Advice and Opinion

When should short-term asset based or bridging finance be used?

As a result of South Africa’s slowed economy and rising operational costs in 2013 and 2014, when business opportunities do arise for small-to-medium sized business owners, property buyers and investors, they need to be in a position to take advantage of these prospects.

However, these investors are often unable to obtain the required finance in the short time frame from their traditional lender in order to secure these deals, and, as a result, the demand for short- and medium-term lending has increased.

This is according to Gary Palmer, CEO of Paragon Lending Solutions, a non-bank short-medium term commercial lender, who says that business owners and property developers are increasingly using alternative lenders as a temporary option to the banks to help secure short-term liquidity. He says that this is due to the fact that business owners struggle to acquire money quickly, sometimes within one week, from banks as their turn-around time is a lot slower than non-bank lenders given the tight lending regulations.

“The current economic environment is favourable for obtaining finance for property deals, while yields and cap rates remain attractive in the property investment arena. Business owners are also looking for assistance to allow them to expand their business operations at a time when it has been tricky to obtain short-term finance from traditional lenders.”

Palmer says stricter control measures and the banks’ tougher lending criteria on asset-based lending have resulted in the major banks being unable to process and approve loans timeously. “As a result non-bank asset-based lenders are no longer seen as a lender of last resort, but as a mainstream method of facilitating transactions while a bank application is being processed. We essentially offer the client ‘breathing space’ until the client is in a position to sell their asset, or settle through the refinancing by a bank, once all the bank’s criteria have been fulfilled.”

Palmer says that many investors are opting to apply for short-term basset based, or bridging finance, in anticipation of a bank loan or transfer because of the flexible terms and the fast turnaround time, which can be approved within 36 hours of meeting a client.

He adds that although these clients have strong balance sheets, they may not have quick access to finance. “Some of our clients have a successful and proven track record in their respective industries. However, with a slower GDP predicted for 2014 an unpredictable economic climate, rising operational costs, as well as having extended flexible payment terms with their clients, these businesses are at times in need of a short-term financial loan in order to grow. Our clients prefer having the advantage of flexible repayments, and are prepared to pay a slight premium for a quick turnaround time and quick access to funding.”

“In other cases a property seller might be waiting transfer of the proceeds of a sale, but requires an advance for commercial or working capital until the transfer is released.”

He says that the advantage of short-term lending and bridging finance is to convert equity in your property to cash. “It allows buyers, investors and business owners to take advantage of commercial opportunities, as well to negotiate better deals. The current economic climate in South Africa is favourable for this type finance and those businesses in need of access to finance should consult experienced lenders to assess what time of financing they require.”

Palmer explains that there are two types of short-term funding available to the market – traditional bridging finance and short-term secured asset based lending. He says that short-term secured asset based lending allows for a longer term exit date for the lender, as a result of long-term finance not being in place.

“When opting for secured asset based lending you are required to only make interest payments per month with capital at the end of the period. When applying for traditional bridging finance, there is a guaranteed exit in place as the long-term funding has already been arranged or the sale of the property has been secured.

“In order for an application to be successful, all the transfer and bond documents must be signed and all suspense conditions must have been fulfilled. There must also be a surplus in the transaction to repay the lender on date of registration, and an attorney should undertake the repayment,” Palmer concludes.

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