So all the big banks have said no, and now all the second tier and specialist lenders are also struggling to meet your financing requirements. What to do now?
Private Lending may be a viable solution. It is essentially borrowing money from a non-traditional lender, in most instances, a wealthy private individual or company that has excess cash from their main area of business who is seeking to earn a higher return on their excess funds. It is important to note that private lending is primarily for business purposes as they are classified as unregulated loans that do not fall under the National Consumer Credit Protection Act.
For what purpose can I use a private lender for?
The vast majority of the time, it needs to be for business purposes as almost all loans a private lender can offer you will be classified as “unregulated” under the National Consumer Credit Protection Act.
Business purpose can mean a range of activities including purchasing a commercial property, purchasing or starting a business, paying out a business debt, working capital for a business, any form of property development activities including construction financing. However, the funds cannot be used to invest in a residential investment property or an owner occupied residential property.
Will I need to sign any declarations?
Yes. Most private lenders will require you to sign a declaration stating that the funds are for business purposes.
Is private lending secured or unsecured?
Private lending is mostly secured with some exceptions. Most private lenders are “asset lenders” which means that they are comfortable to lend against the value of a traditional asset such as property.
Some private lenders will also lend against equipment, future income streams, and business goodwill, but they are much less common and are usually quite specialised in their nature.
What type of assets will private lenders lend against for a “Secured Loan”?
Residential, commercial, land, rural/agricultural assets are usually all acceptable forms of security.
Some private lenders may not accept some security for a number of reasons which can vary significantly from lender to lender depending on their risk profile. It is generally best to speak to your broker who will know which private lender matches your situation.
What level LVR will private lenders go up to?
LVRs vary from asset to asset as well as lender to lender. Generally speaking, most private lenders will cap out at 65% LVR, meaning the absolute maximum they would lend you is up to 70% of the value of an asset. For example, if your commercial property was worth $1M, some private lenders may lend you up to 70% of that, for a total of $700,000.
What is a typical loan term for a private lender loan?
Loan terms start from as short as 3 months to get you through a short cashflow issue or to bridge a gap in your funding requirement (timing mismatch).
It can go up to 5-7 years depending on the lender, but a typical private lending loan term is generally between 6 months to 2 years.
What is the rate that private lenders normally charge for a loan?
Private lending rates are generally higher than rates from any major bank or even tier 2/specialist lenders.
Starting at around 9-10% for a very strong deal (borrower with strong Asset & Liability positions; low LVR on the asset being borrowed against; simple purpose such as purchase a property or refinancing); and they can go up to 12-15% for a 1st ranking mortgage if the borrower/asset is perceived to be higher risk.
Will private lenders take a 2nd mortgage or caveat as security?
Some private lenders will take a second mortgage as security or a caveat across the property as security, however, these normally attract a much higher rate and often require the consent of the first mortgage holder and sometimes a Deed of Priority to be entered into with the first mortgage holder.
If you require a second mortgage or a caveat loan, it is best to speak to our experienced team on your requirement as it can be a tricky process to execute.
What fees are involved to use a private lender?
Private lenders charge essentially the same type of fees as a normal lender. This normally includes an application fee to get the process started; a valuation fee for the asset that they are lending against once the loan is approved subject to valuation; a legal fee for the lawyers to prepare loan documents once the valuation satisfies the lender’s requirements; and an establishment fee once the loan is drawn.
How long does it take to secure a private lender loan?
Generally speaking, a private lender loan takes less time than a fully documented bank loan since the lending requirement is usually not as stringent.
It can take somewhere between 2-6 weeks to finalise a private lender loan. However, this can vary significantly depending on which private lender you use; the complexity & size of the transaction (e.g. a development construction loan for property development transactions will take significantly longer); as well as how long it takes for the valuer to complete their valuation.
Someone told me that private lenders are unregulated and therefore more akin to loan sharks, is this true?
This is not true.
While there are definitely unscrupulous private lenders out there, the vast majority of private lenders have fixed mandates from their investors on what they can and cannot do. A lot of private lenders are run by fund managers who have clear set processes, credit assessment teams, management boards, and other checks and balances to ensure that they act in a way that is sustainable to build a long-term business through the business cycle.
Can private lending solutions be expensive?
Absolutely, but, generally speaking, the expensive private lenders usually take on more risks by offering higher LVRs; more specialised assets; 2nd mortgage/caveat; or simply very fast turn around with significantly less credit hurdles.
We work with a range of very reputable private lenders who specialise in different areas so please get in touch if you think you may need a private lending solution.
What types of people normally get a private lending loan?
Most people who get private lending loans are in business and have a funding gap/shortfall for a short period of time.
This may include property developers; businesses acquiring new businesses/sites; or newly formed businesses with no financials.