What is Private Credit?

If you are a property developer exploring an alternative form of funding, private credit may be an important financing option to consider. In this blog, we will explore what private credit is, how it is structured, how it works, and how property developers can greatly benefit from using it.

 

Private Credit

Let’s begin by looking at the private credit definition. Private credit is a type of financing provided by non-bank lenders to companies or projects that are not publicly traded. For business owners such as property developers, it is a means of securing finance from non-conventional sources, offering greater flexibility compared to traditional bank loans.

 

The Structure of Private Credit Funds

Private credit funds in Australia are typically structured through special purpose vehicles (SPVs), unit trusts, or private debt funds. These structures allow private lenders to pool capital from institutional investors and provide bespoke financing solutions. Each structure has specific legal and tax implications, requiring careful consideration based on the project’s requirements.

 

Types of Private Credit Investments

The key types of private credit investments are:

  • Direct Lending – Loans provided directly to businesses or developers, often tailored to meet specific project needs without intermediary banks.
  • Mezzanine Financing – A hybrid of debt and equity financing, used to bridge funding gaps in large-scale projects. It often involves subordinated debt with higher returns for the lender.
  • Distressed Debt – Financing opportunities involving companies or projects in financial distress, typically aimed at restructuring and recovery for higher future returns.

How Private Credit Providers Operate

Private credit providers, such as private debt funds and non-bank lenders, offer direct loans tailored to borrowers' needs. They focus on:

  • Bespoke Loan Structuring – Tailoring financing solutions to the borrower’s specific circumstances.
  • Risk Management – Employing strategies to mitigate risks while supporting the borrower’s success.
  • Strategic Collaboration – Partnering with borrowers to align funding and project goals for mutually beneficial outcomes.

How Private Credit Works

There is a lifecycle to private credit funding engagements, during which there are three main phases:

 

Initial Loan Agreement

To secure a private credit loan, you need to prepare a robust business plan and financing proposal. Lenders will assess the project’s viability, expected cash flow, and alignment with their lending criteria.

 

Ongoing Management and Support

Private credit providers often take an active role in supporting borrowers. This includes milestone-based funding, strategic advice, and operational support to ensure project success.

 

Loan Repayment or Exit Strategies

Private credit loans typically come with flexible repayment terms, such as:

Revenue-Based Repayments – Aligning repayment schedules with project cash flow.

Asset-Based Refinancing – Using property or other assets as collateral to refinance the loan.

Debt Rollovers – Extending the loan term for projects requiring additional time to generate returns.

Benefits of Private Credit for Property Developers

Acquiring funding through private credit for your property development project can unlock significant benefits for you and your business. These include:

 

Access to Tailored Financing

Private credit offers customised financing solutions that may not be available through traditional bank loans.

 

Flexible Loan Terms

Private credit loans provide flexible terms, including tailored repayment schedules and funding structures aligned with project timelines.

 

Strategic Support and Expertise

Private credit providers often have extensive experience in property development, offering strategic insights and guidance to enhance project outcomes.

 

Risks and Considerations in Private Credit

As a property developer, it is crucial that you are aware of a number of potential risks involved when securing private credit to fund your project. These include:

 

Loan Terms and Covenants

Private credit agreements often include covenants requiring borrowers to meet specific financial and operational metrics. Ensure these are realistic and aligned with your project’s capabilities.

 

Higher Interest Rates

Private credit loans typically have higher interest rates compared to bank loans, reflecting the tailored nature and higher risk profile of the funding.

 

Regulatory and Legal Considerations

Private credit funding in Australia must comply with financial regulations under ASIC. It is essential to understand the legal implications and engage legal counsel to review loan agreements.

If you are uncertain about how the different types of private credit financing strategies will affect your business, it is a good idea to engage an experienced broker to explain your options and match you to the appropriate private credit provider with experience in the property development industry.

 

Contact Us Today For Your Property Development Financing Needs!

With our deep knowledge of present property market conditions and local business needs, as well as a broad established network of financiers, MFEG is the broker of choice for property developers. We offer tailored financing solutions, including private credit funding, for your specific requirements.

Contact us today to find out how we can help you secure the ideal financing solution for your medium to large-scale property development projects.

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