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What is Private Lending and How Does It Work in Australia?
- Innovate Funding
- 6 days ago
- 4 min read
Private lending is growing rapidly in Australia. In fact, the private lending market has increased by over 20% in the past five years. This shift is driven by demand from small businesses, property developers, and investors who want faster and more flexible funding options. So, what is private lending exactly? Why are more Australians turning to it as an alternative to traditional banks? And how does it work in practice?
Let’s take a closer look.
What is Private Lending?
Private lending refers to loans provided by individuals, companies, or non-bank lenders. These lenders operate outside the traditional banking system. Instead of assessing your income or credit score, they focus primarily on the value of the asset being offered as security.
In Australia, private lending is often used for:
Equipment or asset purchases
Refinancing or debt consolidation
Unlike banks, private lenders base their decisions on the quality of the security and the strength of the exit strategy. This approach opens up opportunities for borrowers who may not meet the strict lending criteria of mainstream banks.
Who Uses Private Lending in Australia?
Private lending is not just a solution for borrowers who have been declined by banks. It is also a strategic choice for businesses and individuals seeking speed, flexibility, and tailored lending solutions.
1. Small and Medium Enterprises (SMEs)
Many businesses face cash flow gaps or require urgent capital for growth. Traditional banks are often too slow or inflexible. Private lenders can provide quick approvals and customised structures that align with business needs.
When banks require a high number of pre-sales or take too long to settle, private lenders can step in. They offer funding for site acquisitions, early-stage developments, and completion finance when timelines are tight.
3. Investors and High-Net-Worth Individuals
Some investors use private lending as an investment strategy. By lending their own capital to borrowers, they earn attractive returns backed by real property or business assets.
How Does Private Lending Work in Australia?
The private lending process is generally faster and more straightforward than traditional bank lending. Here’s how it typically works in Australia.
Step 1: Application
Borrowers submit a request outlining the loan amount, purpose, type of security offered, and exit strategy. Documentation is usually minimal compared to what banks require.
Step 2: Valuation and Due Diligence
The lender arranges a valuation of the security property, conducts title searches, and reviews the borrower’s ability to repay. This is often based on the strength of the exit strategy, such as selling the asset, refinancing, or using business cash flow.
Step 3: Loan Terms Offered
If the lender is satisfied, they issue a term sheet that outlines:
Loan amount and term
Interest rate (typically between 8.75% and 15%)
Applicable fees (such as establishment, legal, or exit fees)
Any special conditions or covenants
Step 4: Legal and Settlement
Once legal documentation is finalised and conditions are met, the funds are released. In urgent cases, settlement can happen within 48 to 72 hours.
Key Differences Between Private Lending and Bank Loans
Feature | Private Lending | Traditional Bank Loan |
Speed | 2 to 5 days | 4 to 6 weeks (or more) |
Lending Criteria | Flexible, asset-focused | Strict, income-focused |
Credit History | Less important | Critical |
Documentation | Minimal | Extensive |
Regulation | Lightly regulated | Heavily regulated |
Benefits of Private Lending
Private lending offers several advantages, especially for borrowers who value speed and flexibility.
Fast Approvals
Private lenders can move quickly, which is essential when you are working with tight deadlines or urgent business needs.
Flexible Lending Criteria
Borrowers with poor credit, inconsistent income, or unusual circumstances may still qualify, as long as the security is strong and the exit strategy is clear.
Custom Loan Structures
Many private lenders offer tailored solutions. These can include interest capitalisation, no early exit fees, or loans based on projected future value.
Risks and Considerations
Private lending can be a powerful tool, but it is important to understand the potential risks.
Higher Interest Rates
The interest rates are generally higher than those offered by banks, reflecting the increased risk and the speed of funding.
Short Loan Terms
Most private loans are short-term facilities, usually ranging from 3 to 24 months. They are not suitable for long-term financing.
Strong Security Required
Lenders require a registered mortgage or charge over a valuable asset. If the loan is not repaid, the lender can take possession of the asset.
Variability in Lender Quality
The private lending sector includes a wide range of operators. Always do your due diligence and work with reputable lenders or brokers who act transparently.
Choosing the Right Private Lender in Australia
Not all private lenders are the same. It is essential to choose one who understands your situation and offers a structure that supports your goals. Here are some tips:
1. Review Their Track Record
Look for lenders with proven experience in your sector. Ask for examples of past deals and read reviews or testimonials from other borrowers.
2. Check for Transparency
A trustworthy lender will clearly disclose all fees, rates, and terms. Avoid lenders who are vague about costs or conditions.
3. Understand Their Process
Ask how quickly they can fund, what documents are required, and whether you are dealing directly with the decision-maker.
4. Verify Licensing and Ethics
While business-purpose private lending is often exempt from consumer lending laws, lenders must still comply with ASIC guidelines. Choose one that operates ethically and professionally.
Regulation of Private Lending in Australia
Private lending in Australia is subject to legal oversight, but it does not fall under the same regulatory framework as consumer lending. Here is what applies:
Business-purpose loans are generally exempt from the National Consumer Credit Protection Act (NCCP)
Lenders must still comply with ASIC rules around conduct, misleading statements, and fair dealings
Borrowers should still seek legal advice before signing loan documents to ensure they fully understand the terms
Is Private Lending Right for You?
Private lending is not just an alternative to bank finance. It is a flexible, fast, and powerful funding option for borrowers who have strong security and a clear plan.
Whether you are a business owner looking to seize an opportunity, a developer trying to get a project over the line, or an investor with time-sensitive needs, private lending may be worth exploring.
Make sure you work with an experienced broker or lending partner who can help you navigate the market, compare options, and structure a deal that supports your success.
