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Private lending is a good alternative for businesses that can’t access traditional bank loans. But it comes with the risk of predatory lending. While there are a lot of good lenders who genuinely want to see your business grow, there are also predatory lenders who want to debt-trap you and take your assets.
We’ve written this guide for business owners seeking private lending. It explains the difference between ethical lending and predatory lending and what to look for when choosing a private lender.
What is Ethical Lending?
Ethical lending prioritises transparency, fairness, and the borrower’s welfare. This is not just because the lender cares about their clients; it’s also good for them and their investors.
That’s because an ethical lender earns money from the interest you pay on your loan, so they want you to be able to make your repayments. Before giving you a loan, they’ll make sure you can repay it and that the terms of the loan are fair.
What is Predatory Lending?
Predatory lending is the opposite: low transparency, unfair lending terms, and they don’t really care about the welfare of your business.
In most cases, predatory lenders aim to seize your assets. They’ll push you into a loan agreement with terms that make it hard to make repayments. Then, when you default, they pounce and acquire the assets you’d put up as collateral.
Such cases have been on the rise in Australia, and ASIC has started cracking down on unethical lenders. So be on the lookout if you’re considering or in the process of getting a private business loan.
Warning Signs of Predatory Lending
Here are the red flags to watch out for when dealing with private lenders.
Hidden fees and surprises
An ethical lender will give you the terms of the loan upfront, including any fees. Predatory lenders will pull you in with a low interest rate, but when you’re midway through the application, you discover hidden fees and other surprises. By then, it’s difficult to back out of the deal.
Complex Loan Arrangement
A loan arrangement from an ethical lender will be clear about the terms, including the loan amount, repayment schedule, and what happens in the event of a default.
Predatory lenders have complicated arrangements that hide unfair lending terms. Their goal is to make it harder for you to make repayments and eventually default. If you’re struggling to understand the loan terms, that’s a warning sign.
Lack of Proper Due Diligence
Some borrowers dread the due diligence process that they have to go through before getting a loan. But it’s there to protect you. Ethical lenders want to ensure you can repay the loan. It also lets them know how much they can lend to you without threatening the health of your business.
If a private lender is ready to extend a loan without conducting proper due diligence, be wary. It might mean that they don’t care about your ability to pay the loan and just want to trap you in debt.
Aggressive Sales Tactics
An ethical lender understands that taking a loan is a serious financial and business decision, so they give you time to understand the arrangement without any pressure.
Predatory lenders are more aggressive. They’ll push you to sign the agreement, claiming it’s time-sensitive or for some other urgent reason.
If you’re feeling pressured to agree to a loan arrangement, take your time to really understand what it says. We also recommend getting guidance from a financial expert.
Why Ethical Lending Matters for Both Borrowers and Investors
As a borrower, ethical lending protects you from financial difficulties caused by unsustainable loans. Fair lending ensures you receive a loan that you’re able to repay without affecting business operations.
By making it easier for borrowers to repay their loans, ethical lending also ensures that private lending investors earn a steady income, as fewer loans default.
How PSA Capital Investments Ensures Ethical Lending
At PSA, we have processes in place to manage lending risks while ensuring borrowers get fair terms.
- We are transparent throughout the lending process.
- We have clear loan structures that borrowers can understand.
- We conduct rigorous due diligence.
- We offer fair and flexible terms that allow borrowers to repay their loans and exit the arrangement early with no penalty.
Contact us today at (03) 9847 7689 to learn more about our ethical lending practices.
Disclaimer: The information contained in this document is of a general nature only and has been prepared without taking into account your objectives, financial situation or needs.
