Private Lending Education

Private lending is lending provided by private finance or lending companies. While banks (mainly the ‘big four’) are the biggest secured lenders in Australia, there are many transactions that don’t fit the big bank’s criteria, but are still solid, creditworthy deals.

Private loans are normally for shorter periods than bank loans (for example, from 3-24 months) and provide funds to borrowers for specific situations that traditional banks usually won’t fund.

CASE STUDY

NOTICE TO COMPLETE

“Notice to Complete” on a commercial property settlement A property developer who had already delayed settlement on a Melbourne commercial property was issued with a 'Notice to Complete' from the vendor. He risked losing a $350,00 deposit if he couldn’t settle the transaction within seven days. His broker had led him to believe that finance from a 'major' was imminent, but it wasn’t approved because his tax returns were not up to date.

THE PRIVATE LENDING SOLUTION

The lender advanced first mortgage funding (70% LVR) on a 6-month term, enabling the client to settle on the property. Due diligence was completed and the funds were advanced within five days of application.

Where to next: The client refinanced the private lender's loan with construction funding.

Private loans all require a form of property security. It can be:

• Residential Security
• Commercial / Industrial Security
• Land Security

Private lenders apply different loan-to-value ratios (LVRs) to different security types. For example, the highest LVR might be applied to residential security in a metro area, whereas raw land in a rural area will attract a much lower LVR.

Private lending is generally only available to company borrowers, not individuals. That’s because loans to companies fall outside the National Consumer Credit Protection (NCCP) Act, so different regulations apply.

Qualifying for a private loan is simpler than going to a bank. Lenders will have slightly different requirements but, in general, all private deals must tick four boxes:

• THE BORROWER must be a company (or, if not a company, the loan must be primarily for business purposes)
• THE SECURITY the loan must be backed by property security. This can be residential, commercial, industrial or land
• INCOME VERIFICATION establishing that the Borrower has income to pay the interest
• THE EXIT you must be able to show how you will pay back the loan. This is normally done by refinance, sale or other cash injection.