What is Private Lending and Why Would I Use It?

If you’re in the commercial space or investing in property and an opportunity comes up fast, you may need a loan quickly to take advantage of the offer. You don’t want a great investment opportunity to pass you by because banks are slow in deciding if you can have a loan or not. If you’ve ever tried to get fast loan approval from a bank, you know how that story goes.

In general terms, it is much easier to get finance quickly from a private lender than it is by using one of the big four banks, or other formal lending institutions.

The traditional, normal way of raising funds is to apply to a bank, show them a pile of evidence and wait for them to make a decision. However, this isn’t always a viable option, especially if time is of the essence.

Hodgestone Finance is your first port of call for private commercial loans, being a premier facilitator of private lendding in Melbourne, servicing all of Australia. If you have a project ready to go in the eastern suburbs of Melbourne, or need capital for an investment in the Sunshine Coast, contact our team and we can help you with options, including Lease Doc loans.

In this article we’ll explain what a private lender is and why you can get fast solutions for projects that have a ticking clock on them.

Private Lenders Versus Traditional Institutions

When you’re considering finance for your commercial ventures, weighing up the options of going through a private lender or a traditional bank is important.

Banks generally have lower costs and are good for having long-term financing. They also have a solid and established reputation and are unlikely to fail as an institution. However they do have strict eligibility protocols, slow approval times and rigid procedures.

Private Lenders can give rapid approval turnaround times, often days, compared to months with the banks. They can customise terms of the loan to suit you and your business. Private lenders can often approve clients considered ‘high risk’ or poor credit borrowers.

However, with private lenders the interest rates and fees generally are higher which reflect the speed and convenience. Loan terms also tend to be shorter and there is a higher risk to the borrower if they default on the loan.

Who Would Use a Private Lender

Private lenders are often sought after by property investors, developers and business owners who need fast and flexible loans to take advantage of opportunities. The speed and ability to customise loans to each individual make private lenders a good choice.

If you have an irregular income or complex financial arrangements due to investment properties and rental income, private lenders can work with you to arrange the financing you need.

Complex financial arrangements can mean being cash poor but asset rich. As some of the loans available, such as a Lease Doc loan, would be repaid by rental income, this works well for those with portfolios of commercial and industrial properties.

Why Go Through a Private Lender

Looking at the pros and cons above it becomes clear why going through a private lender has its advantages for commercial loans.

Speed and efficiency. Private lenders are able to make decisions about funding far quicker than the banks can. Their flexibility can see them settling loans for you in days rather than weeks or months. This helps secure finance for projects that need a quick cash injection, or for bridging finance if you need to purchase a new property now, while it is available, before selling your old property.

Flexibility and customisation. Private lenders can tailor a loan to suit your needs, rather than you having to bend and fit into the shape a bank wants you to make. Unconventional or high-risk situations can all be catered for with a private lender. Rates and fees may be higher, but if it is deemed you can afford to service the loan, having the money now can be an advantage.

Alternative Approval Criteria. Private lenders focus more on security and collateral, such as the property and lease agreement you are providing to obtain the loan. They don’t focus so much on a borrower’s credit score or history. This means borrowers with bad credit can often find an option for funding through a private lender.

Common Sense. Private lenders are not restricted by the bureaucratic regulations of the major banks and financial institutions. This can allow more common sense lending rather than a refusal based on some fine print. Private lenders are still subject to legal protections against predatory lending, however. So they do have some regulations, which is important.

How do you go through a Private Lender?

You can be introduced to Hodgestone Finance through a network of financial planners, brokers or accountants. These people want to give their clients the best service possible, so they know to show you to our front door to discuss what you need.

The first step is to know what you need the loan for. Truly define what the loan will accomplish, how much you need and how you’re planning on repaying it. This helps us understand how serious and committed you are, and that you’re prepared to fulfil your obligations to the lender.

You will need to prepare all your documentation, such as an active arms-length lease agreement, a tenancy schedule and bank statements showing proof of rental receipts.

You can fill in a quick enquiry form with us, or call our Melbourne or Sydney to have a discussion to discover if we’ll make a great partnership. Once we’ve had this discussion, we would review the security, the lease agreements and other documentation.

If all goes well we would approve the loan fast. Once settlement has passed, you can use the rental income from your property(s) to service the loan.

The experienced team at Hodgestone Finance is here to help entrepreneurs and business professionals to build their portfolio and to make wise investment choices. If we can assist you with a Lease Doc loan to build and grow your business, then let us have a conversation.

What kinds of properties are eligible for a Lease Doc Loan?

Lease Doc Loans are suitable for a range of standard commercial property types, including retail spaces, industrial warehouses, and office buildings. Eligible properties must be situated within major metropolitan or regional areas.

Can I apply before securing a tenant?

Yes, you can still obtain pre-approval without a signed lease in place. However, approval will typically be conditional on securing a suitable tenant and a signed lease agreement within an agreed timeframe, which may vary depending on the lender.

How does the lender determine my borrowing capacity from commercial lease income?

Lenders will assess the financial standing of your commercial tenant, as well as how much time remains on the lease. Generally this needs to exceed 12 months. The required interest cover ratio can vary between lenders, so we recommend speaking with us to find the right fit for your situation.

What is an Interest Cover Ratio (ICR)?

The Interest Cover Ratio is a measure of how well your lease income services the interest on your loan. Required ICR thresholds differ from lender to lender, so it's worth getting an initial assessment with Hodgestone Finance so we can work out exactly where you stand.

Factors that can influence your ICR include the condition of the property, the financial strength of the tenant, and the length of the lease term.