Lending Fundamentals: What, How and Why?
There are 2 fundamentals that apply in every lending assessment:
Security - The available collateral offered in a loan, such as property or vehicles
Recurring Income - The available sources of regular, ongoing income used to show loan affordability. Examples include rental income, PAYG and business income etc.
In every loan, a lender needs to be able to have control over at least 1 of the fundamentals. Examples of each end of the spectrum include:
Private Loans - No loan affordability is required as the loan is based solely on the available equity of the property security available, as well as the exit strategy of the client.
Unsecured Working Capital Loan - No property security is required, especially in the <$100,000 segment, and the loan is based solely on the recurring cashflow of the business, along with the credit file of the applicant and use of funds.
A lender takes control over these fundamentals through the following measures:
Mortgages & caveats - By registering a mortgage or interest on the Lands Title Office/PPSR, a lender has control over the asset and can sell these assets to recoup losses. A lender can likewise, freeze an asset via caveat, showing that they have a registered interest in the property due to debt owed etc.
Guarantees - There are numerous types of guarantees that a lender can take as outlined below. A guarantee outlines who and what you are liable for in the event of a loan default. The purpose of the guarantee is for the lender to have control/securitize the flow of funds used for loan affordability:
Personal/Director Guarantees limited to the loan amount
Corporate Guarantees limited to the loan amount
General Security Agreements/ALLPAPEs - In practice, this charge restricts further business lending and requires the clearance/refinance of the existing debt for any new bank business debt under the borrowing entity
Unlimited Guarantees
Due to the concept of Loss Given Default along with a lender’s internal default assessment rate, products with less control over 1 of the fundamentals, such as a working capital or private loan, carries a higher interest rate.
