How Brokers Can Introduce Private Lending to Their Clients

For instance, banks prefer borrowers having a regular/predictable cash flow stream. But depending on the industry, there are businesses that have irregular cash flow within the year with their peak and lean seasons or they could still have weak financials from past years or even outstanding ATO debt. Any one of these is enough for a bank to decline to assist.

As an illustration, a small business in a tourist location could have been impacted by Covid restrictions or a natural disaster in the past, but this will still show up as a weak period in historical financials. Most traditional finance institutions don’t like this type of irregularity, making it more difficult for the borrower to get approved for a business loan.

In addition, because banks follow rigid standards for screening borrowers, the business loan application process usually takes many weeks to be approved. And time isn’t always a luxury that businesses have, such as in times when a business needs a bridging loan to cover immediate expenses like employee salaries or other concerns involving a tight deadline.

The reality is that there will always be occasions where traditional finance institutions won’t be the best fit for a business owner looking for finance. This is when private lending products can become advantageous to brokers servicing commercial clients because private lending usually offers faster application and greater flexibility.

Challenges when presenting private lending solutions to clients

The challenge for brokers is how to actually introduce private financing to their clients. Not everyone is familiar with the lending industry outside of traditional institutions like banks, so it’s not unusual for a borrower to be hesitant to take out a private loan.

Fortunately, the reality is far from these impressions of what private financing is. But brokers will need to take the time and effort to explain the actual terms of the private loan product to curtail any hesitation of the borrower.

Advantages of Private Loans over Bank Finance

When introducing private finance solutions to your client, the best place to start is with the advantages private lenders have over traditional financing.

1. Less Stringent Requirements   

Firstly, private lenders don’t follow the same rigid serviceability requirements used by banks. Private lenders usually look at a borrower’s exit strategy to determine their ability to pay back the loan rather than proof of having a consistent monthly revenue stream.

Common exit strategies include selling an asset, refinancing, or paying back via business proceeds.

2. Tailored Solutions

Another benefit is that private lenders are able to provide much more flexibility with their finance solutions. Instead of a one-size-fits-all approach of standard serviceability requirements, the terms of private loans can be tailored around the unique situation faced by the business.

For instance, a property renovator may be able to take out a private loan to finance a renovation project. But rather than pay back the loan on a monthly basis, the exit strategy can be from the sale of the flipped property at the end of a project, with interest capitalised to the loan which is a more beneficial scenario for the renovator who may have limited cash flow during construction. 

3. Streamlined application process

Aside from flexibility, not being bogged down by serviceability requirements lead to faster loan applications and approvals. This is beneficial to business owners who need to secure funding to meet a tight deadline.

4. Cost Effective Solutions

One of the more popular objections of borrowers against private business loans is that private loans typically have higher interest rates. However, focus should be on the total cost over the term of the loan. As private loans are typically short term (3 to 12 months) the actual cost of interest in dollar terms is often lower than expected and provides a cost effective solution to the business.

Tapping into existing clientele

Roughly 10% of Australians are also small business owners. Many brokers who have helped past clients secure their home loan might not be aware that they are also looking for business finance solutions. To help brokers reach these clients, the PMA team has prepared a flyer that brokers can send out to their clients as a means of introducing private business lending to them. 

In that way, any contact from a broker’s clients list who is also a business owner might approach their broker when they need business finance. 

If you are a broker interested in using the flyer, you may download it here.

For more information on PMA’s commercial finance products, feel free to contact us and our customer relations team will gladly answer any questions you may have.