What to consider when choosing private credit
What factors should accountants and their business clients look at when deciding between private credit and more traditional banking avenues?
In the dynamic landscape of global finance, private credit increasingly plays a crucial role in offering tailored finance solutions beyond traditional banking avenues. In Australia, this sector has witnessed significant growth - influenced by regulatory shifts, market demand, and the emergence of private credit globally; becoming the world’s fastest-growing alternative asset class over the last 5 years.
Unlike the US and Europe, where private credit markets are more mature and diversified, Australia has traditionally relied heavily on mainstream banking systems for financing. This is evidenced by the fact that only 8 per cent of all commercial lending in Australia is being facilitated through private credit. Comparatively, these figures are more than 40 per cent in Europe and the US which shows just how far Australia still has to go. With regulatory changes following the global financial crisis, the outlook for Australia’s private credit market looks promising as private lenders look to fill the gaps left by stricter bank lending policies.
Despite the increasing use of private credit, there is still an education gap surrounding the appropriateness of their use – when does one consider private over traditional lending platforms?
Private lenders aim to bridge the void left by conventional banks by funding opportunities that would not traditionally fit their stringent policies, whether this be due to unique asset types, complex structures or strict serviceability requirements. The flexible approach of private lenders allows for a negotiable case-by-case assessment, without the boundaries imposed by conventional black and white credit policies of the large banks that leave no room for negotiation or exceptions. There are a variety of reasons to consider private lending, including:
Broad lending appetite
Private lenders tend to have a diverse investor base meaning that their lending appetite is more varied than traditional lenders – proving very beneficial to prospective borrowers. Serviceability is generally only limited to an accountant’s declaration of affordability with no further financial verification required – opening finance up to a larger pool of borrowers who have struggled to demonstrate the increasingly comprehensive serviceability demands of banks.
Flexible repayment options
Flexible repayment options are also an attractive feature with the option to either service the loan interest monthly or capitalise the entire interest into the loan amount (i.e. no monthly repayments needed, and the interest is added onto the loan amount).
Speed and efficiency
Another key advantage of the private lending market is timing. In its infancy, private lending was often used as a fallback option once setbacks were experienced by mainstream funders. Often left with minimal time to meet settlement, private funders had to adapt and focus on streamlining their processes to allow them to meet these tight deadlines. Today, this speed and efficiency has carved out a niche with settlements turned around in as little as a week. Borrowers have preferred the agile nature of private lenders, with this market becoming the mainstream choice.
However, the private lending space is not for everyone and it’s important that borrowers and their advisers are aware of what constitutes a ‘private deal’. Drawing on Msquared Capital’s due diligence process, our profile of a strong applicant is not only there to protect ourselves but the borrower as well. We typically like to see clients who are self-employed, with multiple property assets and who are ideally well-versed in a myriad of financial investments.
It is also important to ensure there is a well-defined exit strategy which ensures there is a clear strategy to repay the loan at the end of the term so that borrowers do not find themselves in a position of default.
A strong exit strategy is also a vital source of negotiation. If a clear and strong exit strategy is presented, it can increase the overall leverage of a transaction as risk is mitigated with a clear passage out.
The private lending space continues to grow in Australia and with it, an increasing number of funders surface with hopes to capitalise on this growth. Bringing fresh competition, it creates a market where borrowers benefit from competing private lenders each with their own niches whether it be for construction, rural appetite, speed or high gearing. Accountants should encourage their clients to enquire around for the best fit as most lenders will reject loans if they do not fit their speciality and will recommend alternative lenders who are better suited.
Whether it is a quick turnaround, issues in demonstrating financial serviceability or simply not fitting the traditional banking avenues; the private market is increasingly becoming part of the mainstream financing solution. It is important that both borrowers and their advisers remain up to date across the lending landscape to ensure that they are placed with the most competitive and appropriate funder.
Paul Myliotis, managing director, Msquared Capital
