Lending expansion and new product to bolster Finbase

The new product will enable to Finbase to compete in the long-term property investment market, in particular to attract investors who want to hold rental properties.

Operating in this market hadn’t been feasible for Finbase until the Challenger partnership was finalised as its $300 million book was funded by wholesale investors – mainly high net worth individuals and family offices –with typically a one- to two-year investment horizon.

Finbase managing director Pernell Callaghan says the capital deal opens the door to a bigger market and a rise to $500 million in funds under management within six months. After that it hopes more funds will be available from institutional investor Challenger, although that hasn’t yet been discussed.

Finbase is already calling on the Challenger facility weekly for lending to SMEs, sole traders, business owners and established property traders. The non-bank lender does not do residential mortgages.

The average loan size has been about $700,000 over 12 months at interest rates of 6.95% to 8.45%. Lending is to a maximum of 70% LVR. Bigger loans are available.  

Callaghan says borrowers typically do not use their family home as leverage. Often it is an investment property or a commercial building they are running their business from. “They might want some working capital and we will take a first mortgage security against the building.”

The deal with Challenger allows Finbase to do more lending volume and until now demand from borrowers has been larger than what it has had available capital for.

“It is a market the traditional banks have pulled back from and a gap we are filling.” While demand is rising, Finbase proceeds with only 10-20% of applications it receives.

Callaghan believes many of its clients could source money through traditional banks but find the amount of information required and their slowness in approving loans frustrating and detrimental to doing business.

For example, if a trader needs finance to buy a property within a few days that they intend to renovate and sell within six months for a profit, Finbase can move much faster than a bank in approving a loan.

A bank might want 12 months of financial statements, a cashflow forecast and a lot more information on the borrower’s profile before even considering a lending decision.

Callaghan says his business is based on speed and looking more closely at the borrower’s history of property trading, good account conduct, security and exit strategy. “If we recognise a good deal and there is a clear exit strategy, we can make a lending decision much faster for the trader to be able to secure the property.”

Finbase is one of the country’s bigger private credit commercial lenders. In New Zealand the market is growing.

Globally it has moved from a niche corner of institutional finance to one of the fastest-growing global asset classes, surpassing US$2 trillion.
Investors worldwide are shifting away from traditional fixed-income products – where yields remain compressed and liquidity is often traded for low real returns – towards direct lending and structured private debt.

The trend is now gaining serious momentum in New Zealand. Following the post-Covid inflationary, and then recessionary, environment, there have been positive shifts in investor appetite and a growing acceptance from mid-market and corporate borrowers that private credit provides a compelling alternative to traditional bank financing.

As bank lending becomes more constrained, and businesses seek flexible, relationship-driven capital, private credit has stepped into a vital role: funding the productive economy through disciplined, cashflow-anchored lending.

Although many commentators are still singing the recession tune, Callaghan says Finbase’s clients are business owners or self-employed and only earn income through their own endeavours. “Whether the economy is going well or in a recession, they are going to continue doing what they do through all cycles. Because of that they are still looking to borrow funds to complete projects, expand their businesses, or need short-term working capital.”

Challenger and Finbase were introduced by a senior bank in July last year. While not Challenger’s first investment in New Zealand, it is the first of its kind here. 

An investment figure was not negotiated by either party, Callaghan says, but after six to nine months of due diligence, both came to the conclusion they could help each other’s business and $150 million was agreed as the capital partnership.

“Our main focus is on delivering strong assets for Challenger over the next six months, having a good book, clean credit and low defaults and arrears as well as managing the capital of our wholesale investors, who remain the cornerstone of our book. If we do a good job as the business has done so far, it will naturally grow."