What is non-bank lending?

Non-bank lending is the facilitation of debt between two or more parties, where the lender is not a conventional bank.

Non-bank lenders also only lend to commercial or business borrowers, who are using the funds for property/business dealings.

Why do non-bank lenders exist?

“Horses for Courses” as is often said. Bank and non-bank lenders have always existed side-by-side, with different borrowers requiring different solutions. Some situations warrant bank lending, whilst others require a more outside-the-box solution – hence non-bank lenders.

Non-bank lenders offer solutions that most conventional banks simply can’t. Whilst there are a myriad of reasons why borrowers choose non-banks over conventional banks, the most common include better lending terms such as:

  • Higher leveraging (higher LVRs)
  • Lower equity requirements
  • Potentially significantly higher internal rates of return for a developer
  • Much quicker approvals and turn around times
  • Lower presale requirements for construction loans
  • Less paperwork/low-doc options
  • Much more personalised and tailored experience

For smart borrowers, there’s more to debt than simply “what’s the rate?”. The true cost of debt is a much more all-encompassing calculation than simply the interest rate. In fact, in many cases, a property owner/developer is better off with a non-bank solution when compared to a bank – even though the bank’s rates are lower on face-value.

How can non-bank lending be more cost-effective if the rate is always higher than the banks?

What’s proving increasingly popular with non-bank lending for property developers is the cost-saving that non-bank finance offers on projects. In terms of interest rates, it’s almost always the case that non-bank lenders charge a higher interest rate than banks. However, much of the time, developers are better off using non-bank lending, as a development’s feasibility does not rely entirely on the rate alone. Rather, the trust cost of debt needs to take into consideration the following:

  • With lower equity requirements, a developer can put less money down, meaning their internal rate of return is often much higher (the return on money invested, as opposed to the development’s return – measured against time)
  • Further, as a result of lower equity requirements, developers can potentially activate more projects with the same amount of capital, with the costs of the additional interest being potentially negligible to profits made off the freed up capital
  • With lower presale requirements, developers are not pressured to presell at discounted rates to meet bank presale conditions – the money saved in not preselling more often than not far exceeds the extra interest costs
  • With faster turn around times, developers are able to more quickly activate their sites and, in doing so, pay less overall holding costs such as interest, land tax, marketing etc.