Selecting The Right Private Lender
The private lending market in Melbourne is competitive, however the key differentiator between lenders, largely comes down to their deal preference and how they are funded (self-funded, investor funded or another form of wholesale funding). It is critical as a business borrowing funds, that you work with the right investor groups/ lenders to get the best deal possible.
If you have not read our article of when to use private lending, please do so here.
Below are some of deal criteria that lenders have. You should align your self with a private lender that has your situation as their ideal preference, to get the best deal possible!
Security type: Different lenders will lend against different property types such as commercial, residential, industrial, agricultural, rural, and medical etc. The nature of the asset (built or being developed) as well the condition will in part determine pricing.
Security position: Different lenders will prefer different risk reward returns. Some will take on more risk for higher returns. This is determined by their ranking of security position (first mortgage, second mortgage or caveat loans). Their security ranking will also in part determine pricing.
Loan Duration: The shorter the loan period, the more likely it is to be priced higher than a longer-term loan. Typically speaking most private loans using property as security can be as short as 2 weeks and up to 5 years.
Loan To Valuation Ratio: Otherwise known as the LVR. Different private lenders will have varying LVRs, but what is more important is what is being used to determine the value of the asset, eg desktop assessment or a separate valuer. External valuers mean extra cost and time to the borrower.
Background of The Borrower: The borrower and their experience as a business owner and history (bankruptcies etc) also plays a part. Also, the attitude of a borrower when meeting a lender plays a large role. Would you lend money to someone, that did not value what you were doing for them?
Quantum of Money: Some lenders prefer smaller loans, and others prefer larger loans. Usually speaking the smaller loans are priced higher as a percentage of dollar borrowed, versus larger loans. Largely to do with fixed costs (legals valuations etc), and lenders wanting a return for their time.
Interest repayments: Some lenders prefer interest to be paid monthly, others prefer to capitalise interest at the end. Paying interest monthly always leads to a lower cost of capital.
How a lender is funded: As a borrower the lowest cost of capital is gained by working with a lender that is a family office or high net worth investor (what we do). This means there are no fund management fees, and above all the investors get most of the returns. This in turn means a lower cost of capital to the borrower. Versus a fund’s management model, where a premium must be charged on top of the allocated return to the investors for the fund to make money. Both are necessary as different funds / investors have different lending criteria.
From the above it should become apparent that working with the right private lender is not an easy task. It is something we take very seriously (read more here) and where we feel a better deal can be gained elsewhere for a client, we help to facilitate the process.