What is private lending?

Private lending, also referred to as peer-to-peer lending, involves borrowing money from either high-net-worth individuals or businesses that have no ties to any bank, credit union or traditional lender. Whilst banks and traditional lenders are subjected to tough lending regulations, private lenders, typically have less red tape. Private lenders are still regulated by the Australian government; however, it is through a different regulator than the Big 4 banks and traditional lenders.

Private lending continues to gain traction with business owners, developers and real estate investors, who don’t fit or meet the complicated lending guidelines that typical bank managers are required to meet. This is one of the reasons that private lending now represents 10% of all lending in Australia.

How does private lending work?

In essence a private lender works very much like a bank or credit union. As a borrower you receive the funds you require to buy a property, piece of equipment, purchase another business, consolidate debt or any other expenses. You then pay the loan back over an agreed number of installments with interest added on top. Typically, most private lenders access funds from the wholesale market. As a result they can offer extremely competitive interest rates and comparable lending options to your more traditional lenders.

Private lending, in most cases, requires an asset as security over the loan. As long as a borrower meets the documentation requirements and proves their ability to repay the loan, will likely be considered a viable candidate to loan to.

Who is best suited to private lending?

Private lending is usually most suited to:

1. ‘Asset rich, cash poor’ businesses, who need short term, quick finance to cover cash shortfalls or to take advantage of business opportunities.
2. Developers who want to avoid the stringent pre-sale requirements of traditional lenders or are looking to create a ‘new’ company for a specific project and do not have the financial documents to show.
3. Real estate investors who have asset security but lack the cash reserves to purchase commercial property or undeveloped land.
4. Strata schemes who need finance to cover immediate remedial works, improvements or upgrades are also ideal customers for private lenders.

What types of loans do private lenders offer?

The most common types of private lending loans are:

Development finance
Private finance to assist with the construction costs of a property development project.

Bridging finance
A short term loan that ‘bridges’ the gap between the sale and purchase of two properties or a temporary shortfall in a company’s cash position

Land bank finance
Private loans to purchase large block of undeveloped land.

Corporate loans
Financing that assists businesses with the day-to-day operations or to reposition or restructure for growth.

Mezzanine finance
A form of financing that has both debt and equity components. As a result developers commonly use mezzanine finance to cover the shortfall between their primary mortgage and the total cost of the development.

Acquisition finance
Private financing provided to business to make strategic acquisitions of other businesses.

Strata finance
Unsecured private loan taken out by a body corporate/strata scheme to cover improvements, renovations, remedial work and insurance policies.

Benefits of private lending

1. Private lending offers flexible, fixed rate loan structures with the ability to access higher LVR’s (loan value ratios), often as high as 85-90%. As private lenders are more flexible than traditional lenders, they assess borrowers as individuals and look to provide the best option that suits the borrower’s direct needs. Often, they also allow borrowers the added benefit of choosing the length of the loan.
2. Private lending involves a much faster approval process. As private lenders do away with long assessment periods and strict lending criteria they are able to approve finance within as little as 24 hours or 2-3 weeks, dependent on the specifics of the loan.
3. When accessing private lending loans, you are borrowing direct from the actual lender which allows you to bypass brokerage fees. Given most private lenders secure their funds from a wholesale market, they tend to pass the savings onto the borrower, allowing you to gain access to competitive rates and low fee funding solutions.
4. Private lending has a simplistic loan approval process. Most private lenders offer simple online applications and have low or no document loan options.
5. As private lending focusses on the overall deal, not just your credit rating, there are usually less credit checks and background information required.

Drawbacks of private lending

1. Private lenders have much shorter loan terms comparative to banks. Loans are normally 6 months to 3 years compared to up to 30 years through banks.
2. Some private lenders will charge a loan origination fee/establishment fee on top of the interest rate.

Questions to ask when speaking to a private lender

Can I make extra repayments?

Ask the private lender if making extra repayments is possible, how often and whether a fee will be charged.

What are the hidden costs, if any?

As with any loan, sometimes there are additional fees that you may not be aware of upfront. Before signing, always check to be clear on any additional costs that may be conditional upon specific terms or circumstances. It is also important to work with a well-respected lender that has a transparent lending process.

How can Remara Credit help businesses access private lending options?

If you have asset security and limited cashflow, Remara Credit might just be the option you have been looking for. As a private lender, Remara Credit offers borrowers the ability to access private loans up to $10m. Suited to businesses, real estate developers and investors seeking flexible, quick financing solutions at competitive rates. To find out more about Remara Credit private lending solutions, contact our team today.