Caveat Loans

There is one test. Is there a specific event, on a specific date, that will repay this loan, and is there evidence of it. If yes, a caveat loan can be an excellent answer. If no, it is the wrong product and no amount of urgency changes that.

The commercial reason this product exists is that some obligations run on a 21-day clock and bank credit does not. A director penalty notice and a creditor’s statutory demand both do.

1. 01

   Day one, the notice arrives

   The clock runs from the date on the notice or the date of service, not the date you opened it. Ring us that day. Also ring your registered tax agent or your solicitor, because whether to pay, dispute or take another course is their advice to give, not ours.

2. 02

   Day one, we check the security

   Title search, existing registered mortgages, the balance owing on each, ownership structure, and whether any other caveats sit on the title. This determines whether the transaction is possible at all.

3. 03

   Days one to two, an indicative offer

   Amount, term, all fees, and the total cost in dollars over the term. If the numbers do not stack up against the consequence of the deadline, we say so now, not later.

4. 04

   Days two to four, valuation and documents

   Run in parallel. The valuation may be on a short marketing period basis, which produces a more conservative number than a normal market valuation.

5. 05

   Days three to seven, settlement

   The caveat is lodged and funds are paid, often directly to the ATO or to a solicitor’s trust account. Evidence of the payment is retained, because on a notice it matters as much as the payment.

6. 06

   Week two onward, the refinance begins

   Lodgements brought up to date, financials prepared, and a conventional facility arranged to take the caveat loan out. This is the actual solution. The caveat loan just bought the time to build it.

Caveat loans are among the most expensive money a business can borrow. That is not a criticism of the product, it is a description of it. A lender advancing funds in days, behind an existing mortgage, on limited information, prices accordingly.

• Interest, usually charged monthly and commonly prepaid for the term or capitalised into the balance.
• An establishment fee, typically a percentage of the amount advanced.
• Lender legal costs and your own legal costs.
• Valuation, where one is required, at your expense.
• A discharge or exit fee in many facilities.
• Default interest if the term expires without repayment, which is a step change in cost.

Ask for one number: the total to repay at the end of the term, assuming you take the full term. Compare that against the cost of not meeting the deadline. That is the honest comparison, and it is often clearly in favour of borrowing. It is sometimes clearly not, and you deserve to know which one you are looking at.

1. 01Is the exit real, dated and evidenced. A contract of sale, a formal approval letter, a registration timetable.
2. 02Is there enough equity behind the existing mortgages for a lender to be comfortable, allowing for a conservative valuation.
3. 03Is the purpose genuinely a business or investment one. That determines how the transaction is documented and regulated.
4. 04Does the borrower understand the total cost, in dollars, not as a rate.
5. 05Is there a cheaper route that fits the timeframe. Sometimes there is, and we would rather write that one.
6. 06Is the underlying problem solvency. If it might be, the conversation belongs with a registered insolvency practitioner before any money is drawn.

We tell you the true state of things early. Sometimes the true state is that this loan is not the answer.

• A second mortgage, if the first mortgagee will consent. It is usually cheaper and better documented than a caveat facility, and it takes longer.
• A refinance of the first mortgage, if there is time. This is almost always the cheapest structural answer.
• A private first mortgage, where the existing first is small and can be repaid from the advance.
• Equipment refinance, if the business owns unencumbered plant. Cheaper, and it does not touch the property.
• Invoice finance, if the gap is a debtor gap rather than a deadline.
• A payment arrangement with the creditor or the ATO, where one is genuinely available. Discuss this with your registered tax agent.

We look at these before we look at a caveat facility. The caveat loan is the answer when the calendar rules the others out, not when it is simply the first door someone knocked on.