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A difficult credit market may drive more small-to-medium enterprises to private lenders, which will help some SMEs survive and give more brokers a foothold in commercial broking, says the head of a non-bank lender.
Ren Wong (pictured above, left), the CEO of ASX-listed N1 Holdings, said SME owners were “feeling the squeeze” when it came to being able to access funding, and for some it threatened the survival of their businesses.
“The rising rate environment isn’t making it easier,” Wong said. “This is especially hard felt by customers whose business loan facilities are a legacy of cheaper money.”
“All of a sudden the spike in the cost of funds as well as an inflation-driven rise in the cost of doing business are pushing many businesses to the brink.”
More will seek out private lending, Wong said, as business owners and sophisticated investors go on the hunt to secure funding at a cost that’s not detrimental to their operations.
N1 Holdings has experienced a surge of enquiries since the beginning of 2023, settling $30 million in loans in January through what was traditionally a quiet period.
Rob Taylor (pictured above, right), the commercial relationship manager at Sydney brokerage Bayside Residential and Commercial Mortgages, said rising interest rates made loan servicing more difficult.
Capitalisation rates – or expected rates of return – are also now moving higher on commercial properties, which is causing compressed commercial asset values, Taylor said.
“There is a massive need for private lenders when SMEs fall outside the banks’ criteria. There needs to be a secondary market, or they will just fall off a cliff,” he said. “Private lenders are playing an important role in the market at the moment.”
Taylor said SMEs typically use private lenders to expand when interest rates are low. Now, they would be using them more often just to “consolidate and hold on”.
A stepping stone into commercial lending
Mortgage and finance brokers could use any upsurge in interest in private lending options as an easy first step into the world of commercial broking, Wong said.
“Given its business lending nature and that it is receptive to both residential and community properties, is an ideal stepping stone into commercial lending.”
Wong said there was a misconception that SME lending involved commercial property. He said it could have a residential focus, helping those brokers new to SME lending.
“Your SME or self-employed clients might not own commercial property, but that doesn’t mean that an SME lending solution can’t help them,” Wong said.
Taylor agreed that private lending can be a good first step into commercial lending.
“Private lenders tend to have a more simplistic view of the borrower than a bank. They have a big focus on the asset, on the security,” he said. “There are also a lot of skilled private lenders out there, and what brokers will find is that they will often take the time to help them with the transaction.”
Private lending can be a “dangerous world” for those new to the market, and Rob Taylor suggested brokers who are interested should “proceed with caution”.
“We know the majority of private lenders we deal with, and the majority are very good at what they d0 – 99% of the private lenders we use with our clients are fantastic, reputable and professional operations,” he said.
However because the private lending space remained unregulated, Taylor said there were private lenders in the market who would “fleece” unwary SME borrowers.
“I would recommend brokers new to the market talk to other brokers, and ask what kind of experience they have had with certain lenders. Be sure to look very closely at the deal the private lender is offering and decide if it makes sense or not.”
Private lenders offer higher rates than mainstream banks, and as a result, are often not a sustainable option for most SMEs to take over the long term.
Taylor said SMEs that benefitted the most from engaging with private lenders had a plan - for example over 12 months - and then executed on that plan.
“A lot of private lenders are used as a stop gap, giving you time to execute what you are doing,” he said. “What you don’t want to do is not have done anything in 12 months’ time, and then find you owe more money and your property has gone down in value.”
Wong said Australian borrowers, unlike other countries like UK and US, have not used the full potential of private lenders and did not have sufficient awareness of the space.
“Brokers and lenders who capitalise on this opportunity have the obligation to educate the market, and also make sure the industry is working properly to add real value to the market - especially in the unregulated space,” he said. “Eventually voluntary regulation of private lending is probably one way to gain trust.”
