Why interest rates are irrelevant

private lender interest ratesSecuring a business loan can be confusing and finding a transparent lender can be a difficult task. When choosing a lender there is a lot of jargon to sort through which is why it is easy for borrowers to focus only on getting the lowest interest rates. However, it’s far too common for borrowers to buy into a loan because the interest rate looks good only to discover a range of hidden costs and fees.

Interest rate vs total cost of the loan

The rate of interest is only one portion of the total cost of a loan. Trying to calculate the true cost over the life of a loan can be daunting but it makes good business sense to do so. This is why finding a lender that is entirely upfront and transparent about fees is incredibly important. One way to check is to see if they provide a proposed disbursement schedule or estimate of all upfront costs with any indicative offer.

Possible fees

Here is a list of fees a lender may require as part of the loan agreement, which can greatly increase the overall cost of the loan:

  • Establishment/Origination/Application Fees: Setting up the loan/account .
  • Documentation Fees: A fee to cover time spent preparing the loan documents.
  • Direct Debit Fees: When making a repayment some lenders charge for every transaction which add up over time.
  • Monthly Management Fees: Ongoing fees charged for the management of the loan.
  • Withdrawal Fees: Charged for every withdrawal, often seen in Line of Credit loans.
  • Late Fee: If the payment schedule is missed.
  • Early Repayment Fee: Charged if you pay the loan out before the due date.
  • Amendment Fees: Added by the lender if you request amendments to your loan/ repayments.

Educating borrowers

Helping borrowers to understand the difference between a good interest rate and the total cost of a loan is extremely important, particularly when dealing with short term lending. We have had clients come to us in the past who have been offered an interest half of what we offered, however when they took into account the other fees and charges they were required to pay they discovered that we were significantly cheaper than the other lender. When you look at the total cost of the loan, interest rates can become completely irrelevant.

Below is an example of a $435,000 two-month loan for a second mortgage we arranged for a client to help them complete a development project:

Interest for the two-month loan:                                         $16,530 (22.8% per annum)

Approval fee:                                                                               $15,206 ($2,871 to Referrer)

Legal fees:                                                                                     $2,735

Total cost of the loan:                                                               $34,471

This shows that, as the loan was only for two months, the interest was just less than 50% of the total cost, demonstrating how critical it is to know what all the other costs are.

The total benefit

When looking at whether to take this loan, the borrower also needed to consider how much money they would make out of the transaction.  They not only needed to look at the cost of the loan, but at the benefit that the loan was going to deliver.

This is where a rough feasibility study for the development was important.

Gross Realisation Value:                                                        $1,950,000

Land purchase:                                                                          $650,000

Stamp duty:                                                                                 $35,000

Build cost:                                                                                    $650,000

Other costs (agent, council, holding):                               $115,000

Total costs:                                                                                   $1,450,000

TOTAL GROSS PROFIT:                                                          $500,000

This means the project yields a gross profit of $500,000.

Therefore, the cost of the loan divided by the gross profit is approximately 7% of the total cost. The client was able to determine that it made business sense to give away 7% of their profit ($34,471) to get the deal done. As we can see from this example, the interest rate is less significant than the overall cost of the project.

Sound advice

When considering a loan, a borrower needs to gain perspective on the overall outcome of the loan rather than getting caught up just comparing interest rates. This is where sound advice from a broker and a transparent lender is critical.

For further information about private loans for business projects, give us a call on 1800 856 683 or contact us via our website: www.privatemortgagesaustralia.com.au/contact-us/

SMEs with tax debt need to take action

ATO tax debt refinancingOn 22 October 2019, the Government passed law which allows the Australian Taxation Office (ATO) to disclose tax debt information of businesses to registered credit reporting bureaus (CRBs). The law received royal assent on 28 October 2019.

Under the law, the ATO can only disclose tax debt information of a business where certain criteria are met.

The ATO will only disclose tax debt information of a business to a CRB if the business meets all of the following criteria:

  • it has an Australian business number (ABN), and is not an excluded entity
  • it has one or more tax debts, of which at least $100,000 is overdue by more than 90 days
  • it is not effectively engaging with the ATO to manage its tax debt, and
  • the Inspector-General of Taxation is not considering an ongoing complaint about the proposed reporting of the entity’s tax debt information.

The ATO will notify a business in writing if they meet the reporting criteria and give them 28 days to engage with the ATO and take action to avoid having its tax debt information reported.

Many businesses have previously used the ATO like a bank and racked up debts by not paying their commitments on time. This decision could now have adverse effects on credit ratings and credit insurance limits, making it harder to maintain or extend credit terms with suppliers.

There has never been a better time to get your ATO debt in order and set your business up for success in 2020. Private Mortgages Australia is able to help businesses refinance ATO debt and pay out the tax debt with a short-term mortgage. This enables the borrower to pay off the ATO debt and build up a few months of good payment history. The borrower can then try to refinance to a long-term debt and pay off the loan.

For more information about how Private Mortgages Australia can help, read our case study or get in touch via our Contact page.

 

 

5 Ways a Mortgage Broker Can Help You Navigate a Business Loan

Commercial Mortgage BrokerObtaining funding for your small-to-medium business can help you survive tough times or take your enterprise to the next level. Juggling all the steps you have to take to obtain a loan can be stressful and  take up valuable time and resources!

Taking time out from your business to do an analysis of your business needs and research your lending options is only part of the process. Once you find a lender you can work with, you need to negotiate a deal with them that works for you over time and understand all the terms and conditions required over the term of the loan.

Working with a Mortgage Broker

Like most of the tasks in your business, if you can’t do them yourself, find someone who’s an expert at them. Brokers create a bridge between you and the lending world. Their role has them matching business owners with business lenders year-round. They know the best lender to engage for your purposes, so you achieve your important goals. Here’s how they help:

1. They source suitable loan options

This requires a sound knowledge of the finance market and the benefits provided by different lenders. Being able to access a range of lenders, means they are more likely to find one that matches your specific needs. A Mortgage Broker knows who to suggest and why.

2. They find workable solutions

Lenders have criteria for preferred investments. By understanding your specific need for a loan, a Broker uses their knowledge to source the most suitable Lender. You don’t have to decipher which Lender would be more interested and inclined to provide the funding you need, that’s the role of the Broker. You get on with running your business, they get on with finding the right loan for you.

3. They navigate the fine print

A Mortgage Broker conducts Due Diligence on your behalf, so you achieve your desired outcomes safely and easily. There is a specific process to sourcing, securing and completing a loan. A Broker knows how to navigate all the risks associated with private lending. With a greater understanding of the terms and conditions, a Broker can guide you through the whole process and keep you informed.

4. They have the experience

Brokers have a network of Lenders with whom they have developed professional connections. Building rapport with a platform of Lenders is crucial to a Broker’s ability to assist a wide range of clients. A good Broker has extensive experience in private lending and has negotiated loans for many other small to medium businesses. They understand how to avoid any pitfalls and negotiate the best outcome for you.

5. They know their stuff

A Broker can translate all the financial jargon and acronyms prevalent in finance documentation into simple terms for you. You can rest easy knowing they can decipher any complicated terms and conditions that may apply, so you’re not left wondering what’s going on. Plus, they don’t mind you asking questions. They understand that you need to feel confident in agreeing to the terms and conditions of your loan.

Time you won’t get back!

The most important aspect of using the services of an experienced Mortgage Broker means you save time – the one resource you never get back. You can focus on building your business while your Broker takes care of all the rest. By taking on the responsibility of negotiating all the steps required to secure your business loan, a Broker saves you time, energy, money and a lot of stress!

As a private lender, we appreciate the work that Mortgage Brokers do to help our Borrowers. In fact, over 90% of the loans we provide are introduced to us by Brokers. If you have any questions about how a Broker can make your business borrowing plain sailing, please send us a message via our Contact Page.

How does the private lending process work?

It’s no secret that the banks’ can be slow, with the lending process often taking 6-8 weeks to be completed. Greater flexibility and quicker turnarounds are major reasons borrowers often prefer to work with private lenders when obtaining finance. In a recent survey we found that nearly 50% of brokers had decided to work with a private lender because their client needed fast access to funding. This may be because they have an urgent business opportunity, need to quickly refinance some debt or require an injection of funds so they can finalise a project. Access to quick funding is often the difference between being able to take advantage of an opportunity or missing the boat.

So, how exactly does the private lending process work then?

Private Lending Process

Step 1. Submit application form

The Borrower or Referrer fills in the Quick App Form (found here) which includes details about the business, the individual borrower/s, loan amount, loan purpose and real estate assets and liabilities.

Step 2. We conduct initial assessment

We look at the details provided and see if it is possible for us to offer a loan in the provided circumstances.

Step 3. We issue an Indicative Letter of Offer

We provide the Borrower with and Indicative Letter of Offer which gives the details of how much we are willing to lend, the terms of the loan and the interest rate. If the Borrower decides that the Indicative Letter of Offer is suitable to them then they pay a small assessment fee ($550 to $770 inc. GST depending on complexity) to cover costs for searches that we need to ensure that everything is in order for us to move ahead with the loan.

Step 4. Conduct due diligence

Due diligence involves assessment of the applicant, loan structure, security position and exit strategy. There are a number of documents we need the Borrower to send us  to complete these tasks which are included on this checklist here.

Step 5. Issue Letter of Offer

Once we have conducted all the necessary checks and searches we will then issue a formal Letter of Offer. This includes the final interest rate, expected disbursements at settlement and details of any outstanding conditions to be met prior to settlement (if any).

Step 6. Settlement

Once the Borrower has accepted the Letter of Offer loan documents are prepared and sent to applicant’s solicitor by email. Upon return of the fully executed documents the approval fee, legal costs and prepaid interest are deducted from the loan and the balance can be paid by the next business day, sometimes sooner.

Referrer fees are paid within 24 hours from settlement with no clawbacks.

 

We endeavour to make this process as quick as possible and depending on the complexity of the loan can move from the initial application to settlement in as little as 5 business days – possibly sooner. If your client requires quick turnaround on a loan then make sure you get in touch with Senior Relationship Manager, Shanta Lobo at [email protected] or call 1300 856 683.

Brokers can achieve 50% market share for business loans

Brokers can achieve commercial and business lending origination

The Finance Brokers Association of Australia (FBAA) has said that brokers can achieve 50 per cent of commercial and business lending origination.

The FBAA’s executive director Peter White said that brokers in Australia “have every opportunity to follow markets like the UK [where brokers have around 70 per cent market share] and dramatically increase origination market share”.

He said: “The high level of professionalism and best practice engaged in Australia under our regulations, and genuine concerns for skilled conduct producing best outcomes for borrowers, is a recipe for more and more borrowers using brokers.”

As an advisory board member for the Small Business Association of Australia (SBAA), Mr White said that opportunities exist for brokers in the small business sector to improve the service they currently provide.

“Many brokers are very proficient at business and commercial lending, but they need stronger knowledge skill-sets that deepen their understanding of how those loans function within business markets.

“If you are dealing with a borrower who is in an aged care facility, you need to understand the aged care market and its needs. Same with hoteliers, restauranteurs and motel owners, so you can speak their language and gain their respect.

“When you actually know their industry and market, you will own the right to their business,” he said.

This article originally appeared on SME Adviser.