How private lending could give brokers the edge

“If brokers have small-to-medium enterprises (SME) clients with financing needs that mainstream lenders cannot fulfil, they can talk to a private lender instead of walking away from the deal and letting one of their competitors swoop in under them,” he told The Adviser.

“The broker is the driver of the relationship. They are the ones who find the solution for the client. If they don’t pursue alternative solutions, they become more vulnerable.”

SMEs may have funding requirements that are not palatable for mainstream lenders, such as clearing an ATO debt.

“But you could go to a private lender who is prepared to approve financing, provided that the borrower meets the credit requirement and there’s an exit or a second way out,” Mr Donaldson said.

“Usually, they’ll take a first or second mortgage over landed security, or property. And, if they need the money for the short term and it’s secured lending, and the borrower meets the character test, then the private lenders will do the deal.”

Mr Donaldson will moderate a panel session at the SME Broker Bootcamp about the ins and outs of private lending and lenders, and strategies for finding private borrowers, and building a network. The panel will provide case studies from successful private lending transactions to illustrate how brokers could replicate their success.

According to Mr Donaldson, it is easier for brokers to transact with private lenders because there is less government oversight compared to mainstream lenders and as such less red tape and bureaucracy.

Contrary to popular belief, private lenders must adhere to similar laws, regulations, and rules as banks, from the Australian Securities and Investments Commission (ASIC) to the National Consumer Credit Protection laws and Australian Consumer Law.

Nonetheless, private lenders do not hold a banking licence, meaning they do not face the same level of regulatory pressure as non-banks, which must comply with legal and industry policies.

In many cases, private lending is chiefly for business purposes and is classified as unregulated loans, meaning it does not fall under the National Consumer Credit Protection Act.

Mr Donaldson noted that private lenders can be nimbler than mainstream lenders and collaborate with and educate brokers on the process.

“They can make decisions quite quickly, cut through the deal, and focus on what’s important swiftly,” he said.

“There are upfront fees with some flexibility. You can either capitalise it into the loan or in some cases, the broker can nominate their own fee to the client, and that can be included as part of the loan amount in some cases.”

However, he warned, being less regulated does not excuse brokers who engage in unsavoury deals with private lenders.

As with any loan, brokers must consider if their client’s deal is legitimate and if there is an exit strategy that will meet the borrower’s expectation, he added.

“The rule that most brokers apply or should apply is ask themselves if they would lend the client their own money,” Mr Donaldson remarked.

“If the answer is yes but the broker can’t access financing from mainstream lenders, I don’t see any reason why they shouldn’t recommend a private lender if the deal makes sense. Being less regulated doesn’t matter. All that matters is the SME has a genuine need for finance, has an ABN, and meets the character test.”

With private lending becoming increasingly commonplace, brokers could benefit from understanding the landscape and who the different private lenders are, with Mr Donaldson noting that some private lenders are now on aggregator panels.

“But if brokers are uncertain where to look or what to do, they should get advice,” he suggested.

“Talk to other brokers who are playing in this space. Find out what they’re doing and who they’re dealing with. Enquire directly with private lenders, too.”

Mr Donaldson concluded by urging brokers to attend the SME Broker Bootcamp to gain in-depth knowledge on private lending and to hear from lenders that are active in this space and are eager to work with brokers.

“To get this knowledge and opportunity to network with private lenders in one place in one day is not something you can achieve on your own,” he concluded.

The 2023 SME Broker Bootcamp will take place in the following locations:

Wednesday, 6 September: Rydges South Bank, Brisbane

Tuesday, 12 September: Montage, Sydney

Thursday, 14 September: Zinc, Melbourne

Places are limited for this free conference so book your place now by registering here.

For more information about the conference, including agenda and speakers, click here.

[Related: Business lending growth outpaces housing growth, ANZ reports]