Getting a loan can sound deceptively simple, but there’s a lot more to selecting the ideal loan for your client than looking at the interest rate and sending it to your client to sign on the dotted line. With far more options for flexibility and customisation than a big bank, selecting a private loan can be even more complicated. We’re here to help you navigate the maze of lenders, and find the most suitable loan.

The right borrower type

Before figuring out who the right lender is, it’s essential to work out who your client is, as a borrower. Many lenders will only accept loans from businesses, and some will only deal with businesses with clean credit. If they're borrowing as an individual, many lenders will ask for the loan purpose - if the loan is to an individual, but primarily for business purposes, the list of lenders may shrink a bit, but you’ll still be left with plenty of choice.

The right LVR

The Loan to Value Ratio (LVR) is one of the most important metrics in seeking a secured loan. This percentage is calculated by dividing the loan amount by the value of the property. Every lender will only go to a maximum LVR, and this may differ based on the loan purpose and other risk factors, so ask the potential lender upfront about their conditions surrounding LVR - it’ll allow you to rule out ineligible funders at an early stage.

The right focus area

You’d probably decline a haircut or a car repair from a first-timer, so why should you go down the path of seeking a loan from an inexperienced funder?

Even within a niche industry like private lending, there are a wide variety of specialist funders. The private lender that you’re speaking with may specialise in 1st or 2nd mortgages. They may be short term lenders (generally 6-24 month loan periods), or medium-term lenders (3-5 years). They may be more used to advancing loans against certain types of assets or real estate - commercial or residential, rural or metro.  Choosing a lender who specialises in the client's loan type often means greater efficiency, and more effective problem-solving - they’ve seen it all, so they’ll bring a wealth of problem-solving experience to the deal.

Most significantly, private lenders will specialise in different loan sizes. Private lenders usually raise money from high net worth investors, so if the loan is much larger than the private lender is used to, they may struggle to fund, leading to both time and the initial commitment fee being wasted.

The right commitment fees

Are you paying the right upfront fees? It may sound strange, but a fee that’s too low is as much of a red flag as a fee that’s too high. This is known as ‘low-balling’, a tactic from a lender that has no intention of funding the loan, but simply seeking to capture upfront fees and move on. 

Similarly, a very large commitment fee can be a bad sign. This indicates that the fee has been padded out, to increase profits on the overall loan transaction.

An ideal fee is proportionate - the borrower needs to put some money on the table to show they are serious, and the lender needs to be compensated for the upfront work in assessing the deal.  If in doubt, apply the ‘sniff test’ - does the fee seem right for the work the lender needs to do in assessing the deal?

The right timeline

Speed is one of the key advantages of private lending, allowing borrowers to undertake time-sensitive scenarios like taking up short-term business opportunities or bridging a financial gap. After all, what is the point in a streamlined due diligence process if you’re then hanging around for months to receive funds?

A drawn-out loan settlement timeline is a major red flag - it indicates that the lender may require a lengthy capital-raising exercise to find the money for the loan or worse still - never come up with the funds.

The right information

As with any contract, it’s essential that the private lender is crystal clear on the terms and conditions of the loan. Ask the lender to run you through not just the interest payments, but all associated fees, as well as other salient terms of the loan.

If anything is unclear, request more detail - any lender intending to proceed to settlement with the loan should be able to supply you with all applicable terms and conditions, whereas a lender intending to disappear with the commitment fees may not have thought far enough ahead.

Look for transparency with the lender - anyone who struggles with simple questions about terms and conditions at the start of the loan may not be an ideal bedfellow for the months and years ahead.

Not sure if the private lender you’re talking to is right for the deal? Check out our list of essential questions to ask before your client signs on the dotted line.