FAQs

As security for a loan, lenders will require property which 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 registered Caveat. However, there are some instances whereby 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.

From a security perspective a second mortgage provides a higher level of protection for the lender, but still works in much the same way as a registered caveat. It does, however, take a good deal longer to arrange (approximately 6 – 8 weeks). Short term lenders & caveat lenders may, in many cases, initially advance the funds based on a registered Caveat. However, shortly thereafter, they will look to convert this caveat to a registered Second Mortgage.

Short term lending is more expensive than standard bank loans for a number of reasons; the most important of which is the speed of the transaction. Other factors include the risk premium applied and the shorter deployment term of the money.

Most interest rates are expressed as a monthly percentage rate and will vary significantly from lender to lender. As with most transactions, the higher the risk – the higher the interest rate. Interest rates of 2.00% – 3.00% per calendar month (pcm) are appropriate assuming other transaction costs are not excessive. However, in this industry it is not uncommon for some lenders to seek rates of more than 4.00% pcm. These rates can also be coupled with high transaction costs and, in the main, should be avoided.

Establishment costs include a Valuation Fee, an Application Fee and Legal Costs. Generally, Valuation Fees start at around $385.00 and will vary according to the value and style of property. Application Fees should be no more than approximately 1.00% of the loan amount with Legal Costs starting from $990.00. Most lenders will capitalise (include in the loan amount) a cost provision for Legal and Application Fees with the exception of Valuation Costs.

A reputable lender will require approximately seven days to complete the transaction providing due diligence has been undertaken. In some cases it is possible to settle a transaction sooner, however, we would advise caution if lenders promote 24 – 48 hours settlements; borrowers may find themselves paying higher upfront commitment fees and higher rates, and due diligence simply cannot be performed in such a short space of time.

Post GFC lenders providing second mortgage and caveat finance are now more cautious and tend to limit their loan to valuation ratios to a maximum of 75%. This figure is based on the assumption that the prospective borrower has 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.

Key factors to be mindful of include interest rate and associated fees. Exceptionally high establishment/commitment fees are to be avoided at all costs as in many instances these lenders fail to process or transact a loan once the fees have been paid. In our opinion, it is wise to lean towards lenders whose upfront fees are limited to valuation costs and perhaps a minimal application fee. As a rule, borrowers will obtain better deals from private companies than from individuals who represent investors.