Short term financing

Literally over the decades I have been a short-term financier. Whilst at FAI Insurances we had an extensive lending book, at Adler Corporation (post the sale of the company) I concentrated on lending and today a considerable part of my business is short-term lending.

Short-term lending is considered risky but by exercising the proper prudential and internal controls it can be most rewarding, profitable and satisfying. Short-term lending has been described as hard lending, second mortgage lending and — my preferred definition — non-conforming lending. Every short-term lender has their own criteria and their own sweet spot. For me, I lend between $300,000 and $700,000 and for three months to six months. Obviously, I would consider lending smaller amounts of money and larger amounts of money, but it depends on the security, the individual who is borrowing and other pertinent detail.

The LVR (loan to value ratio) is the pertinent metric in the equation. Usually a company (please note I only lend to companies) has borrowed on, say, their home — a first mortgage to a senior bank — and that is normally around 60% to 65% of the value of the property. That means the second mortgage lender will lend, say, 20% of the value of the property. Using $100,000 as an example, the first mortgage will be for $60,000 and the second mortgage will be for $20,000; therefore there is a loan to value ratio of 80%, meaning there is still 20% ($20,000 in this case) left of equity in the property based on current valuation.

All lending comes with a personal guarantee from the borrower and a valuation by a registered valuer. Any other pertinent detail is much appreciated. Questions that are important are what you need the money for and how you will be repaying the money. The history of the borrower and a personal assets and liabilities statement is necessary.

The interest rate of course is directly affected by the economy, the reputation of the borrower, the quality of the assets and the assessment of the likelihood of repayment. Current rates would be between 2% and 3.5% a month. Reasonable documentation is entered into.

Some second mortgage lenders only deal through brokers, but they charge an additional 5% or more. I try not to deal through brokers because I believe that the interest rate charged plus the legal fees is already high and can become unsustainable with another 5% on top.

Many second mortgage lenders advertise; I have not had the need to do that as I am well known in the industry and the greater population as undertaking this activity.