Choosing the Best Loan and Lender
I’m constantly amazed how many bankable projects don’t get financed.
I’m constantly amazed how many bankable projects don’t get financed.
Sometimes it’s not knowing where to go and who to talk to. Sometimes it’s poor quality of presentation (which muddies the waters and makes the loan difficult to rescue). And sometimes it’s not knowing how to structure the proposal to achieve the desired result.
Ultimately and in many cases, the difference between success and failure comes down to who you talk to and what you present to them!
And I’m also amazed how the lending criteria and cost of funds varies between different financiers.
So I thought it was an appropriate time to re-visit some of the debt funding options available - for both property and business - and comment on their usefulness.
Traditional Bank Funding
Banks are eager to lend. Residential property remains the favourite but there’s plenty of money available for commercial and industrial property, subdivisions and developments - and for businesses.
Banks remain the cheapest form of finance with low interest rates. They prefer loans with established businesses or well tenanted commercial and industrial property. But we are seeing banks extending their interest to smaller deals that were previously the domain of second tier lenders. For example:
- Private developers and builders buying 3 or 4 sections and building and selling houses in a planned manner.
- Yet to be fully established businesses.
Most small businesses have their bank facilities secured against property – often the owner’s house or the property from which they operate their business. Other hard security can include other property, plant, equipment, vehicles and stock.
For established profitable businesses with good cash flows hard security is less of an issue. And at a time banks are looking for more business “cash flow” lending is becoming more common.
Plant, Machinery and Vehicle Finance
This is a common form of finance for businesses. Other than the banks there are a number of specialist providers in the market.
It’s generally used to purchase new plant, equipment and specialist commercial vehicles for new businesses or expansion of existing businesses. It can also be a form of temporary finance using these existing assets as security.
Debtor and Invoice Finance
SMEs looking for working capital to fund expansion traditionally borrow more by increasing their loan against the hard security offered as collateral – like a house, the business property owned, or plant, machinery and vehicles. However there is a limit to this as that type of security has a set (and often decreasing) value.
Debtor and invoice finance has become a more common method of funding businesses and there are more players in the market now. It is ideal for expanding businesses that qualify and is one of the most flexible funding arrangements available.
- No real estate, plant, vehicle or other hard security is required.
- Security is over debtors leaving other assets free to raise further funds if required.
- First ranking GSA security can remain for other facilities.
- As the business grows so does the size of the facility.
- The debtors book is often the largest asset in the balance sheet and larger limits may be accessible than offering existing hard security.
- It allows the business to access bulk and early settlement discounts from suppliers.
Advantages over other forms of asset secured loans include:
- Property security is not locked up, is safe from call by the lender if any downturn in the business, and could be used for other purposes.
- With hard security it’s the current value of the security that determines the amount of a loan - not the performance of the business.
- Current business performance determines the level of the facility rather that outdated trading history.
Commercial Property Finance
Loans outside the lending criteria of the banks are available. Often banks will not lend for technical reasons. These include:
- Current overall exposure to the client exceeds credit guidelines.
- Inability to meet P&I servicing requirements.
- Too many vacant tenancies.
- Loan amount too high to reach loan reduction requirements.
- Loan to valuation ratio too high.
- Term of loan too long.
- Earthquake requirements.
This is where non-bank lenders can become a viable option. They often have a more liberal - or should I say a more flexible - lending criteria. And their interest rates have become more competitive.
By the way, we have access to non-bank finance for commercial property on good terms in the $2 million to $20 million bracket - amounts that are quite difficult to get from other non-bank lenders.
Funding Developments and Subdivisions
It’s no secret there’s a severe housing shortage coming up in Auckland (and Christchurch) with government paying serious attention to this problem. See recent interest.co.nz article.
Finance is easing up for developments and subdivisions in the appropriate areas in and out of Auckland. And now it’s readily available for smaller projects like subdividing off a section or sections and building houses, or purchasing sections and building houses in a planned manner.
Isolate the Security
It is sometimes helpful to look at moving loans on certain assets to another lender, usually from a bank to a non-bank lender with slightly different criteria. An example would be where the isolation of the security means performing assets cannot be called upon in the event a non-performing one comes under pressure. Another advantage could be less cash flow servicing requirements as interest only lending replaces P&I.
Refinancing works well for business when the original borrowing (usually from a bank) requires residential collateral security. As the business has grown that requirement might well have passed – but nobody in the bank has told you – and it could be replaced by the other forms of security mentioned in this newsletter.
Finance or Re-finance for Bank Takeout later
Sometimes you're not quite ready for bank lending and need a short term loan until you are. This works for both property and business loans. Examples include finance for:
- Commercial property being refurbished or re-tenanted.
- Residential and commercial real estate with short term debt servicing issues.
- Almost finished developments requiring short term funding to complete.
- New businesses.
- Growing businesses strapped for working capital to fulfil orders.
- New plant and equipment for expanding business.
- Increasing debtors.
- New and/or larger debtors demanding longer payment terms.
- Cash flow lending for businesses not quite ready for bank finance.
We work closely with banks to obtain temporary finance from other sources for bank takeout when pre-agreed conditions are met.
Picking the Right Lender
In essence the message is if you’re looking to borrow money - it pays to shop around. That's what we do for our clients. Here are some examples of the types of loans I’ve arranged.
- Client owned a business subject to seasonal fluctuations and the property that housed it. Refinanced loans from non-bank source at bank rates.
- Large private business wished to buy out partner where relationship was not moving in the direction anticipated. Arranged several loans from one lender to enable the business to execute the buyout, restructure, refinance part of existing debt and increase working capital.
- Part time developer had purchased land which over a period of years he improved by filling and then subdivided. Arranged loan facilities to purchase and move existing homes to the new sites, refurbish and sell. Project recently completed in unrushed manner after several years since the start.
- Assisted in structuring and arranged a debtor financing facility for a substantial business in the transport sector. Worked with other advisors to the business.
- Private developer/builder had agreement to purchase some sections in a recently completed subdivision. Arranged low interest rate bank finance to settle sections and build houses in a planned manner (with no presales).
- Developer/owner of student accommodation block was looking to part refinance mortgage to reduce exposure to existing lender. Arranged the loan using a private lender domiciled offshore. Loan interest only with no currency exposure.
- Used car importer needed bridging finance between purchase offshore and sale in New Zealand. Arranged LC backed invoice finance facility.
The information given in this newsletter is of a general nature. Borrowing conditions will vary between lenders and over time.
TBK Capital arranges the most suitable finance for your circumstances within the lending criteria at the time. We are not a mortgage broker paid by the lender. We are completely independent and charge a success fee to the client, payable only on the successful completion of a pre-agree mandate. See the list of services on our website here.
We’re always happy to hear from you - whether you want to borrow money or not. Either reply to this email or I can be reached on +64 9 307 3257 or +64 21 902 901.
Cheers
JP
John Paine B.Sc., Dip BIA
TBK Capital Limited
Level 15, BDO Building
120 Albert Street
Auckland 1010, New Zealand
Phone +64 9 307 3257
Fax +64 9 309 4519
Mobile +64 21 902 901
Email john.paine@tbkcapital.co.nz