Need a loan? Want to buy a home, invest in a business or build a profitable online business? If you are already heavily mortgaged, self-employed, starting a brand new venture or have another reason why banks and mainstream lenders might consider you a riskier prospect then you may struggle to get access to the money you need.
As world markets become more risk adverse, even the relatively stable Australian finance industry is playing copy-cat and becoming more conservative with its loan portfolio, tightening up lending criteria and becoming more demanding of its potential borrowers. Tighter controls around the distribution of borrowings is not necessarily a bad thing – it means the industry, and economy overall, should be more resilient to shocks if and when they occur. For individuals and small businesses though, it can slow down the process of wealth creation and expansion, as it can take longer to get access to capital.
No surprise then that private lenders are stepping in to fill the gap, and offering loans to would-be borrowers. But what is private lending?
In general, Australians choose to operate within the existing financial services framework. They borrow and invest for private and business reasons from familiar brands such as Commonwealth Bank, St. George, NAB, Westpac, Bendigo Bank, ANZ, ING, Rams Home Loans and Resi, to name just a few. Other investors might choose Macquarie Bank, HSBC or Citibank.
There are other ways to get access to capital, however: angel investors, venture capital, private equity loans and private lenders, to name just a few. While some of these potential sources of investment tend to have fairly standard processes and criteria, and may not be appropriate for, say, borrowing to buy a home, private lending is finding its’ place.
Curiously, the private lending arena is not necessarily the domain of the extremely wealthy. People who elect to become private lenders are not necessarily multi-millionaires and family conglomerates with cash to burn. They may simply be ordinary investors, with a small portfolio of assets and some excess lending capacity who are seeking a higher rate of return than may be available with term deposits, shares, or via investment funds. (Brokers for private lending tout returns of eight to 20 percent, which can look very attractive to potential investors).
Borrowing from a private lender is different to borrowing from a bank or financial institution in key ways, however, the first and most obvious being that if the private lender is putting up their cash to get a better return then YOU will most likely be paying a higher rate of interest in order for that to occur. This may not always be the case, but is worth considering. If interest rates are important to you, then you could always try approaching a bank or common lender for a private quote, where you can request a rate of interest that is lower than the published figures.
Like a bank, private lenders will still require security over the loan in some form, and a mortgage over a property is the preferred method.
Joanne Lemke is a final year creative writing student at UOW, who is looking to break into the corporate copywriting space once she graduates and hopefully go on to eventually some day write a book around her other passions, namely business and financial changes