How brokers can tell if a scenario is right for a private loan

Here are the five questions a broker should ask their clients looking for a business loan:

1) What’s your exit strategy?

While a private lender is a lot more flexible than a traditional lender when it comes to showing serviceability for a loan, they still need to know how the borrower plans to pay back the loan.

The most common exit strategies are:

• Refinancing: If a borrower needs funds but can’t get a bank loan because their financials are not up to date then they could take out a private loan and in the meantime get their financials sorted in order to refinance to a traditional lender at the end of the loan term.
• Selling an asset: If a borrower is purchasing a property and plans to subdivide, develop, construct or renovate then the exit strategy could be to sell the asset upon completion.
• Paying back from business proceeds: If a borrower requires funds for working capital or purchasing business equipment that will allow them to increase productivity then the exit strategy could be to pay back the loan from the increased business takings.

It is important for all parties to have a clear understanding of how a loan will be repaid. If a borrower has a solid exit strategy this will also increase the likelihood of the loan application being accepted and moving to settlement.

2) How much time will you realistically need to complete your exit strategy?

Most loans from private lenders are short-term loans ranging from six months to three years. While some private lenders like Private Mortgages Australia allow for extensions to be built into the loan term, the borrower still needs to have a realistic idea of how long it will take them to pay back the loan. If the borrower can’t complete the exit strategy within the loan term (including the extensions) then the loan may go into default and be subject to recovery action..

3) Why is bank finance not an option for you?

In most cases, business borrowers tend to go straight to a bank when looking for funding. So, if a borrower is scouting for alternative finance, then there is always a reason behind that decision.

This question helps the broker understand the needs of their client, and therefore gain insight as to which alternative finance solution can work best for their client.

For instance, many business borrowers require urgent funding and can’t wait the months that it can take a bank to process a loan application.
Not to mention, getting approved by the bank might be tricky in their case because banks want proof of revenue to establish ability to service the loan. But how can the business generate revenue without purchasing the equipment they need first?

These are the details that can help brokers identify exactly what their client needs, and these are exactly the details that will certainly be helpful when communicating with a private lender.

4) Has there already been a valuation done for the security property?

Most business loans require security or collateral. Having a good understanding of the value of the security property beforehand can help speed up the loan application process. The more recent the valuation, the better as the lender will need to ensure that it is accurate.

At PMA, we have a credit team that conducts due diligence and part of this process is identifying the valuation of the security property. A valuation is not always required, but if it is we have an extensive panel we can choose from to ensure it is done as quickly as possible.

5) Do you know the full cost of what you’re purchasing / using the loan for?

There are times when borrowers are not fully aware of the extra costs associated with the property or equipment they want to purchase.

The purpose of this question is to make sure that costs like stamp duty, GST or other legal fees are all accounted for. The last thing a borrower needs is to take out a loan that is insufficient for their needs and have to wait for approval of a further increase. Brokers can help their clients avoid that situation.

About PMA

Private Mortgages Australia specialise in providing flexible and tailored finance solutions that can address the unique needs of business borrowers and SMEs using secured mortgage lending

Private Mortgages Australia is channel agnostic so even if a broker’s client comes back directly to us for another loan the broker will still receive the regular commission.

If you are a broker and you would like to know more about our referral program or our commercial finance products, feel free to contact us.

If you already have a client you’d like to refer and you wish to discuss a scenario with us, you may complete our Quick App form here (< 10 mins).