People often ask me what is Private Funding / Lending and how does it work. So I thought I’d lay it out in a nutshell:
Private funding is where customers receive loans from private investors, solicitors’ funds, boutique lending firms and the like.
Funds are usually pooled by the fund manager from individuals or institutions that want a higher return on investment and usually have a higher risk appetite.
How does it work?
Private loans are generally short-term in nature i.e. 3-12 months, are reserved for commercial entity borrowers / commercial purposes, and rely on a defined exit strategy to pay out the loan, such as:
- Sale of assets
- Cash flow
Serviceability is not always required, because one of the features of private funding is the full capitalisation of fees and interest into the loan (where possible). Then the full amount (principal plus interest and fees) is paid out at the end of the term as a lump sum.
Another feature is that some private lenders will provide funding against a 2nd mortgage or caveat.
Interest and fees are usually more expensive than mainstream lenders due to the higher risk associated with this type of lending.
What are some reasons private loans are used?
For some, private lending is the only avenue left for them to be able to access funding, and this might be for several reasons such as:
- Mainstream banks may not have any appetite for the proposed use of the funds – e.g. development / construction lending has really slowed due to mainstream lenders holding back in this area. This has led to many property developers not being able to access funding to start / finish their projects. Therefore the higher rates and fees become incidental as the primary focus is to complete a project and collect the profits.
- Unforeseen business events – sometimes, things happen in business which create a credit file, account behaviour or cash flow issue which cannot be overlooked by mainstream commercial lenders.
- Quick access to funding – some private lenders can turnaround applications and settlement within a week. This becomes vital where a property settlement is due imminently and / or a rescission notice has been issued. It can also provide for agility and enable the snatching up of a great deal.
- Debt consolidation – payout of ATO debts or potentially hostile creditors is often another reason private loans are taken.
The above are just a few scenarios that may require private funding. However if you think you or someone you know have a similar situation or are unsure of what your options are, feel free to reach out. The important thing is to discuss your situation before it becomes a problem.
For others, private lending is the preferred method to access funding despite the higher rates and fees. Some benefits include:
- Quick access to funding – as mentioned above.
- Avoid the need to jump through hoops – sometimes, mainstream lenders’ criteria can be quite onerous.
- Financials are not always required – this means that there are less documents to collate.
- Equity can be released without the need to refinance everything – as mentioned above, some private funders will lend against a 2nd mortgage or caveat.
Therefore, private funding can also be an effective business tool, rather than just a last resort arrangement to get you out of trouble.
However, this type of lending should always be discussed with a professional. So get in touch if you wish to discuss your scenario.
Disclaimer: The information provided herein is for general information purposes only and does not constitute specific advice. It should not be relied upon for the purposes of entering into any legal or financial commitments. Specific advice should be obtained from a suitably qualified professional before adopting any investment/financial strategy.