This is the ultimate guide to – How Does Private Lending Work in 2020.
Did you know, over 1/4 of all Australian loans are issued by Private Lenders, not banks!
Private lending is fast becoming a mainstream form of lending in it’s own right!
This is because private lender loans are:
- ✅ SPEEDY – Assess and settle loans MUCH faster than traditional lenders.
- ✅ EASIER – Don’t require the same kind of proof of serviceability as banks.
- ✅ NO CREDIT CHECKS – Do not require any form of credit checks.
- ✅ BAD CREDIT OK – Don’t mind if you or your business have bad credit.
- ✅ NO RED TAPE – Have less strict lending criteria.
- ✅ SIMPLE – Are a much more simplistic way to access financing when compared to traditional mainstream lenders (banks, building societies, etc.).
Check out: Non-Bank Lenders Explained – Why Choose a Private Loan?
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What Is Private Lending?
Private lending is the term used to describe loans when the funds lent come from a private source. Funding may come from either private companies, or wealthy private individuals.
Therefore, it is finance that is NOT provided by banks, credit unions, building societies, etc.
Who Are (Non-Bank) Private Lenders?
Non-Bank private lenders are privately-owned organisations and wealthy individuals (also known as sophisticated investors).
In a private loan situation, these private lending entities enter into contractual loan arrangements directly with borrowers.
All loan contracts arranged by DFS (via our panel of over 200 lenders) are prepared by the very experienced private mortagage lawyers at Sydney’s Summer Lawyers.
Like other forms of finance, private loans are often arranged by finance brokers.
Read about our non-bank private lender loans here.
What Can Private Business Loans Be Used For?
You can use private lending for a range of business purposes, including:
- Property Development Finance
For example, major new multi-residential or commercial building property development building projects or renovations, such as housing estates or apartment/office complexes.
- Short-Term Business Loans
Short term-business loans are usually for periods from 1 to 24 months.
This is an umbrella term given to loans to borrowers who don’t meet traditional lending criteria. For example, businesses with bad credit history.
This is short-term finance provided while larger or longer-term finance is arranged.
As the name suggests, this is a business loan to buy land. The land or other property can be utilised as the security for the loan.
Again, as the name suggests, this is a loan used to purchase business equipment such as machinery or vehicles. The equipment purchased can even be used as security on the loan.
Mezzanine finance is usually used for additional capital to complete property projects or renovations. The private lender will most likely take an equity interest in the project as part of the finance arrangement.
A second mortgage allows you to borrow against the equity you have built up in a property.
- Commercial Property Loans
A commercial property loan finances the purchase of a commercial real estate, such as:
- Office space.
- Retail premises or shopping centres.
- Residential unit bocks.
- Accommodation (such as hotels or motels).
- A business venue (for example, pubs, restaurants or childcare centres).
A Business purchase loans provide you with the funds to buy an existing business as a going concern.
You can also use private lenders for home loans and personal loans in Australia.
What Are The Benefits Of Private Lender Loans?
Private money lenders can provide you with the following potential benefits compared to bank lenders:
- ✅ Faster loan application approvals and settlements. The approval process can be quick and require less paperwork than applying for a loan with a traditional lender. In other words, they are ‘low doc’ loans. This means that you’re more likely to get the funds you need quickly, so you won’t miss out on any business opportunities.
- ✅ Usually better or more flexible loan terms and conditions than traditional lenders. Especially if you’re a small-to-medium-sized business, investor or property developer who has less negotiating power with a mainstream lender than larger borrowers do. These more flexible loan terms and conditions could include:
- Flexible repayment structures and schedules that are tailored to your needs.
- Shorter loan term periods if necessary than bank loans.
- ✅ Less strict lending criteria. This can be especially useful in situations such as if your business has:
- Limited (or no) trading history or tax returns.
- Bad credit history.
- No pre-sales on a building development project.
- ✅ Wider range of loan products. Some private lenders will offer loan products that traditional lenders won’t. For example, mezzanine financing, non-conforming loans, and loans for very short terms.
- ✅ Higher loan-to-value ratios (LVRs). The LVR is the loan amount expressed as a percentage of the value of the asset being used as security.
For example, if you have equity of $1 million in a property, if you borrowed $600,000 against it, the LVR would be 60%.
How Can You Get The Best Private Loan Terms And Conditions?
There are two things you need to do to access the best private loan terms and conditions:
1) Be prepared to provide the private lender with security.
FYI – The most common security used is property. However, with DFS, we can secure private lender loans by using a car, motorcycle, boat, aeroplane, farm machinery… pretty much anything of value!
2) Use the services of a private lending broker to find the best lender for your needs.
We’ll now look at both of these requirements in turn.
Secured Private Business Loans
Secured private loans lower a private lender’s risk by providing them with an asset as security.
1st Mortages and 2nd Mortages/Caveat Loans are a common examples of secured loans.
A caveat loan is a short-term loan secured against a borrower’s existing property. The lender receives a short-term interest in the borrower’s property in exchange for providing the finance.
This caveat means that the property can’t be used as a security against any other finance while the caveat is in place. It also can’t be sold. This lender’s interest in the property is released once the caveat loan is repaid.
Second mortgage lenders will normally charge a higher interest rate for a second mortgage (as opposed to a first mortgage) because the lender who provided the first mortgage has priority if the borrower defaults on repayments.
Second mortgages, equipment and other forms of personal property (such as vehicles you own) can be used as security on a private business loan.
The lender can secure their interest in a vehicle in the Personal Property Security Register.
Caveats are lodged by registered lawyers via the PEXA system in Australia.
Unsecured Private Business Loans
Unsecured private loans are available and are assessed in a different manner than secured loans.
In unsecured private business lending, the borrower does not offer security such as a property or boat. Instead, the loan applicant will be required to show business turnover for at least the last 3 months of trading.
Generally, up to 80% of the average monthly turnover can be lent.
Unsecured loans can be processed very quickly and paid the same day most of the time.
Using The Services Of A Private Lending Broker Like DFS
Private lending brokers like us at DFS arrange private loans for our business clients for a living. We have an established network of over 200 private lenders that we connect our clients with! That means we have finance sources and options that other lenders don’t.
We act as the intermediary between borrowers and our network of lenders. We’ll take the time to understand your individual business finance needs before recommending the most appropriate lender and loan for you. You’ll receive the kind of personalised customer service that big banks and other large financial institutions simply can’t provide.
When evaluating any business loan option, your key considerations should be:
- Can your business afford the repayments?
- Does the repayment schedule suit the cash flow of your business (or is it flexible)?
- The interest rate. Interest rates in Australia are currently at record lows. They are unlikely to rise in the near future due to the impact of the coronavirus on the economy. You should avoid using personal loans and credit cards offered by mainstream lenders for business purposes. These forms of finance have higher interest rates.
- The associated loan fees and charges.
A Step-By-Step Guide: How Does Private Lending Work With DFS?
1 – Get An Express Quote
Once we receive an express loan application (get an express quote here), we may call you (or email if you prefer) to gather further information about your specific needs and requirements. This in turn helps us speed up the process and allows us to serve you to our best possible level. It will also ultimately allow us to create a streamlined experience for all parties involved and get you your funds quickly.
It is at this point that we really get to know the borrower and their individual situation.
To be clear, we are not a bank, we don’t think like a bank and we certainly don’t act like a bank.
DFS make loans easy.
We don’t have long forms or paperwork to fill in. We don’t need to satisfy the hefty banking industries codes, or some crazy company policies.
Instead, we get to know our borrowers on a personal level.
We speak with you like a real person, using regular everyday terms and without industry jargon.
We understand getting a loan can be daunting, so we make it as easy as possible.
At the end of the day we love helping people.
We are supremely hospitable.
And we are genuinely here to help you.
Some questions we may ask the borrower include:
- How much is the loan required?
- What is the loan for?
- How long do you need the loan for?
- Do you have a property or other form of security to offer as collateral?
- If so, what is the address of the security property or other details?
- How do you plan to service the loan?
- What is your planned exit strategy (how do you plan to pay out the loan?)?
- Please provide us with identification
2 – Loan Assessment
Once we have gathered the required information, the DFS applications team will assess your loan scenario.
We will then give you an answer and very quickly let you know if it your quote/application has been approved.
DFS make decisions super fast – usually within 1 hour.
3 – Letter of Offer
We will then present you with a Letter of Offer.
These terms and rates are then put into an official DFS Letter of Offer and sent to the borrower.
4 – Property Valuation (If Required)
Sometimes the Letter of Offer is made pending an official property valuation. Meaning, the letter of offer is valid, pending the outcome of a professional third party valuation.
After you considers the Letter of Offer, if you wish to continue, you will then:
- Sign the Letter of Offer and email back to DFS.
- Pay the nominal fee for a third party professional property valuation to be conducted (if required).
After the borrower has paid this nominal valuation fee, DFS will arrange for the valuation to be conducted.
Property valuations generally take between 1-2 days.
Please note: This may be delayed because of the Covid-19 situation.
Once the property valuation is complete, a copy will be sent to you.
5 – Contract Produced
DFS will now provide the details of the loan to either Summer Lawyers or Bransgroves Lawyers. These are both very experienced mortgage specialist law firms based in NSW.
They will produce the loan contract and associated material, usually within 2-3 days. The contract will then be sent to your nominated lawyer.
6 – Identification and Contract Check
Once your nominated lawyer receives the loan contract, they are required to check and witness identification of all directors of the borrowing entity. Your lawyer will also go through the contract and answer any questions.
You are advised to obtain your own third party financial advice.
You then sign the contract with your lawyer acting as witness.
The contract is then returned to DFS.
Once DFS receive the signed contract back, the lawyers will put a caveat on the borrowers security property (if applicable). This means the property cannot be sold.
7 – Funds Paid (Settlement)
Once the contract is signed and any applicable caveats are processed, the funds are transferred to you.
8 – Monthly Payments
As outlined in the contract terms, normally the borrower is required to service the loan by making monthly payments.
If these repayments are made on time as per accordance with the terms of the loan, then what is known as the “lower interest rate” applies.
If the borrower defaults and misses a monthly repayment, a penalty is applied. This penalty is known as the “higher rate of interest”.
9 – Ending the Loan
At the end of the loan term, the borrower simply pays back the full amount of the loan.
It’s good to know that DFS do not normally charge any penalties if the borrower chooses to pay back the loan before the end of the loan term.