Private Lending For Developments
There are a range of non-banking and private financiers that make loans available to developers. On this page I’ll explain the types of financiers available and what they do and don’t like to finance right now. I’ll also let you know the parameters for achieving finance success with them.
Types of Lenders
Lets start with some definitions. People in the industry often talk about ‘private lenders’ as if they are a secret society. Thats not true at all, its often just that they are small organisations and don’t have the advertising that larger companies do to get their name out there. Thats not to say they don’t have money to spend, they simply don’t need to as they probably have more applications for loans than they can possibly service.
The first type of company that many describe as ‘private’ is a non-bank lender such as a mortgage fund. These funds are set up with the specific purpose of lending money to those people that cannot obtain finance from traditional banking sources. This company will issue a prospectus to the general market-place and raise their funds from retail investors (sometimes called mum and dad investors).
These types of companies will have specific requirements such as a shorter time-frame for their loans. Development Finance is not the only type of loan they offer, they will also do commercial property loans and some rural lending as well. Borrowing from these companies is not necessarily easier and its certainly not cheaper but they are much more likely to look at the project itself and the borrowers experience, rather than stick to any hard and fast rules about pre-sales etc.
The next type of private lender is more aligned to the actual label. These can be private individuals with a high net worth. They will often set up a shelf company and have one or two individuals run the business for them. True private lenders range from those with a large amount of experience to those that are simply after a return on their spare cash. They may have set rules with regard to borrowing limits etc. but they are not advertised.
One comment from a private lender we have dealt was ‘we will lend the amount that we would buy the asset for’. If you haven’t been in this game before, the message here is – we’ll give you what we think it will liquidate for, irrespective of your purchase price or current market valuation.
Private lenders can be aggressive so you need to keep in constant contact with them through-out any loan to ensure that you are meeting your conditions. Remember, they don’t have the leverage capability that banks have so if they lose $10m, then they actually LOSE $10M of someone’s money. If this doesn’t make sense to you, then you should read some more about how banks raise capital.