Pros and Cons of Private Lending | Twelve Grains Capital
Hi! David here. Today we’re going to talk about private lending. In short, private lenders are non-bank institutions or individuals who lend money out to businesses, normally secured against real estate assets, in the hope that they’ll get a better return than parking their funds in a bank. Where major banks have strict lending criteria, private lenders have a more opportunity-centric approach in funding businesses, eliminating the cumbersome approval process.
So, who is private lending for? In most cases, people who acquire private loans are asset-rich, cashflow-poor business owners who require short term, immediate funding to “bridge” a shortfall for urgent and/or golden business opportunities. Or they could be developers who are seeking higher loan limit without having to achieve a certain level of pre-sales.
Like any other loans, private lending does carry a level of risk. However it’s important to note that private lenders, as well as any traditional lenders are regulated by the government in Australia, albeit different regulators.
WHAT ARE THE PROS AND CONS OF PRIVATE LENDING?
Like any other loans, private financing does carry a level of risk. However, it is important to note that private lenders, as well as any traditional lenders, are regulated by the government in Australia, albeit by different regulators.
Some of the PROS of private lenders:
- Easy access and fast turnaround — less paperwork, less headache.
- No background/credit check — private money lenders only care about the security property and your exit strategy.
- Flexible term — generally, private lenders are more flexible when it comes to security type and serviceability requirements.
Some of the CONS are:
- Origination cost — establishment fee of 2–5% of loan amount on top of interest rate is not uncommon, add more (brokerage) if the loan is introduced by a specialist.
- Interest rates — there is rate for risk. Generally private lenders are expecting a return of 9–15%pa, some even expect 20%.
- Short term loans — unlike banks that allow you to pay back in 30 years, most private lenders expect you to pay the loan back in 6–12 months, some of the more lenient ones will allow a couple of years.
HOW DO I QUALIFY for private finance?
Most private lending services will only lend on business purposes (non-coded / non-NCCP regulated loans). Business purposes can mean purchasing commercial property, cashing out to assist with cash flow of the business, or purchasing properties under company structures. The funds can’t be for personal use, e.g. purchasing a residential property for owner occupation. You will be required to sign a declaration that the fund is to be used for business purposes.
Private lenders will make decision based on 3 things:
- Security (location, LVR, asset class, etc)
- Purpose
- Exit strategy
Let us know how we could help. Speak with us today.
Submit a scenario now: twelvegrainscapital.com/scenario
OR call us: 1800 807 620
