As specialists in procuring private lending solutions for property developers, we’ve seen our fair-share of deals.
Whilst every deal is unique in its own way, one theme that is common amongst most is a developer’s frustration with securing finance.
Out of this frustration with conventional bank finance, the alternative debt sector has surged in popularity nationally, in particular with property developers.
“But private debt is more expensive than bank debt—why on earth would anybody consider it?”—a question often presented to us.
As painful as it is to use an analogy as tired as “Uber”, it’s rather fitting. Here it is, in addressing the “why use private” question:
Think of conventional bank funding as a bus and private lending as an Uber—both means of transport but both very unique.
Slow
Governed by a set time table and long waiting times
Multiple stops along the way
“One size fits all” approach
Minimal flexibility with fixed and rigid routes
It’s cheap and at the end you may be late, you may be disgruntled, but it got you to your destination. Very similar to the bank experience: cheap, regimented, slow, inflexible—but works.
Fast
On-demand
No stops along the way
Bespoke routes
Direct route based on advance mapping technology
Private lending provides the quickest bespoke route, with a known cost, privacy, water, air-conditioning and no stopping. It’s a premium but you are delivered to the front door of where you needed to be without delay, on time and refreshed. A characterisation of the experience with the right private lender and private lending solution.
Uber grew out of a frustration with consumers around the failure of conventional modes of transport (taxis and buses in particular) to adapt to innovative technologies and the demands of riders.
Whilst Uber was celebrated by consumers, conventional transport industries were terrified by the rapid adoption by riders.
Much to everybody’s surprise, there was no “doom” of the taxi or bus industries.
Rather, the market matured and those wanting an Uber experience were prepared to pay a premium for the additional benefits of an Uber, as compared to a bus or a taxi.
The markets did not converge, nor did they die—the market simply divided and two new markets emerged; one for conventional “old school” transport and one for “contemporary” transport.
In a similar story, property developers have been figuratively screaming at the conventional banks for years to adapt to a changing landscape and offer lending products that suit.
Developers need:
Higher leverage
Lower or no presales
Fast approvals
Fast progress payments
Flexible lending terms
In a similar light to Uber, private lenders identified this market and have been overwhelmingly gearing themselves up to cater to it as more-and-more developers seek out “contemporary” debt.
As the old saying goes “horses for courses”. It’s not appropriate to straight-out compare bank and private lending options.
Just like an Uber is not a taxi, a private is not a bank.
They offer different solutions for different borrowers.
To any property developers reading this, the question may arise: Would your projects potentially be suited to private debt solutions?
Here are some questions to consider:
Do I want to tip in less equity?
Do I want a higher return on equity (RoE)?
Do I want to take the risk of selling at a discount to achieve presale hurdles?
Do I want to spend money, time and effort on marketing, display suites and staff?
Do I want to maintain holding costs for an extended period of time to satisfy presale hurdles? Think land tax, interest on the land etc
Do I really want a financier dictating my marketing and sales decisions?
Do I want a financier dictating what a “qualifying” presale is?
Do I really want to wait 3, 6 or 12 months for a bank to consider, review and likely knock back my application?
Do I want my progress claims to be assessed with speed and flexibility?
Do I want to be in more projects, quicker and with less equity down?
When adding up the discounted presale rates, the holding costs and the cost of more equity down—is private lending really the “expensive” option?
Is there more to finance costs than just the interest rate alone?
What’s more important—project profit as a dollar sum, or RoE and internal rate of return (IRR)?
What relationship does speed have with true profit?
If you’re a property developer and want to learn more, it’s always worthwhile asking some questions to those in the know.
The team at Private Lending Brokers specialise in connecting property developers with reliable private lenders and welcome your enquiries.
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