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Navigating any kind of loan application process can feel daunting, especially if you’re not familiar with all the financial terms and jargon. Private lending is no different.
At PSA Capital Investments, we believe private lending should be as convenient and smooth as possible. As part of our commitment to making the borrowing process easier for our clients, we’ve decoded some of the common private lending terms and jargon you might encounter when applying for a private loan.
Private Lending Financial Terms Glossary
Private lending
Let’s start with private lending itself. It is an umbrella term that encompasses various types of lending that occur outside the traditional banking system. Some examples of private lending are asset-backed business loans, private mortgages, bridge loans, invoice financing, and construction loans.
The main advantage of private lenders is that they can offer more flexible loan terms that are suited to the situation, needs, and structure of a particular business. Private lending also tends to be quicker, which is important for time-sensitive business operations.
Asset-backed lending
This is a type of lending arrangement that involves putting up an asset as collateral for the loan. The asset can be property, equipment, inventory or vehicles.
If a loan is not backed by collateral, it’s called an unsecured loan, but it’s uncommon in private lending.
Due diligence
Due diligence is the process of investigating the creditworthiness of the borrower to determine whether they are able to repay the loan. The process includes, among other things, a credit history check, analysis of the borrower’s financial statements, and a legal compliance review. You can learn more about how we conduct due diligence at PSA in this blog post.
Valuation
Valuation is the process of determining the value of an asset that the borrower plans to put up as loan security. It can be conducted by the lender or a third party.
Valuation also includes an assessment of the asset’s liquidity, or how easy it is to convert it into cash to quickly recover the loan amount in the event of a default.
Loan-to-value ratio
Loan-to-value (LTV) ratio is the loan amount compared to the value of the asset that’s being financed. You’ll usually come across the term when applying for a mortgage or construction loan.
If you borrow $160,000 to purchase a property worth $200,000, that’s an 80% LTV ratio (160,000/200,000*100).
The LTV ratio represents the amount of risk the lender is willing to take on, so it varies depending on the type of loan, the creditworthiness of the borrower, and other factors. Most private lenders offer lending with LTV ratios of up to 75-80%.
Loan repayment term
The loan repayment term refers to the length of time the borrower has to repay the entire loan amount, including principal and interest. It affects the size and frequency of repayments, so the lender will choose it carefully to ensure the borrower can comfortably make loan payments.
Loan fees
Loan fees are the costs associated with borrowing a loan, separate from interest. Different types of loans have different kinds of fees, but the most common ones are establishment fees, legal fees, origination fees, and disbursement fees.
Gross loan amount
The gross loan amount is the loan sum that the lender agrees to provide to a borrower. It includes the principal, interest, and any loan fees. This is the amount that’s repayable by the borrower by the end of the loan term.
Net loan amount
The net loan amount is the actual amount the borrower will receive after fees and other costs have been deducted from the gross loan facility.
First mortgage & second mortgage
The first mortgage is the initial or primary loan secured against a property.
The second mortgage is a secondary loan taken out on a property in addition to the primary mortgage. It allows borrowers to tap into the equity built up in their property. Unlike a first mortgage that can only be used to purchase a property, you can use a second mortgage for a wider range of things, including investments.
We wrote a blog post on first and second mortgages if you’d like to learn more about mortgage loans.
Exit strategy
Some private lenders require borrowers to provide an exit strategy, which is a plan for how you’ll repay the loan. It is common with short-term high-risk loans such as bridging loans and hard money loans.
Exit fee
An exit fee is charged by some private lenders when borrowers pay a loan in full before the end of the repayment period, or when they refinance with another lender.
At PSA, we do not charge an exit fee, so borrowers are free to repay a loan ahead of time and exit the arrangement sooner.
Get Flexible and Affordable Loans From PSA
Our goal at PSA is to see businesses get back on their feet and thrive, which is why we offer fair and affordable lending terms.
Our team of experienced finance professionals will guide you through the private lending process, explaining every step and helping you understand all the finance jargon.
Ready to discuss flexible financing that’s tailored to your business? Give us a call on (03) 9847 7689.
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.
