The private lending space in Australia is booming. There has been a considerable increase in both the number of players and the volume of transactions following the Big Four's crackdown on investment loans and construction loans thanks to the Financial Services Royal Commission. Borrowers seeking short to medium term finance are finding it increasingly difficult to secure funding from traditional channels and are looking to private lenders to fill the void.
New entrants into the market (and existing players looking to increase their portfolio) should keep the following five tips in mind when targeting opportunities in the private lending space.
With many prospective borrowers only finding out late that their preferred bank lender is not willing to proceed, private lenders need to be in a position to move fast in order to capitalise on opportunities. This stretches across the entire scope of the transaction – from issuing the letter of offer and preparing the loan and security documentation, to finalising negotiations, signing and settlement, an efficient process and short turnaround will give a lender the best chance possible at writing new loans in the current market.
- No surprises
Making offers and preparing transaction documents can be a costly exercise, particularly if a prospective loan falls through after the bulk of the hard work has been completed. For this reason it is important that any potential deal-breakers be brought to a borrower's attention early. Flagging the key commercial and legal terms in the letter of offer (rather than trying to hold these back for the transaction documents) will help ensure that all parties are on the same page regarding the terms of the loan and have the opportunity to discuss any potential issues before either party incurs any significant expenditure.
- Documents, documents, documents
Successfully closing a new loan opportunity is obviously exciting for a private lender, but beyond writing new loans it is vital that adequate protections are in place in the event of default. With the current uncertainty in the property market and investor sentiment, a private lender needs a robust set of loan and security documents to help mitigate potential losses in the unfortunate event of a loan failing to be repaid as planned. Private lenders need to ensure their documents are tailored to the specific type of loan, adequately attach to the forms of security being provided and comply with all legal and regulatory requirements to avoid the arrangements being unenforceable in the future.
- Avoid the code
Private lenders are able to move quickly and minimise compliance costs by carefully selecting their target market. The National Credit Code (NCC) applies to all credit contracts (such as mortgages and guarantees) between a credit provider and a 'consumer'. Essentially, a loan to an individual that is provided for domestic purposes or to purchase, renovate or refinance residential property for investment purposes, will be caught by the NCC. Loans to companies (other than strata corporations) are generally exempt from the NCC, which is the sweet-spot most private lenders target to avoid the increased regulation and compliance that comes with providing loans that the NCC applies to.
- Be fair to be enforceable
Since November 2016 laws have been in place protecting small businesses in Australia from unfair terms in business-to-business standard form contracts. The identity of the borrower, the term and size of the loan and whether or not the borrower has the ability to negotiate contract terms will all be factors in determining whether the small business unfair contract protections will apply to the loan. Private lenders need to carefully consider the terms of their loan and security documents and regularly update these in line with changing regulations and market trends.
This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.