This article is about the street interest rates that an increasing number of non-PAYG business owners and people without security pay. Most banks have equated these otherwise customers to financial lepers and thus excluded them from accessing their balance sheets. They are called non-conforming borrowers.
If you’re deemed to be “non-conforming” you probably won’t get much joy from a bank. However, there are other lenders out there willing to provide funding to you at a price.
What’s that price?
It depends on what type of business you are, your financial predicament, your credit and behavioral history and perhaps a few other things.
If you can’t get debt anywhere and your requirements are small (between $5k and $200k) and short term (less than 12 months) there are a number of providers that will be able to assist. These are SMB lenders or Peer to Peer lenders. The rates will vary but can be as low as 12% (some P2P lenders may go lower – depending on how they source their funding) and as high as 48% p.a..
If you need the debt to enable you to grow your business and it’s considerably larger and longer term, here are your options:
- If your debt requirement is less than $25M and you can demonstrate that you can service the loan and repay the money, then high net worth individuals may be able to invest in your business. The rates start at 12% and usually attract a hefty up-front fee of between 3-5%.
- If your debt requirement is greater than $25M then you will attract institutional investment and the rate may be around 9%-12% with similar up-fronts as above. There are a small number of transactions where lenders will consider a lower rate but the transaction will need to demonstrate very low risk.
Please note that the above are rates for senior debt. Rates for mezzanine debt, subordinated debt or equity will be considerably higher.
These markets have flourished in recent years because the list of people and businesses to which banks have stopped lending to is continually growing. Some of my previous articles have said that this is not entirely the banks’ fault and that they are simply responding to the changing and more restrictive regulatory environment. This is still true.
In every economic cycle, substitute lenders have flourished. The last cycle saw the likes of Aussie Home Loans, Wizard and RAMS rise up. These lenders are now all owned by the banks.
This cycle is seeing the banks cede ground in the business-banking sector. Let’s see what happens when the steam runs out of the property sector. I’m not qualified to make predictions (and in my view neither is anyone else), but I bet that the banks will magically find a way of lending to segments that they haven’t lent to for quite some time.
That can only be a good thing.