The Ultimate Guide To Private Lending Finance Terms

Understanding finance concepts and finance terms can be very confusing, especially when it comes to industry jargon and private lending.

That’s why we created this article to ensure Australian business owners and investors, could improve their financial literacy.

This guide breaks down the essential terms and concepts in.

1. Private lending
2. Invoice finance and cash flow management
3. Compliance and legal terms

The terms and concepts explain this article may be different from typical academic explanations, as we aim to explain real world concepts. As a function of time we will continue to update this glossary.

General Private Lending Terms

Private lending broadly speaking can cover a number of lenders, such as second tiers (La Trobe etc) , third tiers (Pepper etc), funds and, family offices and HNW individuals that lend money outside of the banking system. However, private lending typically refers to private funds, family offices, HNW individuals and SMSFs that lend their money out.

Typical concepts related to private lending.

• Equity Financing: Using your property or assets as collateral to secure funding. This can include property, equipment or alternative assets.
• Shadow banking: Lending that happens outside of the banking system, typically in the private system.
• Asset backed lending: Lending where an asset of some type is provided as security.
• Alternative Financing: Any funding source outside of traditional banks, such as second tier, third tier, private lenders or fintech companies.
• Non-Conforming Loans: Financing solutions for borrowers who don’t meet traditional bank criteria.
• Refinance: The practice of getting credit from another credit provider, to payout an existing credit provider.

Technical terms you should be aware of in finance and private lending.

• Loan-to-Value Ratio (LVR): The percentage of a loan relative to the value of the collateral property / asset.
• Loan term: the length of the loan.
• Gross loan facility: The total facility available to you in dollar terms, but not necessarily the net funds you’ll receive on settlement after all fees are deducted.
• Paid in advance: Means the loan costs that are deducted from the gross loan facility, such as app fees, legals, interest, valuation costs or any other lender costs.
• The main feature of paid in advance relates to interest. Whether the interest is paid in advance for one moth, or the whole duration of the loan. This is typically determined by the type of loan facility you are getting.
• Net loan amount: How much the borrower will receive on settlement of a loan, after all fees have been paid out of the gross loan facility. This can include the payment of app fees, legals, interest for the total loan period or just a portion etc.
• Face value interest rate: The quoted interest rate charged on the gross loan amount.
• Effective rate of interest: The actual interest cost on the net funds received in hand on settlement. The effective rate is different from the face value rate, especially on loans where interest is paid in advance.
• This is because interest paid in advance deducts interest from the gross loan facility and leaves the borrower with the net funds, after all costs are paid in advance. Because the lender technically is providing less funds to the borrower on settlement after all fees are paid in advance, the effective rate of interest is higher for the borrower on the net received funds.
• Where interest is paid monthly, the effective rate typically matches up with the face value rate.
• Valuation: The process of determining the value of an asset or project, by the lender or an independent third party. Valuations are a complex matter, because different valuers can apply different methodologies or come to different conclusions about the underlying asset value.
• Valuations can be done in one of two ways. In house or by an external third party. Valuations that are done in house, are done internally by the lender. This can be via database, industry contacts or their own assessment. External valuations are done by a third party that is paid for by the borrower in most cases, acting in the interests of the lender.
• As is value: Refers to the current value of an asset, in its current state, regardless of what future up kick in value may occur from permits being granted in future.
• First mortgage: The lender that has the first ranked security position or first claim against an asset and or business. The party holding this position will be paid out first, in the event of refinance or sale. This party typically has the right to enforce the sale of an asset in the event of default of its terms.
• Second mortgage: The lender that has the second ranked security position or second claim against an asset and or business. The party holding this position will be paid out second, in the event of refinance or sale. This means there must be adequate equity left after the claim of the first mortgage holder for the second mortgage holder to be paid out what is owed to them. This party typically has the right to enforce the sale of an asset in the event of default of terms.
• Caveat: A party that has a security interest or claim against an asset and has the legal right to lodge a security interest against the asset. A caveat does not out rank a mortgage registered prior to it, nor does it give the holder the right to put the asset to sale. If a property is sold, and there is negative equity, a caveat holder can not stop the sale.
• Credit score: As an individual you hold an individual credit score and also a business. Your credit score is based on several factors including debts, credit applications and past payment history. Most main stream lenders require you to have . Generally speaking, private loans do not factor in credit scores as part of your application at RSC.
• No Doc Loans: Unlike banks or second tiers, that require you to submit financial information, for a full doc or low doc loan. Most purist private lenders and like the deals we do at Royce Stone Capital, do not require loan documentation.

Invoice Financing

For businesses, managing cash flow is critical to success. Invoice financing provides a way to unlock funds tied up in unpaid invoices. Understanding key concepts surrounding invoice financing is critical to unlocking your business success.

Typical concepts of invoice financing are.

• Factoring: Selling unpaid invoices to a lender (the factor) in exchange for immediate cash.
• Invoice Discounting: Borrowing against the value of your unpaid invoices while retaining control of collections.
• Accounts Receivable Financing: Using your receivables as collateral for a loan.

Technical terms for invoice financing.

• Advance Rate: The percentage of the invoice value a lender provides upfront.
• Non contestability: For invoice financing to take place, the invoices being financed by the lender mustn’t be able to be disputed for quantity or quality. This is a key sticking point for invoice financing because the lender must be certain, that when the invoice falls dueit will be paid in full so the lender can collect their 100 cents in the dollar.

• Credit Control: Managing customer credit terms to reduce the risk of late or non-payment. Credit control when it comes to invoice financing is of particular importance, because non payment of a financed invoice could mean the invoice is either fraudulent, being contested for quality or quantity, or there is a legitimate delay. It is therefore imperative for invoice financiers to ensure that they stay on top of invoices being paid by debtors, before advancing extra funds to a borrowing client.
• Interest rate: The rate of interest that is charged to you as a borrower is in one of two ways for invoice financing.
• The first is interest being charged on the actual funds provided to you. So for example If the lender is giving you 80% of the invoice amount. Then they will only charge x percentage of interest on the 80% of funds provided as you draw down.
• The second way, is where the lender charges you a percentage of the invoice amount, but only provides you with a 80% of the invoice amount. In this instance the effective rate is higher than the quoted face value rate, because it is being charged as a percentage of the invoice amount rather than the funds provided to you in your hand.

Why Choose Royce Stone for Private Lending?

At Royce Stone, we specialise in delivering tailored private lending solutions that meet your unique needs. Whether you’re seeking flexible property loans, invoice financing, or short-term bridging finance, our team offers:

• Fast Approvals: Access funds quickly, and settleed within the week.
• Tailored Solutions: Loans designed to suit your goals and circumstances.
• Transparent Terms: No hidden fees, just clear, straightforward advice and fees.

To learn more about private loans click here.

To learn more about first mortgage private loans click here.

To learn more about second mortgages click here.

To learn more about invoice finance click here.

To speak to us about a tailored solution for you, click here.