HOW CAVEAT LOAN HELPS DURING SHORT-TERM CASH FLOW CRUNCH

In this article, we’ll look at caveat loans and how they can be a good solution to deal with short-term cash flow requirements.

What is a caveat loan?

The first thing to understand about caveat loans is that they are not mortgage loans. While sometimes referred to as a ‘second mortgage’ because they are secured against a property, they are different in structure and terms to traditional mortgage loans.

You must own a property to take out a caveat loan against it. A caveat operates like a form of ‘injunction,’ which means the loan is lodged on title behind your existing mortgage (no consent is required from your bank to do so). This also means the borrower is prevented by a ‘caveat’ from selling the property (or taking out further loans against the property) without the permission of the caveat loan provider.

What are caveat loans for?

In Australia, caveat loans are a fast source of short-term funds that are commonly used to manage the cash flow between the sale and purchase of a property. If you have sold a property and need to pay for another, but settlement timing doesn’t match up, a caveat loan can be a great short-term solution.

In addition, caveat loans can be used to complete major renovations or residential development projects. Funds required for construction can be sourced with a caveat on the property, which will be released once the property is finished and sold.

Caveat loans are commonly used as a short-term option for business owners who need a fast cash flow injection, regardless of credit history. For example, you own a business and you:

  • Have a large tax bill due immediately, but won’t have the cash to pay it for a few months.
  • Could benefit from a working capital injection to maintain business operations to offset invoice lags.
  • Need to purchase a large amount of stock (to service an order, or to take advantage of a bulk purchase discount) and need to fund it with short-term debt.

Similarly, a caveat loan can be a good short-term solution for borrowers who need money in a hurry to do home renovations in preparation for sale, regardless of credit history.

What are the benefits of a caveat loan?

Caveat loans in Australia are widely available from a variety of lenders and offer a range of features that make them appealing for short-term loans when funds are needed quickly. The upside of caveat loans includes:

  • They’re quick: Caveat loans can be applied for, approved and settled often within a few days.
  • Minimal documentation required: The paperwork required for caveat loans is far less onerous than mortgage loans, making it easier and faster to apply for this type of loan.
  • Flexible: Caveat loan terms are flexible and can typically be negotiated for anywhere from one month to three years.
  • Easy: Once you have repaid the loan, the caveat on your property is lifted immediately with minimal fuss and red tape.

Key takeaway

If you own a property, even if it is the subject of a first mortgage, a caveat loan can be a fast and relatively cost-effective source of short-term funds for personal or business use.

Mango Credit

Yanis Derums is the Founder and Director of Mango Credit– a leading private lender specialising in bridging loans for personal use and business short term loans for commercial and/ or investment purposes. Yanis has extensive experience with financial analysis, credit assessment, product structuring, and general business management

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