The cheapest option for borrowers in most loan scenarios is going to be bank funding – if it is available timeously and on the right conditions. However, if it isn’t available, short term funding from a non-bank lender should be considered.
Short term funding is generally more expensive than longer term bank funding – that’s a fact. But borrowers and brokers should rationalise this higher cost not by reference to the absolute rate, but by asking what the opportunity cost would be of not accessing the short term funds. What project would not be completed, what sale would fall through, what options expire or deposit be lost? If the quantifiable answer amounts to more than the cost of short term money then take the offer. However, if the payback from realising a given business goal is less than the cost of realising it by short term borrowing, then the short term loan may not be the best option.
There are many reasons why short-term funding comes at a price – it’s all about cost and risk:
• A short-term funder uses funds invested by private and corporate investors to finance loans to borrowers. Banks use a very different funding model - their loans are funded through their
retail or wholesale depositor base. Investors who contribute to the short-term loans are looking for better returns than if they put their cash in the bond market or into a bank savings account – returns which are commensurate with the risks of the loans in which they invest,
• A short-term loan that is processed and paid out in a matter of days - often on the basis of limited information - usually represents a higher risk than a conventional bank loan that is set after weeks of assessment. Understandably, higher risks attract higher returns for investors and therefore attract higher costs for borrowers,
• The very fact that a loan is short-term (the average being six months), means there is limited time in which the investors and the loan manager can earn a return on their capital at risk, as well as recover their business origination and ongoing management costs. Inevitably, this means that borrowing costs are higher than they would be for a longer term loan set for several years,
• Every short-term loan is unique and requires a customised solution to be developed for the borrower. This adds complexity to the process of loan assessment, establishment, collection and termination and consequently costs are driven upwards,
• If a borrower defaults on a short-term loan secured with a second mortgage, the claims of the short-term lender are second to those of the first mortgage holder. This often results in negotiated compromises and extended recovery times which increase the risks and therefore the costs,
• While no reputable short-term lender will extend a loan expecting a default, it is a given that a proportion of the overall loan book will experience some delays in payments and final settlement. Whilst a professional short-term lender will work closely and intensively with a borrower who is struggling to meet payment and exit obligations, and do everything possible to ensure a satisfactory outcome, this reality does increase both risk and costs and therefore the rates to borrowers,
• There is no penalty to a borrower for settling a loan earlier than scheduled. It is therefore in the borrower’s interest to expedite loan repayment and so reduce their costs.
At Quantum Credit, we see ourselves as fulfilling a valuable business ‘enabling’ role. We make it possible for business to succeed by providing flexible funding fast – but only when it is the right option for the borrower. In this context, it could be said that we ‘rent-out’ our money for temporary use and the costs involved reflect the risk realities.
If you want to find out whether short-term lending is the right solution for your scenario, give the team at Quantum Credit a call and put their experience to work.