Why don’t banks like my asset when it makes good money?

Ever wondered why banks don’t like to lend money against assets that are clearly making good money? I was really curious about this and have researched it over many years, as I have high yielding assets that took me some time to get good funding on.

The banks spread their risk, once they have filled the quota of funds lent against an asset class, they no longer hold an appetite for it. This will vary from one bank to another. So, you may find while one of the big banks give very low LVR’s (loan to value ratios) on say industrial, another bank will throw money at you in that sector.

It doesn’t stop there though, they see risk differently from investors and developers, where we see risk as something we can mitigate and as opportunity, they see it as an issue to deal with if they have to.

I was recently talking to the top end of lending in one of the big banks in regards to service stations, general conversations, and they revealed they only lend around 40-50% LVR due to the contamination issues that may occur in the future. I was extremely grateful to know this as it shows me yet another opportunity, however it definitely brings funding issues to the surface as these assets in prime locations can be double digit millions.

At the other end of the scale, specialised use investments such as storage units, car washes, and incubator space are under-valued based on lack of understanding, this is definitely something you can assist with. There is great opportunity to have these assets as a high yielding portion of your portfolio, they are also assets that are very diverse and suited to many locations, with multiple applications / uses attached.  As they are considered “specialised use” the bank valuers will reduce the value based on the perceived risk, therefore putting your asset at the lower end of the scale when it comes to financial leverage.

Can you overcome this? Of course you can!  You will need to work with your lenders, if it means you need to get specialised valuers to assist then that is what you need to do. However, first, you need to understand if the bank has an appetite for that particular asset class at that time. If they do not, then no amount of specialised valuers will make the difference.  So before you spend money speak to the commercial lending arm of the bank you want to work with, and speak to multiple banks to gauge who is doing what and who is the most likely to be the easiest…. or provide the path of least resistance!

Finance brokers do this for a living and although nothing beats a great relationship with a business banker, a broker can save you time and they generally focus on more than the big four banks. This is a benefit to you too, as it will minimise cross securitisation which is too many eggs in one basket, if all your lending is with one bank, and you have any issues with them, your fault or not, then all of your loans are assessed. They can recall all funds not just the one they have an issue with. Trust me, read some of the fine print you sign when you take a loan out. So, spreading your loans across multiple banks is ideal, the more the better. This means you are now relying on the broker relationships with the banks, not your own.

None of this is a big issue when you understand it, however it can be if you are running tight time frames and need funding, even if you have great assets to use as security.

Also knowing the fine print is crucial, as you declare you have read and understood it, it pays to do so at least once. With interest rates the way they currently are and trillions of unused equity Australia wide, I am interested to see what will happen in the “Private Lending” space. This is a well respected lending space that is still regulated, however not to the degree of the standard banks, and certainly a lot quicker. You do pay for the privilege though. Again, this is not a problem, you just need to factor it in to your numbers, remembering to account for the time factors.

Until next time enjoy reading those loan documents

Melissa