A nine-month bridge, with the bank already waiting on the other side

A family farming operation in western Victoria, third generation, mixed cropping. The neighbouring block came up, which in that district happens roughly once in a working life. They signed on it. Settlement was set for a date the vendor would not move.

The problem was timing and only timing. The business was sound and the equity in the home farm was substantial. But agricultural income arrives in a lump after harvest, and settlement fell several months before the receipts. The agribusiness lender was working on the facility and was not going to be ready in time, because a bank’s credit process runs at the speed a bank’s credit process runs.

The choice on the table

• Let the contract lapse and lose a block that would not come up again for a generation.
• Sell something to raise the money, which meant selling productive land to buy productive land.
• Bridge the months between settlement and the season’s receipts with short-term funding.

Private lending is the right tool for a small number of situations and the wrong tool for most. It suits a defined gap with a defined end. It does not suit an ongoing shortfall, and using it that way turns an expensive short loan into an expensive long one.

The exit is the deal

Before any lender was approached, the exit was documented. Not described. Documented. The agribusiness lender’s conditional approval for the takeout facility was obtained, and the private facility was structured to sit behind that timetable with room in it.

A private lender is being asked to fund quickly against security, and the question it is really asking is how it gets repaid. Where the answer is an intention rather than a document, the file either does not proceed or proceeds on terms nobody wants. Where the answer is a conditional approval with a date, it becomes an ordinary transaction.

What a borrower should expect from private funding

• It is priced above bank funding. That is the trade for speed and for flexibility, and it should be treated as the cost of a specific outcome rather than as a rate to be argued down.
• Terms are short. Months, not years, with the facility written to a defined end point.
• Interest is often prepaid or capitalised into the facility rather than paid monthly, which affects how much needs to be borrowed in the first place.
• The borrower carries valuation, legal and establishment costs, and they should be quantified before anything is signed.
• Security is registered properly. Here, a first mortgage over the home farm freehold.
• Independent legal advice is normal and, on a facility of this kind, sensible.

1. 01

   Step one — confirm the exit before anything else

   Conditional approval obtained from the agribusiness lender for the takeout facility, with its own timetable understood.

2. 02

   Step two — size the facility honestly

   Purchase shortfall, capitalised interest, and all costs included, so the borrower is not short two months in and forced to renegotiate.

3. 03

   Step three — settle the purchase

   Nine-month private first mortgage settles on the contract date. The block is secured.

4. 04

   Step four — take it out

   Harvest receipts land, the agribusiness facility completes, and the private loan is repaid inside its term.

In this scenario the purchase settles on the contract date, the block is added to the operation, and the private facility is repaid when the mainstream refinance completes. Total cost of the bridge was known and accepted at the outset, and it was weighed against the value of a block that would not come up again.

That is the correct way to judge short-term funding. Not against a bank rate, which was never available on that date, but against the outcome of the alternative. Here the alternative was losing the contract.

• Exit approved in writing before the bridge was arranged, not hoped for afterwards.
• Facility sized to include capitalised interest and every cost, so the term was not under pressure from day one.
• A nine-month term written against an exit expected earlier, leaving room for a bank timetable to slip.
• Repaid in full within the term, with the operation on ordinary agribusiness terms afterwards.

The honest warning belongs at the end. Where the exit does not eventuate, a bridge has to be extended or refinanced, and both cost money. Anyone considering short-term funding should ask what happens if the exit is late, and should not proceed until that answer is acceptable. If the exit is uncertain, private funding is usually the wrong structure, however quickly it can settle.