Connecting High-Rate Borrowers with Yield-Seeking Investors
“Borrow short, lend long” is the banks’ mantra, but niche lender Investors Central has turned that around – it borrows long, and lends shorter.
Investor Central’s business model is to raise funds from investors and lend them through its finance company Finance One, to a highly specific group of non-conforming borrowers (consumer or commercial) seeking a secured vehicle or caravan loan.
These borrowers are individuals or small business owners whose credit history is such that they are often overlooked by major lenders. Finance One has developed well-honed lending policies used throughout the loan approval process, which are used to assess the creditworthiness of potential borrowers, resulting on average in only one in five applicants securing a loan.
These borrowers pay an interest rate of between 17%–29% a year for their loans: the weighted average rate is currently about 23% a year.
Finance One’s lending operations are funded by its parent company Investors Central, which has released its fourth and current prospectus, offering fixed-term redeemable preference shares (debt instruments), over terms ranging from 12 to 60 months, with fixed returns ranging from 8% a year to 14.35% a year. The minimum investment is $25,000 at 8% a year for 12 months, with higher minimums applied to various terms.
Self-managed super funds (SMSFs) are a major target group, but Jamie McGeachie, chief executive officer of Investors Central and Finance One, says the fixed-term investments also appeal to trusts, companies, partnerships and individual investors. “We think returns starting at 8% will be fairly attractive in a low-return environment, but it can be even better for the larger investors, who can earn 14% a year with a $500,000 investment over a fixed three-year term – that’s a fantastic result if you’ve got a self-managed super fund.”
The structure works because borrowers pay more than investors receive, and Investors Central/ Finance One aligns the maturity profile of its borrowing to its lending: the weighted average fixed investment term at present is 49.1 months, while Finance One’s current average loan term is 41.3 months.
The loan book stands at $69.5 million. The fourth prospectus, which opened in October, is raising up to $30 million. Finance One will use the funds raised under this prospectus to broaden its vehicle funding to include caravans, small to medium trucks (up to 10 tonnes), motorcycles and specialised heavy commercial vehicles. To cater to commercial borrowers Finance One has lifted its maximum loan from $50,000 to $75,000.
McGeachie says the key to the structure is the individualised way that the lender assesses loan applications. “Our clients are borrowers whose credit history means that they can’t get a loan from a major lender. The reasons for that range all the way from an unpaid telco bill to bankruptcy,” he says.
“We are confident in our personalised assessment process, it’s been built up over nearly 20 years, and it’s very high-touch, we get three months’ worth of bank statements, we get the credit file, and we personally validate their employment, mortgage or rental history. Our approach is to take the time to understand each client in detail, what caused the issues they may have had, what has changed in their circumstances, why they have capacity to repay a loan, and why they’re creditworthy of getting a loan through us,” says McGeachie.
Drilling down into understanding a client’s financial situations “before we even get started” mitigates a lot of the risk, he says. “We currently lend only to about one in five applicants. We’ve got about 5,700 clients across the nation, so the risk is spread. We feel that de-risks the loan portfolio to a large extent, and of course these are secured loans, so we do have recourse to the asset,” he says.
Finance One currently lends on average $4 million a month. For the financial year ended 30 June 2016, bad debts expense and doubtful debts expense accounted for 6.26% and 5.07% respectively of group total income. McGeachie expects the expansion into commercial lending will bring Finance One a stronger client profile, and also assist in mitigating risk exposure through overall lower loan-to-value ratios (LVRs) for commercial applicants.
The current Investors Central prospectus will close on 25 October 2017, unless it is fully subscribed earlier. Investors Central raises capital progressively to match the demand of Finance One loans. Investors Central continually maintains sufficient operating capital and a capital adequacy reserve fund to cover the redemption of preference shares.
“We’re hoping that yield-oriented investors put their toe in, maybe invest the minimum of $25,000 for say a four-year term, and pick up their 10% return – and then see the detailed performance report every three months, see the business and industry sector that we’re operating in, and from there build their confidence and maybe add to their investment, provided that we require the funds,” says McGeachie.
Investors Central is a unique offering in the fixed-income space. The product is likely to find a warm reception among SMSFs and yield-oriented investors keen to diversify away from the capital-price risk of holding listed shares for dividend income, while picking up yields significantly higher than term deposits.
If you would like to get more information on the Investors Central prospectus - click here.
James was founding editor of Shares magazine, and oversaw one of the most successful magazine launches in Australia. He has also written for BRW, Personal Investor, The Age and Management Today, and was subsequently personal investment editor at The Australian and editor of financial website, investorweb.com.au