Private Lending and Its Challenges

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Private lending has become increasingly popular among Australian business owners as a solution for those who have been unable to secure financing through traditional banking channels. Private lending offers several benefits, such as flexible loan terms, fast processing times, and the ability to be used for any business purpose. However, there are also inherent risks associated with private lending that business owners should be aware of before deciding to pursue this option for their business lending needs.

Read next: Keeping Your Head Above Water With Private Lending

Understanding Private Lending

Private lending involves borrowing money from providers that are not traditional banks or financial institutions. Private lenders can include private loan companies with their funding lines, financial planning investment funds, high-net-worth individuals or a combination of these. 

Private lending providers offer a variety of loan types, including: 

  • 1st mortgages, 
  • 2nd mortgages, 
  • property development and construction loans, 
  • bridging finance, 
  • caveat loans and
  • short-term property loans.  

Whilst it’s common for private lenders to offer 1st and 2nd mortgages in particular, construction and property development finance is considered more specialised and not offered by many lenders.

Some lenders prefer security in capital cities only but private lending is available on most property types in both metropolitan and regional areas.

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The Benefits of Private Lending

One of the most significant advantages of private lending is its accessibility. Business owners who have poor credit scores, a history of bankruptcy or defaults can still secure funding through private lenders.  We’ve achieved approvals for a number of clients who were previously declined by banks and other lenders.

The loan application process for private lending is typically focused on the value of the security property and the exit strategy from the loan making it a genuine low-doc lending alternative.  This makes the loan process is much faster and less stringent than traditional bank lending, which in turn allows you to receive your funding more quickly.

Another benefit of private lending is its flexibility. Unlike traditional lending, whose policy may only allow loans to be offered for a specific purpose, private lenders will allow lending for any genuine business purpose including:

  • Working Capital
  • Property Purchases
  • Tax Debt Loans
  • Cash-out
  • Bridging finance
  • Debt Consolidation
  • Property Development
  • Refinancing other private loans
  • Term extensions to development finance
  • Funding for residual stock
  • Notice to Complete loans
  • Purchasing plant & equipment

This flexibility can be particularly useful if you find you need funds fast for an opportunity or to plug a hole.

The Risks of Private Lending

Despite the benefits of private lending, there are also inherent risks that business owners must be aware of before pursuing a private loan solution. One of the risks is the lack of regulation for private finance loans to business entities as they do not fall under responsible lending laws in Australia. While consumers have specific legal protections, businesses do not have the same level of protection.

Another risk associated with private lending is the short-term nature of many private finance loans. Business owners must have a sound exit strategy in place before borrowing funds, as these loans often come with high interest rates and short repayment periods.  For this reason, we favour private lenders with a track record of rolling over loans at the end of term and who demonstrate a customer-focused approach to rates and fees and seek to return our clients to more traditional commercial loans as quickly as possible.

Private Lending and Real Estate

Private lending can be particularly useful for completing real estate transactions and bridging finance until traditional funding can be put in place. With private money lenders offering loan terms as short as one month, flexible loan terms can be tailored to fit your specific needs irrespective of whether you need bridging finance or, perhaps, when you’ve been issued with a notice to complete. 

Whilst the solutions offered by private mortgage experts and private mortgage lenders can provide business lending options that may not be available through traditional channels, you should be aware these loans can come with higher than bank interest rates and will require an appropriate amount of property security.

Finding a Private Lender

Private lending is a specialised lending niche.  We strongly recommend you seek guidance from a private financing expert with demonstrated experience in providing business owners with funding through a number of private lenders.  

If you are going it alone, business owners who are considering private lending should thoroughly research potential lenders before agreeing to a loan or signing an offer. Make sure the lender has a track record of settling the amount of funds you require with the security you’re offering before you sign any contracts or agree to any fees.  It’s important to understand the fee structure if there are penalties within the contract for defaults and what those might be.

Choosing the right Private Lending Partner

Private lending can be a valuable financing option for Australian business owners, particularly those who may not be able to secure funding through traditional channels. However, it is essential to understand the risks associated with private lending and to thoroughly research potential lenders before agreeing to a loan or signing any contracts. By doing so, you’re more likely to realise the benefits of private lending while minimising your exposure to potential risks.


To talk to an expert about private financing for your business contact us here.

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