The Pros and Cons of Non-Bank Lending Explained
Written by David Lovato – CPC Development Lending Solutions
As any developer knows, finding the right finance is critical to your project getting off the ground. But getting all the funds in place can be a time-consuming and frustrating process. With the RBA starting the rate rising cycle in May cheap commercial loans via bank funding are becoming more expensive and less attractive.
Non-bank lenders have taken a growing market share since the GFC as bank regulations tightened over the last decade. This has lead to more competition which is great news for you, because borrowing through non-bank lenders offers some big benefits. Interestingly as bank lending tightened, non-bank lending loosened leading to a wild west mentality. Not all lenders are reputable, there are many pitfalls but doing deals with the best non-banks can be rewarding and will help you grow your business.
The advantages of non-bank finance
Non-bank lenders are typically privately owned and operated. So they can offer credit with fewer strings attached than traditional banks, such as:
- Lower pre-sales requirements to start construction
- Lower equity requirements, freeing up cash to drive your future development pipeline
What’s more, you get to deal with funders who understand property partnerships, repeat business and an entrepreneurial mindset. So they will generally approve or decline your application within days (not weeks or months like the banks).
Non-bank lenders also generally adopt a whole-of-business approach: they focus on the bigger relationship rather than the individual transaction. So If things don’t go to plan, you can work with them to ensure a win-win outcome.
What’s the cost of a non-bank loan?
Lenders charge various upfront and ongoing loan fees, so the cost of a loan isn’t just about the interest rate. The devil is in the detail, because steep charges and loan fees can eat into your profits, making your project unviable.
Three factors determine non-bank rates and fees:
- The loan’s risk profile
- The project’s profitability
- The borrower’s financial strength
A word of warning. Some lenders are deliberately vague about the applicable fees and charges, leaving you to discover them for yourself after you’ve committed to the loan.
For example, many loans come with a discounted interest rate that reverts to a higher rate if the loan terms are altered without mutual agreement during the loan term.
So it’s vital you’re clear on all applicable fees, charges and conditions before you apply. A specialist development finance broker such as CPC can help with this.
Five common mistakes to avoid
CPC has heard countless horror stories of developers trying to save money by arranging finance themselves, rather than through a specialist finance broker.
This usually ends badly.
That’s because these developers often end up making mistakes such as:
- Falling for too-good-to-be-true deals
Some non-bank lenders lure borrowers by promising them fees and interest rates that seem too good to be true. Sadly, these lowball offers are generally scams.
- Getting overcharged
You should also be wary of lenders that charge large upfront fees or seek caveats on your property to secure their fees before getting started on due diligence. Reputable lenders charge only a nominal upfront fee (to make sure the borrower is serious), which then gets refunded at settlement.
- Signing up for punitive penalty clauses
Watch out for clauses in offer letters or loan agreements that impose heavy penalties for breaches of loan terms.
- Committing to long minimum interest periods
Be careful of loans that require you to pay interest for a minimum number of months, as you might end up being penalised for paying down debt early.
- Working with fake lenders
Some unscrupulous brokers portray themselves as lenders and charge large upfront commitment fees. Once you’ve paid, they find excuses not to write the deal.
Why work with CPC?
Even the most experienced property developer finds it hard to choose the right non-bank lender and loan product. That’s because there are many lenders on the market, each offering different loan products, borrowing criteria, interest rates, and fees and charges. But you need to get it right, because you don’t want to make an expensive mistake that prevents your project from breaking ground.
That’s where CPC comes in.
We’re a specialist development finance broker, and have been arranging funding for our clients since 2014.
We work only with well-established, reputable non-bank lenders that have:
- Operated through different market cycles
- Got a strong track record for managing loans from beginning to end
So you can be confident the lender we find for you will have:
- Sufficient funds available
- Demonstrated cashflow management
- A loyal, long-term investor base
CPC unashamedly charges a nominal upfront fee. This ensures we can dedicate time to your project, so we can better understand you and your objectives.
We can then match you to the right lenders, presenting your project in the best light so they are keen to win your business.
Download our in depth lending guide here to learn more about current rates and jargon used in the development lending space.
Need development finance? CPC Development Lending Solutions can help you get your next project funded. To confidentially discuss your options, contact David Lovato on +61 434 932 634 or [email protected]
