The truth is Australians love to bash private lending as much as they love to bash Telstra for being too expensive. We bash it, but all know it has the best coverage and it is the most reliable! We love to hate it, and it has become part of its brand identity.
Similarly this is now what has happened with private lending. People must use it, but they love to hate it. Royce Stone Capital uses Telstra (our CEO, use to work for them) and we wouldn’t trust anyone else, despite the premium. If it isn't broken, don’t fix it.
All too often the bad stories of private lending are shared, predatory lending and high interest rates etc. This is less than 1% of cases, and not the 99% of the good stories you never hear about!
The good stories of a private loan / private lender
- A business being saved because a bank wasn’t willing to lend it money, due to serviceability requirements, despite there being enough security and the client having a 10 year track record.
- 1000's of Jobs being made or saved because a private lender was wiling to provide a private loan, when the business or property developer couldn’t’ get funds.
- The property developer that made a fortune because he didn’t have to wait on meeting high debt coverage ratios that the bank had in place, allowing him to reuse money quicker!
- The joint ventures and partnerships that later came about because the lender trusted the borrower. Or in our case a family office that JVs with our clients.
Are you noticing a trend now with private loans?
That trend is simple.
When banks aren’t willing to take the risk, even with clients that have been with them for 20 plus years, a private lender is!
Private lending is willing to do what the banks aren’t.
Is a private loan more costly based on interest alone? Yes, and rightly so, as the investor must be compensated for the additional risk, also know as the risk premium in finance.
Does a private loan cost the borrower more?
The answer is if you calculate it purely on interest rate compared to a bank, yes!
But, if you calculate it in terms of opportunity cost, private lenders outperform banks for short term and medium-term lending every day of the week.
If you had a $100M dollar business, that required just $100k to save it. How much is that $100k dollars’ worth if a bank wouldn’t give it to you, and only one party could?
I have serviced clients in that exact situation! We can do it, because we are backed by family offices that trust us.
What is the real cost to you, for a private loan?
Whether you need a first mortgage private loan, second mortgage loan or caveat loan, or bridging finance, what is the real cost of a private loan?
To put it simply it is the opportunity cost of not using capital made available to you, and you having to pay more tax!
If a borrower didn’t use private lending, what would happen?
If a business or property developer needs urgent funding, and the bank won’t give it to them, the opportunity cost of not using a private loan, is that they potentially risk losing their business.
Or it could mean a business owner will miss a massive business opportunity and the profits made from such a deal, as well as the reinvestment of those profits.
The cost of not using private lending
Is essentially what could happen if you didn’t use those funds, if they were made available to you!
Our smart clients realise that the way to conquer this conundrum, isn’t to do an either-or decision between bank funding and private lending. But simply, it is to use both and for them to complement one another.
Put simply, if you had the funds you needed, as you needed them what could you achieve as a business owner or property developer?
Private loans and tax.
Now let’s go one level deeper.
For a business or builder / property developer to demonstrate serviceability to a bank, they must show profits in their financials, tax returns, history and thus pay more tax.
This could require a business to crystallise profits (sell assets or not incur certain expenses to grow) sooner rather than later, just to demonstrate serviceability to get funding from the bank.
This means the borrower must pay more tax in the short term, and that they may have to miss out on potential future capital growth in their assets or business. Which is essentially a double tax.
This is another cost to not using private lending!
Whereas with private lending, most solid private lenders that are purist (they are getting fewer and fewer), will only look at the quality of the security, without the serviceability requirements as a primary. Meaning as a borrower you don’t need to pay more tax or lose future capital growth!
Now you know, what most don't know. Given your new knowledge now, what will you do with it?
For a confidential discussion, to help you thrive, click here.
