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These themes were discussed at the Commercial and Asset Finance Roundtable, hosted by Broker Daily.
Here, six brokers outlined their experiences in dealing with private credit lenders, driving home just how important it is to stay vigilant.
What was described as a ‘boom’ in private lending, the potential for flexibility has become an attractive option for borrowers who need funds fast.
“If you can actually offer a solution that is more flexible, quicker, just an easier experience, but they have to pay a little bit more, a lot of clients immediately see the value in that,” said Simplicity Loans & Advisory broker Isabella Constantinou.
Investors have shown increased appetite towards private credit, said Shore Financial CEO Theo Chambers. However, compared to Europe and the US, Australia is still lagging behind, with a much smaller portion of the commercial market turning to private credit.
However, Chambers said “it is swinging that way” and brokers should prepare for increased attention given to these lenders.
“The amount of development going on in Australia, a lot of this development wouldn’t get out of the ground without private lending. And then also I just think the average investor has become more comfortable with investing in private credit,” he said.
A major catalyst for the boom was the pandemic. People simply had no other choice and, upon dealing with private lenders, realised it maybe didn’t deserve the stigma attached.
However, amid the positive attitudes formed came an increase in the number of private lenders in the market.
This has become a problem for commercial brokers, said Constantinou, as they’re having to deal with a multitude of options, which she said can become a “dangerous place to have to navigate.”
“A business like Simplicity that only does commercial, we’ve got a lot of checks and balances in place to vet lenders, [but] you still can get caught out with lenders in the private space that ultimately don’t have the right intentions,” Constantinou said.
Private lenders with shady intentions have become somewhat of a trend in recent years.
The end of last year saw “predatory” lenders take the limelight, with one brand in particular; Oak Capital seeing some dodgy dealings come to light.
Meanwhile, in October, we saw ASIC place a stronger emphasis on the regulation of private credit as expansion dominated.
The impact of this could be people borrowing with a private lender when there is a more suitable option.
Constantinou said some examples of being paired with the ‘wrong lender’ include “big commitment fees when they issue a term sheet and if the client decides to proceed, they have to pay the commitment fee. Often, it’s non-refundable.”
“If they do proceed to settlement, it then gets rebated against the lender’s establishment fee. But you have to be so careful with who you’re dealing with that does that, because a lot of the time there are lenders out there that will charge their commitment fee with no intention of settling the deal,” Constantinou said.
This means there could be a lender that spends “five minutes reviewing a deal, they collect five grand and [say], for some reason, we’ve read the valuation. We don’t believe in it and we’re not proceeding to the deal on that basis. It’s such a scary place,” said Constantinou.
This is where education and upskilling come into play. A key theme of the roundtable was the lack of attention given to the commercial and asset finance side of broking. Compliance and a deep understanding of lenders are key to promoting positive practice.
“This is what will help borrowers steer clear of a “lender that doesn’t have their best interests at heart,” Constantinou said.
Chambers said: “The sad part is it can also make such a big difference to the consumer if they go down the wrong path. An example could be where someone’s put a client with a private lender because they’ve not realised someone like La Trobe could do a low doc loan. And the difference could be an interest rate of 7 per cent versus capitalised interest at 10 per cent or 12 per cent. [If] that’s on a 10-million-dollar portfolio, it’s costing someone a million dollars. It can be a big difference.”
While the private credit market certainly has a place for the right type of borrower, brokers must remain vigilant so as not to disadvantage their clients financially.
As with just about everything in the broking industry, due diligence must remain top of mind, especially when handling potentially the biggest financial commitment of someone’s life.
However, more and more borrowers are turning toward these lenders, with a market that sees more and more interest by the year.
With more money comes more competition. Whether this increased attention from borrowers and regulators will weed out the disingenuous lenders remains to be seen.
[Related: Businesses turning to a ‘booming’ private credit market for loans]
