Brokers considering a private lender for clients need to research the parties behind the lender, who their funding sources are, and how they would respond to a payment delays or default, according a lender.
During a webinar on business and commercial borrowing in 2021 by private lender Zagga, CEO and co-founder Alan Greenstein told the panel discussion that brokers need to understand the private lender they are dealing with, underscoring the fact that they are going to provide a significant sum of capital to the borrower.
He advised brokers to understand the parties behind the private lender, where they are sourcing their funding, and how the lender would handle risk (for example, the coronavirus pandemic).
Commenting further, Mr Greenstein said: “We saw during COVID, a lot of the private lenders suddenly lost their funding sources and suddenly pulled loans away.
“You should certainly be asking your funder for some of the examples of the transactions that they have funded in the past, [and] who the counterparties are that they use in terms of the valuers and the lawyers that they use, because that’s always a good insight into the kind of people that you’re dealing with from an integrity point of view.”
Mr Greenstein also suggested that brokers could ask the private lender in question if they could access a copy of the facility agreement of a previous loan (with all specific client information removed) to examine the nature of the terms and conditions.
Furthermore, Mr Greenstein said brokers could examine what the lender’s process and “attitude” would be if a client delays or defaults on the loan repayment.
He explained: “[Are they] the kinds of people who are immediately going to put the clients into default, turn up the thumb screws, and start charging the higher rate of interest rather than the lower rate of interest?”
The Finance Brokers Association of Australia (FBAA) board director Clive Kirkpatrick, who was also part of the panel, told the webinar that it is vital for brokers to understand the lenders they deal with, and “undertake a fair level of due diligence”.
He recalled that while he was general manager for lending at aggregator Vow Financial, a number of its brokers dealt with “unscrupulous private lenders”.
“A couple of examples that brokers faced were they were charged establishment fees where the funder had no intent to fund the loan at all, so they lost their establishment fees,” Mr Kirkpatrick said.
“I’ve also heard of really large valuation fees that seemed excessive and paid for by the broker… and the funder came back with the valuation and it just didn’t stack up. The fees were non-negotiable.
“That’s a fair bit to think through in terms of selecting a funder.”
Tips for lodging applications with a private lender
For brokers seeking to lodge business and commercial loan applications with a private lender, Zagga complex credit risk specialist Tom Cranfield told the webinar that the lender would need information about the financials of the borrower, the amount of capital being sought, who the borrower’s current lender is (if applicable), and what the outstanding balance would be on the loan.
He also said that among other elements, brokers should provide details about the borrower’s experience in either running a business, or their experience in developing property if the borrower is a property developer.
In addition, the broker could also provide a valuation or quantity surveyor report if they have engaged them, along with a feasibility study, which would outline the statutory fees and professional fees.
Commenting on the benefits of providing as much information as possible, Mr Cranfield said: “It speeds up the process. Quality information flow, [and] good information flow allows us to be much more efficient. It does avoid the rework [of applications].
“We’re very much looking at how we are going to get back the money, how much money you want, why you want the money, how you will use the money, and then looking at the details of each individual transaction, the information on the transaction itself, the experience and details of the operating business, and their personal asset and liability positions.”