The three questions every private lender asks

Bank lending runs on policy. An application is scored against rules about income, credit history, industry and loan size, and if it falls outside them, the answer is no, often before a person has thought about the deal. Private lending works differently. A private lender is putting its own or its investors’ money at risk, and it decides by asking three plain questions.

If you understand those questions before you enquire, you can present your situation the way a lender thinks about it. That alone can turn a maybe into a yes, and a slow yes into a fast one.

Question one: what’s the security?

The first thing a private lender wants to know is what stands behind the loan if everything goes wrong. For the loans we arrange, that’s property: a home, an investment property, a commercial building, an industrial unit or land.

The lender isn’t only interested in what the property is worth today. It wants to know how confident it can be in that value, and how easily the property could be sold if it ever had to be. Those are different things. A $900,000 house in an established Brisbane suburb with dozens of recent comparable sales is very strong security. A $900,000 rural block an hour from the nearest town, with two sales in the district in the past year, is far less certain, even though the headline value is the same.

The lender will also look at what’s already owed against the property, because that determines how much room there is. The key measure is the loan-to-value ratio, or LVR: the total secured debt divided by the property’s value. If there’s an existing bank loan, it’s the combined LVR that counts.

Factor	Stronger security	Weaker security
Property type	House or standard unit	Specialised building, remote land
Location	Established suburb or major centre	Small town, remote area
Sales evidence	Plenty of recent comparable sales	Few or none
Existing debt	Low, with a mainstream lender	High, or in arrears
Title	Clean, single owner or willing co-owners	Disputed, complex or unwilling owners

How to answer it well: give the full address, who owns the property, what’s owed and to whom, and anything unusual such as flood history, a defect claim or a lease. If you have a recent valuation or appraisal, send it. Our property types section explains how lenders see each kind of security.

Question two: what’s the money for?

The second question is about purpose. It matters for two reasons.

First, the law. The loans we arrange are for business purposes only. A loan used wholly or predominantly for business is generally outside the consumer credit rules that govern home loans and personal loans. Lenders need a clear, honest statement of purpose to confirm which rules apply, which is why they ask you to sign a business purpose declaration.

Second, risk. The purpose tells the lender whether the money is likely to make the situation better or worse. Clearing an ATO debt that’s about to trigger a director penalty notice is a purpose that removes risk. Buying discounted stock with firm orders behind it creates value. Covering ongoing losses with no plan to fix them simply delays a problem, and lenders know it.

Good purposes are specific. “Working capital” is vague. “Pay $140,000 in overdue GST and PAYG before the director penalty notice deadline on 14 November, and $60,000 for stock for the Christmas period” is clear and believable.

How to answer it well: say exactly what the money will do, with amounts, and attach supporting documents such as an ATO statement, a contract, an invoice or a settlement statement.

Question three: how will it be repaid?

The third question is the one that decides most private lending outcomes. Private loans are usually short-term, often six to twelve months, and they’re designed to be repaid in a lump sum from a specific event. That event is the exit.

Common exits include:

• refinancing with a bank once accounts are lodged or a debt is cleared
• selling a property, either the security or another asset
• receiving a large payment, such as a contract milestone or an insurance settlement
• selling stock or equipment
• an equity injection from a partner or investor

A lender will test the exit for two things: is it realistic, and is it likely to happen within the term? A bank refinance is realistic if the business has a clear path to meeting the bank’s requirements. It’s not realistic if the business has been declined repeatedly for reasons that won’t change. A property sale is realistic if the property is saleable at the expected price within the time allowed.

The strongest files have a backup exit too. If the bank refinance falls through, could a property be sold? If the contract payment is late, is there another source of funds? Our guide to exit strategies private lenders accept goes deeper, and you can test your own plan with the exit plan checker.

How to answer it well: name the exit, give a date, show evidence and offer a backup.

How the three questions work together

The three answers aren’t scored separately. A lender weighs them together, and strength in one area can make up for weakness in another, within limits.

Scenario	Security	Purpose	Exit	Likely result
ATO debt, home with large equity, bank refinance planned	Strong	Strong	Strong	Fast approval
Stock purchase, investment unit, sale of stock	Good	Good	Moderate	Approval, perhaps shorter term
Ongoing losses, rural block, no clear exit	Weak	Weak	Weak	Decline
Settlement shortfall, commercial building, bank approval in place	Strong	Strong	Strong	Fast approval

Notice what isn’t in the table: credit score. A poor credit history is considered, and it may affect the price or the amount, but with strong answers to the three questions, it rarely stops a deal.

A quick example of all three

A Rocklea transport operator needed $230,000. Security: a house in Sherwood worth about $1.3 million with $520,000 owing to a bank. Purpose: clear $180,000 of overdue PAYG and GST before a director penalty notice deadline, plus $50,000 for tyres and registrations. Exit: refinance into the bank home loan once the ATO debt was cleared and the next tax return lodged, with the sale of a spare prime mover as the backup. Three clear paragraphs, each backed by a document. The lender approved the same day.

What this means for you

Before you enquire anywhere, write down three short paragraphs: one on the property, one on the purpose and one on the exit. If you can’t fill one of them in convincingly, that’s useful to know. It might mean offering a different property, narrowing the purpose or planning the exit more carefully before borrowing.

When you enquire with us, the form asks about each of the three. Please answer accurately, because it’s how we brief the right lender. There’s no credit check when you first enquire, and your file stays with our desk rather than going out to a list of lenders.

Start your enquiry, or read about private business loans first.