Debt 101: Who are the different types of lenders out there today?

While I like to think that I have a good working knowledge of all areas of law, I am most experienced in banking and finance, having worked in that area for over 10 years now. I am getting old, my friends.

Whatever your personal views are on using debt to fund a property purchase or an investment, the reality is that most businesses, at some point, need debt to fund their operations or to expand their business, and there are more choices than ever for where they can try and source debt.

The main three options are borrowing from the big banks that we all know and accept as a necessary evil bedrock to our society, using a mortgage or debt broker (the real estate agents of the finance world, with all due respect) and going to private investors with money to lend.

Option 1 – The big banks

Traditionally, the main way for a developer to seek debt funding for their project would be to approach their relationship bank, and discuss the matter with their relationship banker or branch manager. The bank would agree that the project seemed very exciting and bank-able, and then would pass the matter on internally to their risk assessment team.

Then the questions begin.

Big banks, whether they are one of the big four, or one of the growing number of offshore banks, regional banks or smaller banks, will all require huge amounts of information and detail on the project before they even consider making an indicative offer, let alone lend the developer any money.

They will ask for valuations, feasibility statements, personal and company accounting records, valuations (from one of their accepted valuers), pre-sales reports setting out the number of lots in the development that have been pre-sold, who they were sold to, at what price, and how much of the deposit has been paid.

And that’s just their first request. Based on the responses to these initial queries, a developer will quickly be hit with many more requests, including (for example) details of any previous projects, details of the builder, architects and marketing strategy, and whether any of the purchasers are foreign investors (and if they are, whether they have the necessary government authorities to purchase into the development).

Answering all of these questions takes a long time. Typically, we’d expect a big bank to take around 8 to 12 weeks to provide funding, from the time of first approach to the time the bank and developer are ready to lend and borrow.

Option 2 – Brokers

In my experience, the quality of loan brokers in Sydney and Melbourne have been very high, and they are clearly focussed on customer service and assisting both the lender and the borrower to come to a mutually agreed position as quickly as possible. After all, there is a good commission in them for helping get a deal done quickly.

Brokers will typically ask all the same questions as the big banks above, but they’re much quicker in assessing these materials as there are fewer levels of approval required. Brokers generally collect the information and then package it all up for their network of lenders to consider.

Brokers take a commission, so are always more expensive than a big bank. The funding they source is also more expensive, and there are always high up-front fees and often a requirement for the borrower to provide some form of up-front security to cover these initial fees. This might mean that the lender puts a caveat on the property, or asks for a personal guarantee for directors, to ensure that all up-front fees are paid.

Option 3 – Private lenders

Developers can also go to private lenders directly for funding, although will find themselves dealing with some of their unique requirements or requests, which a broker would otherwise have dealt with.

One of the main questions we recommend you ask any private lender is whether they actually have the funds you need available to lend, or whether they first have to source the funds from their investor network.

We’ve seen some developers have to wait for weeks for the private lender to collect the funds from its network, which is why we will always recommend that you go with a private lender that has the funds in hand and ready to go. That has the benefit of giving you greater certainty of funding too.

Private lenders are expensive, although not as much as they once were as competition in this area has increased. Their interest rates, fees and security requirements will usually be higher, but they will turn your request for a loan around much more quickly than a big bank. Think 2 to 3 weeks, rather than 8 to 12.

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