An introduction to the private lending world
If you are looking for a guide to help you understand private lender qualifications, this article will help explain how to approach your next private loan. This will be a beginner’s guide to provide you with an overview of private lending, its benefits and help you get a clear picture of how it is superior to bank funding for short- and medium-term debt.
The main difference between private lenders and banks, is that they have less pre qualifications for a loan. The primary interest of a bank is serviceability and the security / collateral. Whereas with a private funder, their primary focus is only on the security. Because private funders are taking more risk, their pricing is more expensive at face value, but this is countered by the ease at which you’re able to get money and put funds to active use.
Understanding private loans
You may be asking what is a private lender? In short private lenders are non-bank lenders that can be an institution such as La Trobe Financial, a fund set up for private lending (with investor capital) or a wealthy Individual lending their own funds.
There are different private financiers in the market, with different licences. Some can lend to consumers, and others for business and commercial reasons only.
The main difference between private financiers and banks, is the ease at which they can provide capital with less prerequisite qualifications.
At Royce Stone Capital, we only deal with lending for businesses and investments. Our business model is unique, as we source funds from a family office directly for our clients. This gives our clients the ability to deal directly with decision makers, and a family that understands the challenges of being in business. It also provides a lower cost of capital, as a family office has bulk funds that they need to deploy, instead of it sitting idle!
The other beautiful thing about private lending compared to a bank, is that private lenders can later become business partners and JV partners, if they become confident of your abilities.
Private capital is focused on providing ease of capital. This means funds can be provided within a week if necessary and if you're working with the right lending parties, such as a family office.
Key eligibility criteria for private lenders
Depending on the type of private loan you are seeking, and who you are sourcing funds from, the eligibility for a private loan varies. The main difference between banks and private financiers, is that their eligibility requirements are far less.
Some private lenders will look at your credit score, whilst others won’t. Some will require proof of serviceability such as an accountant’s letter (low doc loans) others won’t. Others may ask for proof of income, and or bank statements as supporting evidence.
At Royce Stone Capital, we focus only on no doc loans and with no credit checks. The deals we work on have a primary focus on what the quality of the security is, and your exit strategy.
Credit score considerations
Some private financiers will do a credit score check on a borrower, whilst others won’t. Doing a credit score check for a private lender, is typical of institutional private lenders, and some funds now that try to get a full understanding of borrowers.
As more private lenders become wholesale funded by large institutions or have warehouse facilities from banks, they increasingly have to meet key borrower metrics such as credit scores. This means more and more lenders are now becoming like banks, or quasi banks rather than purist private financiers.
At Royce Stone Capital we believe in purist private financing. That is, private lending solutions that don’t require a credit score and where only the quality of the security is looked at, and exit! This means you get capital immediately without all the red tape and headaches. To this effect, your credit score will not effect your private lending eligibility through us.
Income and financial stability for private loans
The income verification requirements for private loans varies greatly from one private financier to the next. Some will require proof of income and proof of financial health as part of their application process, whereas others won’t. It is important that you as a borrower work out what is required from a private financier as part of their application process before you sign any documentation. This will give you a good indication of your chances of success with that lender.
Where most banks and large private lenders are focused about financial income / stability, most purist private financiers are only concerned about the quality of the security and the exit strategy. The exit strategy being the mechanism / event that allows the loan to be repaid, such as a sale of assets or business venture.
At Royce Stone Capital our primary focus is the quality of the security, as most of our family offices do not require income verification.
The role of collateral in private loans
Collateral requirements in private lending are by far the important aspect of securing a private loan. The primary focus of private financiers is the quality of security / collateral you provide.
You may be asking, why do private financiers focus on collateral / security so much?
Essentially private financiers are taking on more risk by not focusing on your serviceability and credit score as much. Consequently, because they are not relying on your serviceability and financials as much, most of their focus is on the quality of the security for a worst case scenario. As such, they may offer lower LVRs than banks, to give themselves enough of a buffer should they need to take possession of an asset and sell it if a loan goes bad.
As a rule of thumb, first mortgage loans typically go up to 65% LVR, and anything above 65% up to 80% LVR is done at second mortgage rates.
Additional qualification and requirements for a private loan.
Additional requirements for private loans are that you must be very clear about the exit. Private financiers are happy to absorb additional deal risk if there is a clear exit. What is an exit, basically it is how you will repay the debt!
This can be from a sale of asset, or it may be a business venture that you’ve entered that will provide profit to repay the debt.
Private financiers are unique in their lender qualification requirements, because each will have their own criteria that will need to be fulfilled by a borrower. Because of this, there is no one unique fits all method.
How to prepare for a private loan application
The steps you’ll need take for a private lending application are as following.
- Have your ID ready.
- Have a borrowing company or trust.
- Have a valuation of your property security or an owner estimated valuation (a valuation if required will be done later).
- Have a clear explanation of how you will repay the debt.
- Discuss your experience and what you’ve done in the past that may be relevant to the loan.
- Provide evidence of your ability to service the debt if you’re paying monthly.
Preparing for a private loan application is relatively easy, compared to a bank. The most important thing however to select the right private lender for your specific situation, as different private lenders have different deal preferences.
Conclusion about private lending.
In summary of private lender qualifications, the most important thing to remember is that they are primarily focused on the quality of security / collateral being provided for the private loan. If you can provide good quality security, you should be able to get a private loan, with decent rates. You must also remember that the bulk of private loans are non coded loans, meaning they be for business purposes not consumer or personal in nature.
What next for your private loan?
For your next private loan and to explore your private lending options, you can visit our page here.
Alternatively, to have a confidential discussion, feel free to contact us at Royce Stone Capital.
