge over your company’s assets. In reality this is extremely rare. Practically all lenders will require property as security for their loan. This will take the form of a first mortgage (if the property is not already encumbered with a bank loan) or a registered second mortgage or a registered caveat.
What is the difference between a registered caveat and a second mortgage?
In simple terms a registered caveat is a recognised document that is registered at the Land & Property Management Authority (LPMA). A search of the legal title of your property will show evidence that a lender has a caveat (or financial interest) in your property. In much the same way as your secured bank loan works you cannot sell, transfer or obtain other loans unless you pay out or re-finance the caveat loan. Short term lenders will use caveat loans because they are generally quick to arrange and register. A second mortgage works much the same way as a registered caveat, however, it provides the lender with a greater level of security for its loan. It does, however, take a good deal longer to arrange (as much as 6 – 8 weeks). In most cases you will find that short-term lenders/caveat lenders will initially advance the money based on a registered caveat but will look to convert their security to a second registered mortgage shortly thereafter.
What interest rate should I be paying?
By comparison to standard bank loans short-term lending is expensive, and the rates charged are well above standard home loan rates. There are a number of reasons for this but essentially the speed in which the transaction is undertaken, the risk premium applied and the shorter deployment term of the money are the key contributing factors. Interest rates will vary wildly from lender to lender. As with most transactions the higher the perceived risk – the higher the interest rate. Most interest rates are expressed on a monthly basis. Interest rates of 2.00% – 3.00% would be considered reasonable assuming other transaction costs are moderate. It is not uncommon in this industry for some lenders to seek rates of more than 4.00% p.c.m. In the main these rates should be avoided particularly when they are coupled with high transaction costs.
What are reasonable establishment costs?
Most lenders will charge a valuation fee, an application fee and legal costs. Valuation fees will generally start at around $385.00 and vary according to the property. An industry average for application fees would be approximately 1.00% and legal costs starting from $990.00. With the exception of valuation costs most lenders will capitalise (include in the loan amount) a cost provision for application and legal fees.
How long should the process take?
A reliable lender undertaking reasonable due diligence will need about seven days to complete a transaction and have loan funds in your account. Whilst it is possible to settle a transaction a good deal sooner, this appears to be an industry average. Borrowers should be wary of lenders promoting 24 – 48 hours settlements. Reasonable due diligence simply cannot be performed within those time frames and borrowers will generally find themselves paying higher upfront commitment fees and higher rates.
How much can I borrow against my property?
Pre-GFC short term lenders, as with most loan providers were far more positive about the property market and as such combined loan to valuation ratios of around 80% were normal. Lenders providing caveat and second mortgage finance now tend to limit their loan to valuation ratios to a maximum of 75%. This figure assumes that they have a reliable exit strategy (means of repaying the loan). The loan to valuation ratio of 75% includes the combined value of the first mortgage and the proposed caveat/second mortgage.
What pitfalls should I be wary of?
The short term lending market is deregulated. Most operators tend to be private companies who are self-funded or brokers acting on behalf of investors. The key issues to be mindful of are interest rate and associated fees. To be avoided at all costs are those lenders whose establishment/commitment fees appear exceptionally high. In many cases, these lenders simply fail to process or transact a loan once these fees have been paid. Whilst their indicative letters of offer look sound, their clauses for non-refunding of fees are quite extensive. Borrowers should lean towards lenders whose upfront fees are limited to valuation costs and may be a small application fee. Generally speaking, borrowers will obtain better deals from the aforementioned private companies than individuals who represent investors. This, however, can be a hard thing to determine as practically all firms who operate in this area claim to be ‘the lender’.
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