Quick answer
Before signing a private loan letter of offer, check the total cost in dollars, every fee, any minimum interest period, how interest is handled, the default rate and triggers, the security and guarantees required, early repayment terms, extension options and conditions that must be met before settlement. Have your own solicitor review it before you accept.
Key points
- Work out the total cost in dollars, not just the price
- Find the minimum interest period and default terms
- Check every security and guarantee requested
- Have your own solicitor review it before accepting
A letter of offer, sometimes called a term sheet or indicative offer, is the lender’s written proposal. It sets out how much you can borrow, for how long, at what cost and on what conditions. It comes before the formal loan documents, and it’s the best moment to understand the deal and ask questions, because once the documents are signed, changing anything is much harder.
Private loans are short and often arranged under pressure. That’s exactly when borrowers skim. Use this checklist to slow down for twenty minutes before you accept.
The money
1. The loan amount. Is it the amount you need, after fees and any prepaid interest are deducted? Many private loans deduct costs at settlement, so the cash you receive is less than the headline amount.
2. Net funds at settlement. Ask for a settlement statement showing exactly what will be paid to you or on your behalf, and what will be deducted.
3. The total cost in dollars. Add up interest for the realistic term, every fee and any discharge cost. This is the single most useful number for comparing offers. The caveat loan calculator can help you estimate it.
4. How interest is handled. Is it prepaid from the advance, capitalised and paid at the end, or paid monthly? Each affects your cash flow and total cost differently.
The fees
5. Establishment or lender’s fee. Usually a set amount or a proportion of the loan, deducted at settlement.
6. Broker or introducer fees. If an intermediary is involved, how much are they paid and by whom? You’re entitled to know.
7. Legal and valuation costs. Who pays the lender’s solicitor and the valuer? Is there an estimate or a cap?
8. Commitment or application fees. Are any fees payable when you accept the offer, before settlement? Are they refundable if the deal doesn’t proceed?
9. Discharge fees. What does it cost to remove the mortgage or caveat when you repay?
The timing
10. The term. Is it long enough for your exit to happen, with a buffer? A term that expires a week before your expected payment is a problem waiting to happen.
11. Minimum interest period. Many private loans charge a minimum number of months’ interest even if you repay sooner. If you plan to repay early, this changes the real cost.
12. Early repayment. Apart from any minimum period, are there fees for repaying early? Can you repay in part to reduce interest?
13. Extension terms. If you need more time, can the loan be extended? At whose discretion, at what cost and with how much notice?
When things go wrong
14. Default triggers. What counts as a default? Common triggers include missed payments, the term expiring, other debts being enforced, false information and insolvency events. Some contracts include broad triggers that deserve attention.
15. Default interest and fees. What happens to the price on default? Default charges in private lending can be significant, so understand exactly when they apply and how much they add.
16. Enforcement. What can the lender do on default, and how quickly? With a registered mortgage, the lender may eventually be able to take possession and sell. Your solicitor should explain this plainly.
The security
17. Properties secured. Which properties are included? Is it only the one you discussed, or has the lender added another? Check the addresses.
18. Guarantees. Who must give personal guarantees? Directors, trustees, spouses, co-owners? Is each guarantee limited or unlimited? Every guarantor should get independent legal advice.
19. Other security. Is the lender also taking a general security interest over business assets, registered on the PPSR? That could affect other finance you hold.
Before settlement
20. Conditions precedent. What must happen before the loan settles? Common conditions include a satisfactory valuation, first mortgagee consent, independent legal advice certificates, insurance, payment of rates and land tax, and a signed business purpose declaration. Missing one can delay settlement, so start on them immediately.
How to use this checklist
Print it or keep it open while you read the offer. For each point, write down the answer from the document. If an answer isn’t there, ask the lender to confirm it in writing. If an answer surprises you, ask why.
Then compare. If you have more than one offer, set them side by side using total dollar cost, term, minimum interest period, default terms and security required. The cheapest-looking offer isn’t always the best one if it carries a short term, heavy default charges or extra security.
Protections for small businesses
Australian law protects small businesses against unfair terms in standard form contracts, including many business loan contracts. If a term seems one-sided, such as allowing the lender to change the price at will or call a default for trivial reasons, ask your solicitor whether it could be unfair. ASIC publishes guidance on these protections, and the Australian Financial Complaints Authority handles some small business lending disputes.
Questions to ask out loud
Some things are easier to ask than to find in the fine print:
- “If I repay in four months instead of twelve, what’s my total cost?”
- “If my exit is a month late, what happens and what does it cost?”
- “Are there any fees I haven’t seen in this letter?”
- “Who else is being paid from this loan?”
- “What would cause you to call a default?”
A reputable lender will answer clearly. Vague answers are a warning sign. Our guide to private lending red flags covers others.
A worked example
An owner received two offers for a $300,000 loan. Offer A had a lower monthly price but a twelve-month minimum interest period and a high discharge fee. Offer B was slightly pricier per month but had a three-month minimum and no discharge fee. The owner expected to repay in five months from a property sale. Worked through in dollars, Offer B was cheaper by a wide margin, because Offer A would have charged a full year’s interest regardless.
Keep a copy of everything
Save the letter of offer, the final loan documents, the settlement statement and every email confirming a term or a figure. If a question comes up months later, perhaps about a payout figure or an extension fee, having the original documents makes it a short conversation rather than a dispute. Diary the loan’s expiry date, the end of any minimum interest period and the date by which you’d need to ask for an extension.
We’ll walk through it with you
When we introduce a lender, we’ll go through the letter of offer with you point by point, and we’ll always encourage you to have your own solicitor review it. There’s no credit check when you first enquire, and your file isn’t sent out to a list of lenders. Accurate answers in the form help us find an offer that fits.
Start your enquiry, or learn how the process works first.
Frequently asked questions
Is a letter of offer binding?
It depends on its wording. Some are indicative and subject to conditions; others require you to pay fees once accepted even if the loan doesn't settle. Read the acceptance terms carefully.
Can I negotiate a letter of offer?
Often, yes. Fees, the term, the minimum interest period and extension terms are sometimes negotiable, especially with strong security.
Do I really need a solicitor?
Yes. Most private lenders require independent legal advice anyway, and a solicitor who reads the full documents can spot terms that a checklist can't.
What's a commitment fee?
A fee some lenders charge when you accept an offer, sometimes payable even if you don't proceed. Ask whether it's refundable and when it's due.