ASSET RICH BUT CASH POOR? CONSIDER A SHORT-TERM LOAN

In this article, we’ll look at short-term loans – why you might need one, the benefits of using them, and the different types of short-term lenders in Australia.

Why you might need a short-term loan

You might have heard the saying “asset rich and cash poor” which describes a situation where you have good security, but lack of access to cash. A short-term loan can be a good solution meet temporary challenges and the ups and downs of cash flow in your business or personal life. Short-term business loans usually have a term of two months to 36 months. Common loan sizes are from $25,000 to $500,000.

Why you might consider a short-term personal loan

One of the most common forms of short-term personal loans in Australia is a bridging loan. As the name suggests, a short-term bridging loan essentially ‘bridges the gap’ between the sale of the original home and the purchase of the new house. As such, a bridging loan can be a good alternative when you need to act quickly to secure a new property and the settlement dates for purchasing and selling don’t match, which is often the case.

Less commonly known is that you can use a short-term personal loan to renovate or prepare your property for sale, or even complete a small sub-division. You might also use this kind of loan to pay off personal debts, such as credit cards or a tax bill.

Why you might consider a short-term business loan

Anyone who has run a business understands that a cash flow crunch can occur for any number of reasons, no matter the size of the business. Short-term business finance provides a simple solution and fast injection of funds to alleviate a credit squeeze and let you focus on running your business.

Backed by equity in your property, short-term business finance can be used to:

• Purchase new stock or equipment
• Make wage payments or hire new staff
• Offset slow-paying customers
• Pay outstanding tax bills
• Fulfil a new contract
• Smooth out time lags between invoice payments
• Start a business
• Invest in an established business or buy an existing business

You can also use a short-term business loan to take advantage of a new business or investment opportunity that needs immediate action and funding.

Where you can obtain a short-term loan in Australia

The good news is there are many short-term loan providers in Australia, available from a range of lender types. Here’s a snapshot of the main institutions that provide short-term finance:

• Banks: Traditional lenders are renowned for offering low-interest rates with strict lending criteria. A bank loan typically suits people with high credit scores (i.e. a good credit history based on paying off debt on time, demonstrated savings, not defaulting on a mortgage payment, and so forth). Banks often have lengthy application and approval processes – which is not ideal if you need funds quickly.
• Private lenders: As the name suggests, a private lender is an independent financier backed by institutions and investors. As such, private lenders tend to be more flexible in their approach and product offering, and are attractive for those with lower credit scores seeking a fast application and approval process. Private lenders usually charge higher interest on loans, which are often deemed as riskier.
• Non-bank lenders: These are financial institutions that are not banks, credit unions or building societies. Non-bank lenders don’t offer the breadth of products of traditional funding providers, but they are flexible on rates and fees – and therefore often appeal to self-employed borrowers due to less strict lending criteria.
• Fintechs: A rapidly growing and dynamic sector within the finance industry in Australia, fintechs use technology to keep costs low (passing that onto borrowers in the form of lower interest rates) and algorithms to better judge risks (ensuring fewer defaults and better deals for approved borrowers).

You can apply online for short-term loans from a variety of lenders, with private lenders and fintechs offering a relatively simple application process, minimal documentation and fast funding (within three to five days from application).

Key takeaway

If you are facing a cash flow shortfall in your business or personal life, and you have equity in your property, a short-term loan can be used for up to 36 months for a variety of purposes.