How to choose a private lender: six checks before you borrow

Why Paul made this video

He calls it the good, the bad and the ugly of private lending. Private money has carried small businesses through tight spots for decades, he says, but the industry holds three kinds of operator: lenders who are open about their terms and want the loan to work; lenders whose aim is to take as much as they can from someone in a hurry; and operators who call themselves lenders with nothing to lend, who collect a fee and then hawk the loan around the real lenders. The six checks are for business owners, and for the brokers who refer them.

The six checks, and how to run each one

1. How long has it been lending, and where is it? Paul looks for a lender that has been around a fair while and is not shy about publishing a physical address. Ten more minutes takes it further: find the company on ABN Lookup and ASIC's registers, check the registered name matches the website, and ring it on a number you found yourself.
2. Does it lend its own money? Ask outright. An operator that has to sell your loan on sends your application, and your identity documents, to whoever might take it, and the days spent shopping it are days you may not have.
3. What sits behind the rate? A low headline figure with "from" in front of it starts the conversation rather than ending it. Ask about monthly or account fees, which Paul calls “interest in disguise”, and about anything charged when the loan is repaid.
4. What does repaying early cost? Some lenders keep the interest you would have saved and add a penalty on top.
5. What if you need the money for longer? A sale that settles a few weeks late should not bring a large extension fee, or a flat refusal to extend.
6. What do you pay before anything is approved? Paul is blunt: if a lender wants thousands or tens of thousands up front, “run a mile”. Such operators say yes to everything because the fee is the business.

Compare the whole loan, not the rate

Checks three, four and five can be run with one request. Ask each lender to put in writing what the loan will cost, in total dollars, over the period you expect to need the money, and again for three months longer. That single figure flushes out the monthly fees, any minimum interest period, the exit charges and the price of an extension, and it turns two offers built in different ways into two numbers you can set side by side. A lender that will not put the figure in writing has answered the question for you. The guide to hidden fees in Australian business loans lists the charges to ask about by name.

How HomeSec answers the six

HomeSec has lent since 2004, from its own funds, and a person decides every loan. Repaying early: anytime, with no penalty, and unused months of capitalised interest are rebated. Running longer: the term is open, and there is no fee to extend. Monthly fees: none. Up front: a small commitment fee, payable only once your loan is conditionally approved. Paul is candid that HomeSec does not sell itself on its rate; his point is that a loan with every cost in the open often works out cheaper than one that only looks cheap. The full list is on what it costs.

A word for brokers

Paul's closing point is aimed at brokers. When a referral goes wrong, the client blames the broker who sent them, not the lender they never chose. Running the same six checks on any private lender before introducing a client protects both. For how the different kinds of private lender work, and who regulates them, see private lenders in Australia.