Does short-term lending mean sky-high rates?

Interest rates charged for short-term loans should fairly and competitively reflect the risk of the loan and the loan period. Having said that, there's no doubt that rates shouldn't be excessive. A good benchmark for short-term rates is 1-2 per cent per month for a typical loan period of one to six months.

The correct approach is to strike a balance between the risk and providing the best solution for a client's need at a competitive rate. It's important to realise that the short-term market sector provides often-crucial cash injections to enable businesses to expand and/or bypass cash flow issues. That includes paying creditors, purchasing stock, paying the ATO and GST, or providing working capital or bridging finance.

The role of client communication shouldn't be underestimated. It's all about managing client expectations from the outset. Clients need to realise that a short-term loan is just that – intended as a stop-gap measure for a limited period. Its use, customisation and real-time requirements should also be considered. A short-term loan should be viewed on its own merit and not be compared with a traditional first mortgage bank rate that reflects a standard product with a typical loan period of 20-plus years.

While short-term lending creates an alternative income stream that can be highly profitable, it's still a niche market. And like any niche market, it requires an understanding of both product and processes to maximise opportunities.

We encourage brokers to diversify into the growth market of short-term lending and realise its lucrative potential with confidence.