This article is designed to help explain what private lending is and who provides it. It will cover the basics of what you need to know in order to find the right solution for your needs.
What is private lending?
Private lending is the marketplace where non-bank financiers (sometimes called private financiers) lend money to businesses. In other words, it’s a funding channel between non-bank entities that have capital to lend and businesses seeking capital.
Private lending is sometimes called shadow banking because it exists outside the traditional banking system. It’s an important part of the overall economy, as it can offer liquidity and funding solutions that banks cannot or will not provide.
Why does private lending exist?
These private financiers typically take on more risk than a bank and have fewer strict conditions. For instance, many focus more on the quality of security (the asset being used as collateral) rather than serviceability. They often don’t require two years of trading history or place heavy emphasis on credit scores. Because they assume more risk, the cost of capital is usually higher than what a bank would offer.
However, the benefit for businesses is that they can secure funding far more easily than going through a bank—especially when a bank refuses to fund them. The privage lending market fills a gap between what traditional lenders will provide and what businesses need.
Who provides this type of lending?
Capital can come from finance companies, family offices, high-net-worth individuals, and self-managed super funds (SMSFs) that are willing to lend to businesses. The investment side of this market is known by various names including private credit investments, mortgage-backed securities, corporate credit, or private debt investments.
Often, investors pool their money into a private fund, which then lends to different businesses according to its mandate. Other funding arrangements, such as those offered by RSC, are direct lending deals between family offices and businesses, resulting in more flexible terms and lower costs of capital.
What are the regulatory requirements?
These loans serve the needs of business owners and investors, so they are structured to be more flexible and not restricted by the National Consumer Credit Protection Act (NCCP) 2009. Since they fall outside the NCCP, they can provide far more adaptable terms and quicker access to liquidity.
The NCCP places responsibility on lenders to ensure consumer loans are suitable, and the risk on the lender in many cases. Because private loans falll outside of the NCCP, it is up to the borrower to confirm they can meet the terms of the agreement.
That said, even outside NCCP Act, there are still commercial laws and legal precedents that non-bank lenders must adhere to for responsible lending.
Why do people use private lenders?
Business owners choose these funding sources for a variety of reasons, including:
- Loans can be settled within a week.
- Emphasis on security rather than serviceability.
- No-doc options, meaning financials aren’t always required.
- Reduced focus on credit scores.
- Funding for deals banks won’t take on.
- Ability to capitalize interest so regular repayments aren’t necessary.
- They can arrange second mortgages.
- Will take on riskier projects, such as land banking and service stations, which banks often avoid.
Click here to learn more about private lending service offerings.
Click here to learn more about first mortgage private loans.
Click here to learn more about second mortgages.
