Traditional Funding VS Non-Traditional Funding

Why would I take out a private or non-bank loan? I hear on a regular basis clients say to me “it is all about the rate”. Sure, the cost of debt is important when considering raising funds for a business or investment purpose or property development funding but what if you can’t raise what you are looking for through traditional means?

Banks & Non-Banks provide traditional funding. Banks are seen as the cheapest form of finance and they are, however, non-banks also provide good rates and sometimes better than the Banks. I am talking about funding which cannot be sought at a Bank rate. These lenders may lend out under an Australian Financial Services License controlled by ASIC. Investors in these funds want a higher return than what is offered by the Banks and there are varying risk profiles of assets. The higher the risk profile, generally the higher the cost of borrowing.

There is a myth when it comes to borrowing in the non-traditional sector. Particularly when the investment decision means that the overall internal rate of return from the investment is high and well exceeds the cost of debt. It is a simple calculation of the cost of capital over a period vs the return on the investment.

A good example is with a property development transaction. There has been considerable tightening by lenders as traditional funders will not accept the market risk and they will be wanting 100% of debt coverage from pre-sales, experienced developer, good equity position etc.. The developer may have a reasonable contribution upfront but not sufficient to obtain traditional debt and despite the credit worthiness of the deal, they are unable to proceed with the development as they are unable to obtain credit. What’s more is if they did obtain pre-sales this could potentially delay the start of the project which is a cost and they would also need to meet the market with selling at a lower price.

There is additional benefit from having a lower contribution towards Total Development Costs for property development funding. In doing this, the Return on Equity (ROI) would be higher as there is a lower amount contributed by the developer. Developers are starting to understand this and a higher amount contributed by debt is gold when it comes to a financial return.

Do your sums. If paying a higher rate provides a net return which is acceptable to you then the deal makes sense.

I have not had non-traditional funding before, is the process more difficult?

If you have not had non-traditional funding in the past you may be asking what is the process? Will I get what I am looking for? Does it take longer? Many non-bank funders rely on finance brokers like Macarthur Finance & Capital to introduce the loans to them. You are their client and so are we. We therefore develop strong relationships with the decision makers and have the ability to talk through a transaction. We have had a considerable amount of experience in getting the structure how it needs to be ultimately for the benefit of the client. Working with non-bank funders, we can identify how to provide flexibility so we are only providing them with what they need rather than what they want which provides comfort around future funding for other projects.

Split funding arrangements also make perfect sense as one lender is not going to have all your business and shopping around is potentially the best way to give you the flexibility you need.

Contact: Ray Slack rays@macarthurfinance.com.au
0421 334987