Private Lending
What is Alternative Lending or Private Lending?
When banks say No, private lending may be a viable solution. Private lender essentially lends money with a focus on value of asset, unlike traditional banks lending that focus much on income serviceability. Thus at times it can be called asset lending. Private lending is primarily for business purposes, and do not fall under the National Consumer Credit Protection Act. Private lending is emerging as a very popular solution for sophisticated property investors, property developers as well as small business owners who seek quick financing alternative.
Private lending as per above mentioned at times called asset lending, thus real estate backed. The loans can come in the forms of first or second ranked mortgages, that will vary in costs. The type of asset to be secured can usually be residential property, commercial property, industrial property, vacant land, real estate projects, etc. And LVR usually max 65% to 75% depending on the type of asset/security. Private lending also suits borrowers who may only need a shorter term bridging loan solution, for instance 3 months to 12 months loan term.
Although private lending is unregulated under the National Consumer Protection Act, it doesn't mean it's akin to unethical practice, however being careful when dealing with lenders and it's always important to only engage with reputable lenders. N1 Holdings is a direct lender, compliance as per ASIC and ASX-listed entity, with corporate mission to be an ethical lender.
N1 Holdings wholly owned subsidiary "N1 Asset Management", operates as a fund manager and manages a pooled mortgage fund, as a direct lender providing solutions to sophisticated investors, project developers and SME owners. Aprt from pooled mortgage fund, N1 also connects investors with borrowers via contributory fund lending.
Common loan purpose:
1. Bridging - Buy before Sold
2. Purchase
3. Equity Release
4. Renovation
5. Working Capital
Commercial Property Purpose
1. Residual Stock
2. Development Site
3. Land purchase and cashout
Residential Property Purpose
1. Bridging
2. Renovation
3. Self employed
4. Fast funding
Private Lending FAQ:
1. What is the difference from traditional lending?
A: Borrowing amount and LVR is based on the value of property
2. What type of security is acceptable
A: Residential, Commercial, industrial and Vacant land with or without DA
3. What is the requirement?
A: Secured with property, company borrower with personal guarantor
4. What is maximum LVR?
A: Subject to security type and location can be up to 70%-75% LVR
5. What are the loan terms?
A: Can be from 3mth to 24mth
6. Can it be done if the security is in personal name?
A: Yes
7. Can it be done if it's owned in the name of a trust or SMSF?
A: Trust is ok, but not SMSF due to limited recourse nature
What is off market lending or contributory fund lending?
We have heard of privately brokered deals in property transactions market, whereby deals are transacted without advertised or marketed in the usual way via public domains. This strategy is normally reserved for high ticket price properties. And networking plays an important part in transacting these deals.
Speaking of lending, we’ve witnessed the essentials of “off-market lending” bringing both sides of the fence - lenders and borrowers together in a more uncommon way. And yes these are usually complex deals so we are not talking about home loans (information easily accessible via internet) or bank-type business or commercial loans. Similarly to off market property deals, usually seen in bigger loan size.
At perception, one might challenge that’s how commercial loans brokers do deals, matching borrowers with lenders. In fact the distinct nature of off-market lending deals is with the lender. To more accurately define off market lending deals, are lending deals that are originated by single or syndicated “off-market” lenders. At times, it can be called contributory fund lending.
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What are “off-market” lenders?
Direct lenders and brokered lenders are the major driving force in the world of business, commercial and corporate lending. Off-market lenders are investors who want to tap into the interest earning yield of lending to quality businesses, but not actively pursuing deals in the market, in another word not a “common lender” or “usual lender” who are open for business in the lending industry. This is similar to trust-structure on-call lending business model in the market, while distinct nature is in the investors - of whom may even be foreigners with capital sitting onshore but not being managed by private bankers or fund managers.
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What types of deals suit off-market lending?
These type of deals are usually complex in nature, yet the size is not large enough or tenure is not sufficient to justify the eyes of corporate financing. And it most certainly suits deals that aren’t suitable for “shopping around”. And we’ve seen many many deals turned down due to have been shopped around. Not to be shopped around deals can be borrowers need to stay strictly confidential, as it might trigger other covenants if certain information became public knowledge, along the lenders market.
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Why use “off-market” lenders?
Other then being highly confidential of the need for borrowing. Borrowers who have unusual circumstances that just don’t fit most lenders appetite, might just suit an off-market lender. Does that make these deals higher in risks or covenant lite? Yes and no, that’s when an experienced broker come into play, and the broker wouldn’t want to push the deal happen just for the sake of making the transaction occurred because that will sabotage the relationships and there won’t be the next deal from this off-market lender if the lending turns sour due to high risk. And it’s only safe to have independent legal and professional accountants to be involved in the due diligence process.
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Are they more expensive to tap into?
There have been deals that are cheaper due to the fact that “off-market” lenders unlike established lenders or fund managers who need to chase yield, to reach a profit net off the expenses of managing a business. These investors are cost-lite and with the aim of making passive yield that beats average return products in the market.
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What are the cons?
As previously mentioned, these deals could be a trap if not managed properly. Sometimes there is a reason why common lenders wouldn’t extend a loan to certain borrowers. Hence due diligence is critical. However there are deals that just don’t want to seek common lenders and choose to seek a more affordable cost option. As per discussed, these lenders can be a cheaper option, and without handcuffs in loan agreements or hefty exit fees.
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What are the pros and cons for investors?
As investors into these lending deals, they can set their own rules, generate yield without management fees, and in control of exit term. I have been an investors in multiple funds and the demand to have a concrete exit timeline is always a headache. The cons? These deals might be too off the chart and thread the risky ground of lending appetite. Investors should seek professional opinions and not rely on personal emotions in assessing these deals. That’s when a reliable act-for-your-interest broker’s advice becomes valuable.
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What makes a quality broker?
A quality broker is one that can pull in a professional team with strong credit experience. A team that has the accounting, compliance, taxation, legal, and risk management expertise to execute due diligence on behalf of investors. A broker team that acts for your interests, and stays the course for long term sustainable business development, instead of shooting the star for once off bullseye deal.