Key Takeaways
- Private lending is when you borrow money from individuals or lending businesses that aren’t banks.
- Traditional bank loans refer to borrowing from one of the Big Four banks and other banks across Australia.
- Private lending is faster and more flexible than banks and now can have loan terms as long as 30 years.
- Some businesses find it harder to get loans from banks because of stricter eligibility requirements. Although rates are usually lower and repayment terms can be longer.
- Businesses that need funding quickly or don't meet bank requirements may want to work with private lenders.
- Business owners should choose the option that best fits their financial goals and needs, since both have pros and cons.
- To find the best option for your business, work with experienced mortgage brokers like Dark Horse Financial. We'll help you get the right kind of lending based on your situation.
Having access to financing is a big part of how well Australian businesses do and how fast they grow. When looking for ways to get funding, business owners often compare private loans to bank loans. Depending on the borrower’s situation, financial history, and business goals, both have their pros and cons. Banks are still the primary way to get a business loan, but private lenders are becoming more and more important in the finance world. Many businesses find their speed and flexibility useful.
What is Private Lending?
Private lending in Australia refers to loans provided by non bank lenders, like private individuals, privately owned businesses, specialist finance firms, or contributory funds with an investor base. Private lenders don’t have to follow the same rigid regulations as banks. This lets them be less conventional with how they set up loans and assess risk.
Private lending in Australia is often used by businesses that:
- Do not qualify for bank loans due to credit history, lack of financial records, or unconventional income.
- Require fast access to funds for time sensitive opportunities.
- Need short term financing solutions, such as bridging finance or caveat loans.
Private lenders used to charge higher interest rates and fees than banks but with so many options in the market now, sometimes rates can be lower than a bank.
What are Traditional Bank Loans?
Traditional bank loans are loans from established banks, like the Big Four banks and regional banks in Australia. The Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investments Commission (ASIC) set strict regulations for banks that make their lending practices more consistent and less risky.
Bank loans usually have lower interest rates than private loans, and they also usually have longer repayment terms. But the application process can take longer and may need a lot of paperwork, like tax returns, financial statements, and other proof of serviceability. It can take weeks or longer to get approval, which may not be good for businesses that need funds right away.
Key Differences Between Private Loans and Bank Loans in Australia
When comparing private lending vs bank loans, several differences stand out:
Speed of Approval
- Private Lenders: Can approve and release funds within days, sometimes within 24–48 hours.
- Banks: Can require up to 10 weeks (or longer) of review due to compliance checks, systems processes and detailed financial assessments by internal Risk teams.
Eligibility Requirements
- Private Lenders: More flexible, may lend to businesses with poor credit or incomplete financial records.
- Banks: Require strong credit history, detailed documentation, and consistent, demonstrable profitability.
Loan Costs
- Private Lenders: Usually higher but not always.
- Banks: Usually offer a greater breadth of credit solutions at lower rates.
Loan Structure
- Private Lenders: Tailor loan terms to suit individual borrower needs, including short term or interest only arrangements.
- Banks: Offer more standardised loan products with less flexibility.
Risk Assessment
- Private Lenders: Focus less on credit score and more on the borrower’s general asset position and exit strategy for the loan.
- Banks: Place greater emphasis on proof of income serviceability and credit score.
Pros and Cons of Private Lending vs Bank Lending
Advantages of Private Lending
- Quick access to funds for urgent opportunities.
- Flexible loan structures that can adapt to unique business needs.
- Willingness to consider borrowers with lower credit scores.
- Less emphasis on paperwork and formal documentation.
Disadvantages of Private Lending
- Can sometimes be higher interest rates and fees compared to banks.
- Less regulation than established banks.
Advantages of Bank Loans
- Usually lower interest rates.
- Greater safety nets for customers due to strict regulatory oversight.
- A wide range of loan products, including overdrafts and business lines of credit.
- Stronger protections for borrowers.
Disadvantages of Bank Loans
- Lengthy approval processes that can delay funding.
- Strict eligibility requirements that exclude many businesses.
- Less flexibility in tailoring loans to unique circumstances.
- Heavy reliance on financial documentation and past performance.
When to Choose a Private Lender Over a Bank in Australia
Business owners may choose private lending in situations such as:
- Urgent need for funding where waiting weeks is not practical.
- Difficulty meeting a bank’s strict criteria due to credit score or income documentation.
- Short term financing needs, such as bridging finance during property transactions.
- Opportunities requiring fast action, such as purchasing discounted stock or funding a time sensitive project.
Banks may still be the better choice when:
- The business meets the eligibility requirements and can access low cost finance.
- Long term funding is needed with predictable repayment schedules.
- Borrowers want the security and protection that come with regulated financial institutions.
What Risks Are Involved With Private Lending Compared to Bank Loans?
While private lending offers valuable advantages, business owners should be aware of the risks:
- Higher Costs: Interest rates can significantly increase repayment obligations.
- Shorter Terms: May create cash flow pressure if businesses cannot refinance or repay quickly. Having an exit strategy is a must.
- Lack of Regulation: Businesses have fewer levels of protection than if they choose banks.
Commonly Asked Questions
What makes private lending more flexible than banks?
Private lending is more flexible because regulations are less strict and lenders are more willing to tailor loans that fit your needs. Private lenders can
- Approve loans despite lack of documents.
- Allow borrowing despite a low credit score.
- Adjust repayment schedules to match business cash flow.
Banks, in contrast, have to apply standard policies across all borrowers, leaving less room for negotiation.
Why do private lenders charge higher interest than banks?
When private lenders lend to businesses that might not meet bank standards, private lenders take on more risk. Many lenders make up for this by charging higher fees and interest rates but private lending rates are now cheaper than they have been in the past and can be cheaper than banks in some circumstances.
Can I get faster loan approval from a private lender than a bank?
Yes. People know that private lenders are quick to assess and approve applications. Banks might take weeks or even longer to process applications, but private lenders can do it in just a few days. This makes them a good choice for businesses that need money quickly.
Are there private loans for borrowers refused by banks?
Yes. In Australia, private lenders often give loans to people who don’t meet the requirements of banks. They look at applications more carefully, focusing on how much the borrower can pay and how valuable the asset security is (if there is any). It’s important to remember that interest rates are usually higher.
Final Thoughts
When Australian business owners have to choose between private lending and traditional bank loans, they look at the cost, speed, and ease of access. Businesses that meet the requirements and need long term, low cost financing still turn to banks. But private lenders fill a big gap by giving businesses that can’t get bank loans or need money right away quick, flexible funding.
To make a smart borrowing choice, you need to know the pros and cons of each option and how they differ. By making sure that the choice fits with their business goals and financial situation, business owners can make sure they get the type of financing that works best for them.
Disclaimer: Loans and their accompanying benefits are available only to those who qualify for them and have been approved. Though we put a lot of care into writing this article, the information presented within is general and doesn’t consider your unique situation. It is not meant to serve as a substitute for professional advice, and you should not rely on it solely for any major financial decisions. You should always consult with a professional when you’re dealing with finance, tax, and accounting matters.
Get the Lending You Need
Whether you choose to borrow from a bank or a private lender, choosing the right lender is important to get the best deal for your loan. Dark Horse Financial can help connect you to the right institution and make sure you get the best rates and terms possible. Send us an enquiry today.
