Private credit explained: direct lenders and funds

What the term means

"Private credit" is an industry term for lending by organisations that are not banks. In property finance, it covers a wide range of lenders: individuals and family offices lending their own money, specialist non-bank lenders, and lenders that raise money from investors through managed investment funds and lend it out as property-secured loans.

When people talk about growth in private credit, they usually mean the last group: funds that pool money from investors and lend it to borrowers, often for construction, development, bridging and commercial property loans.

For a borrower, the label matters less than one practical question: where does this lender's money come from, and what happens to my loan if that changes?

How funds differ from direct lenders

There are broadly three ways a non-bank property lender may be funded.

Lending its own capital

Some lenders lend money they own outright, such as a family office or a business lending from its balance sheet. Decisions sit with the owner, and the lender does not need to return money to outside investors.

Lending through a fund

Other lenders raise money from investors into a fund and lend it out. The fund's rules set out how and when investors can withdraw their money. Some funds allow regular withdrawals; others lock money in for a fixed period. Each loan may be held by a single fund or shared across several.

Warehouse or wholesale funding

Some non-bank lenders borrow wholesale funding from banks or institutional investors and on-lend it. Those arrangements usually come with conditions the lender must meet, which can influence what it is able to agree with borrowers.

Many lenders combine these methods. Lenders generally explain their funding if asked, and it is reasonable for a borrower to ask.

How private credit differs from bank lending

From the borrower's side, the differences between a bank and a private credit lender usually show up in four places.

Assessment

Banks generally follow standardised credit policies, with set income tests and documentation requirements. Private lenders often place more weight on the property, the exit and the borrower's track record, and may consider situations that fall outside bank policy, such as a short-term need, an unusual property or income that is hard to document.

Speed and flexibility

Private lenders can sometimes make decisions faster, because fewer layers of approval sit between the application and the decision. That flexibility can also cut the other way: terms may be negotiated case by case, so two borrowers with similar loans can end up with quite different documents.

Cost

Private credit is generally more expensive than bank lending, reflecting the higher risk the lender accepts and its own cost of funds. Fees can make up a large share of the total cost on short loans. The loan cost estimator adds interest and fees together so you can see the overall cost of an offer you have received.

Term

Private credit loans are often short, designed to be repaid from a sale or a refinance. That makes the exit plan central to the loan, and it is why understanding how the lender approaches extensions matters before you sign.

Reading the loan documents with funding in mind

Several clauses in a typical property loan are worth reading with the lender's funding in mind. Ask a lawyer to explain them before you sign.

• Assignment or transfer clauses let the lender sell or transfer the loan, sometimes without your consent.
• Review events let the lender review the loan if certain things happen, such as a change in your circumstances or the value of the property.
• Conditions precedent to drawdown set what must be true before each advance. In a staged loan, these apply to every draw, not only the first.
• Market disruption or increased cost clauses may let the lender pass on changes in its own funding costs.
• Default and enforcement provisions set out what counts as a default, how much notice you receive and what the lender can do next.

Knowing where these clauses sit, and what triggers them, helps you ask focused questions and plan for the less likely outcomes as well as the expected one.

What regulators have said

Australian regulators have paid attention to the private credit sector. ASIC has published reports and guidance about private credit funds, including how they are run, valued and described to investors. The Reserve Bank of Australia discusses non-bank lending and private credit in its Financial Stability Review.

Most of that work focuses on investor protection and financial stability rather than on borrowers. Privet links to these publications in the sources for this page so you can read them directly. Privet does not summarise regulators' findings beyond what they publish.

What it can mean for borrowers

The way a lender is funded can affect how it behaves when conditions change. These are general possibilities, not predictions about any lender.

Extensions and variations

If your loan needs more time, the lender's ability to agree may depend on its own funding terms. A fund facing many withdrawal requests may prefer loans to be repaid on time rather than extended.

Staged drawdowns

For construction and development loans, the lender must have money available for each progress payment. Ask how the lender ensures funds are available for every stage, not only at settlement.

Valuation and redemption pressure

When property values fall or many investors want their money back, a fund may need to reduce its loans. In those conditions a lender may look harder at loans near the end of their term, at loans with higher LVRs, or at loans where the exit looks uncertain.

Enforcement and default

If a loan falls into default, the lender's approach may be shaped by its obligations to its own investors. Understand the default terms in your loan documents and seek legal advice early if you have difficulty repaying.

Loan transfers

Loan documents often allow the lender to transfer or sell the loan. Ask whether that could happen and who would manage the loan afterwards.

Questions to ask a lender about its funding

1. Do you lend your own money, money from a fund, or wholesale funding?
2. If a fund, can investors withdraw on short notice, and what happens to existing loans if many do?
3. Is my loan funded in full at settlement, and how are later drawdowns funded?
4. Could my loan be transferred or sold, and who would manage it?
5. How do you decide on extensions, and does your funding affect that?
6. Who manages the loan if your business stops operating?
7. Do you hold an Australian Credit Licence where relevant, and are you a member of AFCA?

You can check a lender, and any related fund manager, on ASIC's professional registers. Privet's scams warning explains common warning signs.

What this page is not

This page does not:

• compare, rate or rank lenders or funds;
• suggest investing in any fund;
• refer investors to anyone;
• make any claim about returns or performance.

If you are considering investing in a fund, speak to a licensed financial adviser. ASIC's MoneySmart website has information for investors.

Related reading

• Bridging finance explained
• Construction and development finance explained
• Types of property finance
• Loan cost estimator

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• Scenario: buying before you sell
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• Scenario: refinancing a short-term loan
• Scenario: funding a renovation
• Scenario: a shortfall before settlement
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• Stamp duty in ACT
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