Private Lending

A private lender is lending against the day the loan ends. Before anything else, we work out what that day looks like and whether it is real.

• A refinance to a bank or non-bank facility, once financials are lodged, arrears are cleared or a trading period has been demonstrated.
• A property sale, with a realistic marketing period and a valuation that supports the number.
• A settlement already contracted, such as a sale that has exchanged.
• A capital event: a receivable landing, an insurance payout, a distribution.

Hope is not an exit. Neither is the general belief that trading will improve. If the only plan is that something will turn up before the term expires, the honest answer is that the loan should not be written, and we will say so.

This is the situation where private lending earns its cost. Two examples come up constantly, and both run on a 21-day clock.

Director penalty notice

21 days

The clock starts

The date on the notice

Statutory demand

21 days from service

Bank credit assessment

Weeks, not days

A director penalty notice

A director penalty notice makes a director personally liable for certain company tax obligations. The clock runs from the date on the notice, not the date you read it. The options available depend on whether the amounts were lodged on time, which is what separates a lockdown notice from a non-lockdown one. Where paying the company’s liability is the answer, funds have to be available inside the window, and private lending against property is one of the few routes that moves at that speed. Read our page on director penalty notices, and get advice from a registered tax agent or an insolvency practitioner about which option applies to you.

A statutory demand

A creditor’s statutory demand gives a company 21 days from service to pay the debt, come to an agreement, or apply to the court to set the demand aside. If none of those happen, the company is presumed insolvent, and that presumption is hard and expensive to undo. Funding the debt inside the window is often the cleanest answer, and again the timeframe rules out a normal bank process. Our page on statutory demands and winding up sets out what the notice means; a solicitor should advise on whether to set it aside.

Private funding is more expensive than bank funding, and it should be. You are buying certainty and speed from a lender taking more risk with less information. What matters is that every cost is visible before you commit.

• Interest, generally charged monthly and often prepaid for the term or capitalised into the loan, so it is funded rather than paid from cash flow.
• An establishment or line fee, usually a percentage of the facility.
• Lender legal costs, passed through to you, plus your own legal costs.
• Valuation, paid by you, and on a short-term file the lender may rely on a figure reflecting a limited marketing period.
• An exit or discharge fee in some facilities.
• Brokerage. Where a fee is payable by you on a private transaction, you will see it in writing, with the amount, before you commit to anything.
• Default interest, which applies if the term expires and the loan is not repaid. This is the cost that hurts, and it is entirely avoidable by planning the exit.

Prepaid interest

Interest for the whole term deducted from the advance at settlement. You receive less than the face amount, and the cost is fixed and known from day one.

Capitalised interest

Interest added to the balance each month rather than paid. Nothing leaves your account during the term, and the payout figure at the end is larger than the amount you drew.

Default interest

The higher rate that applies once a term expires without repayment. It is a step change rather than a nudge, and it is the cost that does the damage.

Discharge fee

The charge for releasing the security when the loan is repaid. Ask for it at term sheet stage, because it belongs in the total cost.

Ask for the total cost of the facility over its full term, expressed in dollars. Then compare that against what the deadline would cost you if it is not met. That comparison, not the rate, is the decision.

1. 01

   Establish the deadline and the security on the first call

   What is the date, what property is available, who is on title, what is already registered against it, and what is owing on any existing mortgage.

2. 02

   Confirm the exit before we approach a lender

   If we cannot describe the exit in a sentence with a date in it, we work on that first.

3. 03

   Get an indicative term sheet quickly

   Amount, term, all fees, all conditions. You should be able to see the total cost in dollars at this point, not later.

4. 04

   Valuation and legals in parallel

   On a short-fuse file nothing runs sequentially. The valuer is instructed while the documents are being prepared.

5. 05

   Settlement

   Funds go where they need to go, whether that is the ATO, a solicitor’s trust account, or a creditor. Where the payment answers a notice, evidence of the payment matters as much as the payment.

6. 06

   Start the refinance the week after settlement

   This is the part most borrowers skip, and it is the part that decides whether this was a good decision. We work on the exit from day one.

• The security is real property, often a home or a commercial building. If the loan is not repaid, the lender can enforce against it. That is the whole basis of the product.
• Terms are short. A three or six month facility comes around fast, and extensions are at the lender’s discretion and usually cost more.
• Capitalised interest means the balance grows during the term. The payout figure at the end is larger than the amount you drew.
• Default interest is a step change, not a nudge.
• If the exit fails, the options narrow quickly. This is why we insist on a real exit rather than an optimistic one.
• This is not a solution to an unprofitable business. If the trading position is the problem, borrowing expensively against the home makes it worse, and we will tell you that rather than write the loan.

We have seen worse and found the way through. That does not mean every way through is worth taking.