What developers need to understand before approaching a non-bank or private credit funder
Introduction
Private lenders are often described as more flexible than banks, but flexible does not mean careless. A private credit fund may be willing to consider a project that falls outside a major bank’s policy, yet it will still conduct a detailed assessment of whether the loan can be repaid, whether the security is sufficient and whether the sponsor can manage the project when conditions do not unfold exactly as planned.
The difference is usually not that private lenders ignore risk. It is that they may be prepared to accept, structure and price risk differently. A bank may decline a transaction because the project does not fit a standard policy setting, such as a presale threshold, minimum developer experience requirement or particular asset class. A private lender may instead ask whether the risk can be controlled through lower leverage, additional equity, stronger security, tighter covenants, higher pricing, staged drawdowns or a more conservative exit strategy.
For developers, this distinction matters. A weak funding application does not become strong simply because it is sent to a private lender. In many cases, private lenders examine the commercial substance of a project more directly because their capital is often deployed into transactions with greater complexity, shorter timeframes or higher leverage than a conventional bank would accept. The lender therefore needs confidence that the project has enough value, margin, liquidity and management capability to withstand setbacks.
This article explains how private lenders assess property development risk in Australia, the key questions they ask, the metrics they test and the practical steps a developer can take to improve the quality of a funding submission.
Private lending is risk selection, not risk avoidance
Every development loan contains risk. Planning approvals can be delayed, builders can fail, construction costs can increase, sales can slow and valuations can move. A private lender does not expect a project to be risk-free. Instead, it tries to determine which risks are acceptable, which can be mitigated and which are too difficult to control.
This is why a private lender may approve a transaction that a bank declines, but also why it may impose a structure that appears more conservative in other respects. The lender could permit fewer presales, for example, while requiring a lower loan-to-value ratio, a larger interest reserve, a stronger cost-overrun guarantee and more frequent reporting. It may accept a less experienced developer if an experienced builder, project manager and consultant team are in place. It may fund a specialised asset but require a credible tenant, operator or purchaser before construction begins.
Private credit decisions are therefore highly transaction-specific. Rather than relying only on a standard product policy, the lender generally assesses the total risk package. The site, planning status, feasibility, sponsor, construction team, market, exit and security position are considered together. A weakness in one area may sometimes be offset by strength in another, but a project with several unresolved weaknesses will rarely be made financeable by paying a higher interest rate alone.
“Flexible does not mean careless.”
— The Australian Property Development Handbook
The first question: how will the lender be repaid?
The central question in every private development loan is the exit. Before focusing on pricing or leverage, the lender wants to understand exactly where the repayment money will come from and when it is expected to be available.
For a residential development, repayment may come from the settlement of completed lots, townhouses or apartments. For a commercial project, the exit may involve selling the completed asset to an investor, refinancing the stabilised property into an investment loan or repaying the facility from a pre-agreed one-line sale. A land subdivision may repay progressively as titled lots settle. A residual stock facility may rely on the orderly sale of remaining completed dwellings over a defined period.
Private lenders usually test the exit rather than simply accepting the developer’s preferred strategy. They may compare projected sales prices with current evidence, apply slower settlement assumptions, reduce the expected value, increase selling costs or test a higher refinance capitalisation rate. Where the exit relies on refinancing, the lender will ask whether the completed asset is likely to meet the serviceability, loan-to-value and leasing requirements of the proposed take-out lender.
A credible exit strategy is specific. It identifies the likely repayment source, timing, assumptions, fallback options and evidence supporting each assumption. A statement such as ‘the debt will be refinanced at completion’ is not enough unless the completed valuation, net income, expected refinance leverage and interest cover have also been tested.
Sponsor experience and execution capability
A development feasibility may look attractive on paper, but a lender is ultimately relying on people to deliver it. Private lenders therefore examine the sponsor’s experience, financial capacity, track record and behaviour in considerable detail.
Relevant experience does not always mean that the developer must have completed an identical project. The lender will look at the scale and complexity of prior developments, whether they were completed on time and within budget, how funding facilities were managed, whether sales and settlements occurred as forecast and how the sponsor responded when problems arose. A developer who has successfully delivered multiple townhouse projects may be considered for a larger project if the increase in scale is sensible and supported by an experienced team. A first-time developer may still be financeable, but generally needs stronger advisers, more equity and a simpler project structure.
Financial capacity is equally important. The lender wants to know that the sponsor has enough liquidity to contribute the required equity, meet cost overruns, pay non-funded expenses and support the project through delays. Net worth can provide comfort, but liquidity is often more important during construction. A developer may have substantial property assets yet little accessible cash. If those assets cannot be sold or refinanced quickly, they may not solve a short-term funding gap.
Private lenders also assess conduct. Delayed information, unexplained changes, inconsistent figures and incomplete disclosure can damage confidence. A developer who identifies problems early and provides a realistic solution is generally viewed more favourably than one who conceals an issue until the lender discovers it. Trust does not replace security, but it strongly influences whether a lender believes the project can be managed through uncertainty.
Site quality, title and planning risk
The lender’s security begins with the property itself. A private lender will examine the site’s location, zoning, title, access, services, planning status and marketability both as a development site and, if necessary, as a mortgagee sale.
Planning risk is particularly important. A project with a fully effective development approval, resolved appeal periods and clear operational works requirements is generally lower risk than a site relying on a future approval. Some private lenders will fund pre-development or planning risk, but the leverage and loan structure will normally reflect the uncertainty. The lender may advance against the current as-is value rather than the proposed end value, require additional collateral or stage the facility so that further funds become available only after approval milestones are achieved.
Title issues can also affect financeability. Easements, covenants, contamination, flooding, access limitations, heritage constraints and infrastructure obligations may reduce value or delay construction. A private lender will expect these matters to be identified before settlement rather than emerging during legal due diligence. Where a risk is known, the application should explain how it has been priced, designed around or contractually addressed.
Location is assessed from an exit perspective. A strong metropolitan site with broad buyer demand may support greater confidence than a specialised project in a thin regional market. This does not mean regional projects cannot be funded, but evidence of demand, realistic absorption assumptions and conservative leverage become more important when the resale market is narrower.
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Valuation risk and the lender’s view of value
Private lenders rely heavily on valuation, but they do not always rely on a single valuation figure. They consider the basis of value, the evidence supporting it and how that value may change if the project is delayed, incomplete or sold under pressure.
For development projects, the valuation may include the current land value, the gross realisation value of completed stock, the value on an ‘as if complete’ basis and the value of the project at different stages of construction. A private lender may also consider an orderly realisation value, mortgagee-in-possession scenario or discounted bulk-sale value. These alternative views help the lender understand how much protection remains if the preferred exit does not occur.
The lender will compare the valuation with the developer’s feasibility. If the developer assumes sale prices materially above the valuer’s evidence, the lender will generally use the lower figure for credit assessment. If the valuation depends on aggressive rental growth, a low capitalisation rate or full occupancy immediately after completion, the lender may apply more conservative assumptions.
Valuation risk is not only about the end value. It also affects progressive drawdowns. If construction costs increase without a corresponding increase in value, the lender’s loan-to-value ratio may deteriorate. This is one reason private lenders monitor both cost-to-complete and value throughout the facility term.
Feasibility, margin and sensitivity testing
A private lender does not simply ask whether the base-case feasibility shows a profit. It asks whether the profit is large enough to absorb reasonable adverse movements and still leave a clear path to repayment.
The lender will review gross realisation value, total development cost, profit on cost, profit on revenue, loan-to-cost, loan-to-value, equity contribution, interest allowance, contingency and peak debt. It will also examine whether all costs have been included. Common omissions include authority charges, finance fees, legal expenses, sales commissions, escalation, GST timing, holding costs and interest beyond the planned completion date.
Sensitivity testing is central to private credit assessment. The lender may reduce revenue, increase construction costs, extend the project duration and combine these assumptions in a downside case. A project that remains profitable after a moderate value reduction and cost increase is more resilient than one where a small change eliminates the entire developer margin.
The lender is also concerned with timing. A project can show a healthy total profit but still experience a cash shortfall before settlements occur. Monthly cash-flow modelling is therefore important. It should show when equity is contributed, when debt is drawn, when interest is capitalised, when presale deposits are available, when construction claims are paid and when sale proceeds are received.
Leverage: how much debt is too much?
Private lenders can often provide higher leverage than banks, but maximum leverage is not automatically suitable leverage. The appropriate debt level depends on project margin, market depth, construction risk, sponsor strength, presales and the reliability of the exit.
Loan-to-cost measures debt against the total project cost, while loan-to-value measures debt against the value of the completed project or the lender’s selected valuation basis. Both matter. A facility may appear conservative on end value but highly geared against actual cost, leaving the developer with very little cash invested. Conversely, a project with substantial land equity may have a low loan-to-cost ratio but still present valuation risk if the land value is uncertain.
Private lenders often focus on genuine sponsor equity. Equity that has already been spent on the site, approvals and design may count, but the lender will still ask how much additional cash remains available. Vendor finance, deferred fees and subordinated debt may support the capital stack, but they are not always treated as equivalent to cash equity because they create additional repayment obligations.
Higher leverage increases the lender’s exposure to small changes in value and cost. It also increases the developer’s sensitivity to interest and delay. A higher-leverage facility can be commercially sensible where it preserves capital for other uses or avoids expensive external equity, but the decision should be based on total project economics rather than the headline loan amount alone.
“Private lending is risk selection, not risk avoidance.”
— The Australian Property Development Handbook
Construction risk and cost-to-complete
Once construction begins, the lender’s risk shifts from the value of the site to the ability to complete the project within the available funding. This makes cost-to-complete analysis one of the most important parts of a private development loan.
The lender will assess the builder’s experience, financial capacity, licensing, current workload and history of completing similar projects. It will review the building contract, including whether it is fixed price, the treatment of provisional sums, extension-of-time provisions, liquidated damages, security, variations and termination rights. A fixed-price contract provides useful protection, but it does not eliminate risk if the builder is financially weak or the scope is incomplete.
A quantity surveyor normally reviews the construction budget before first drawdown and monitors progress claims during the project. The lender will compare remaining undrawn funds with the estimated cost to complete. If the available facility and committed equity are insufficient, the lender may stop drawdowns until the shortfall is covered.
Private lenders pay particular attention to contingency. A project with minimal contingency may appear more profitable in the feasibility but can be difficult to manage in practice. The appropriate allowance depends on design completion, contract certainty, project type and construction stage. Early-stage projects and complex refurbishments generally require more contingency than fully documented, straightforward construction.
Builder insolvency and replacement risk
Builder failure is one of the most serious risks in development finance because it can create delay, additional cost, legal disputes and deterioration of the partially completed asset. Private lenders therefore assess not only the original builder but also what would happen if that builder had to be replaced.
The lender may ask whether the design and approvals are sufficiently documented for another contractor to take over, whether warranties and subcontractor information are available, whether the borrower has control of the site and project documents and whether the budget contains enough allowance for replacement costs. The lender may also require step-in rights or assignment of key contracts.
A strong builder reduces risk, but the lender will not assume that any contractor is immune from financial pressure. Regular quantity-surveyor reporting, confirmation of subcontractor payments and monitoring of variations can help identify problems before they become critical.
Market, presale and leasing risk
The lender needs evidence that the completed product can be sold or leased at the prices assumed in the feasibility. This involves more than broad statements about population growth or market demand. It requires recent comparable evidence, realistic absorption rates and an understanding of competing supply.
For residential projects, presales can reduce market risk and provide evidence of buyer demand. Private lenders may accept fewer presales than banks, but they will still examine the quality of the contracts, deposit amounts, sunset dates, purchaser concentration, valuation risk and the likelihood that buyers can settle. A large number of contracts is less useful if they are all dependent on the same investor group or if prices are significantly above current valuations.
For commercial developments, preleases and tenant quality are often central to value and refinanceability. The lender will consider lease term, rent, incentives, review structure, fit-out obligations, tenant covenant and any conditions that remain outstanding. A long lease to a strong tenant may materially reduce risk, while an unleased speculative project requires stronger evidence of demand and usually more conservative leverage.
Market risk also includes settlement timing. Even where presales are strong, delays in titles, occupancy certificates or purchaser finance can extend the loan term. A prudent facility includes enough time and interest allowance to manage a reasonable settlement period after practical completion.
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Open the feasibility calculators →Exit risk in refinance-and-hold projects
Projects intended to be retained require a different assessment from projects that will be sold. The private lender must determine whether the completed asset can be refinanced into longer-term debt at maturity.
This analysis usually focuses on stabilised net income, capitalisation rate, completed value, debt serviceability, lease maturity profile and the likely lending appetite of the take-out market. The lender may use a higher interest rate and lower refinance loan-to-value ratio than the developer expects. It may also require evidence that sufficient time has been allowed for leasing and stabilisation before the private facility expires.
A refinance exit can be attractive because it allows the developer to retain the asset, but it becomes vulnerable if interest rates rise, valuations fall or leasing takes longer than expected. A credible backup strategy may include partial asset sales, additional equity, a facility extension or conversion to residual stock or investment finance.
Security, guarantees and control
Private development lenders usually take a first-ranking mortgage over the property, a general security agreement over the borrowing entity, guarantees from relevant sponsors and assignments of material project documents. Depending on the transaction, they may also require share security, control of project bank accounts, assignment of insurance and step-in rights under the building contract.
Security does not replace a viable project, but it determines the lender’s options if the borrower defaults. The lender wants the ability to protect the site, continue construction, appoint a receiver, sell the property or enforce guarantees where necessary. The more complex the ownership or capital structure, the more important it is that security priorities and enforcement rights are clearly documented.
Where mezzanine debt or preferred equity is also involved, the senior private lender will examine subordination and intercreditor arrangements. It needs certainty that junior capital cannot enforce, withdraw funds or disrupt the project ahead of the senior lender. Poorly coordinated capital stacks can delay approval even where the underlying project is sound.
Interest reserves, loan term and delay risk
Private development loans commonly capitalise interest, which means interest is added to the loan rather than paid monthly from operating income. This is convenient during construction but creates a risk that the facility limit will be consumed faster than expected if drawdowns occur early or the project is delayed.
The lender therefore tests the interest reserve against the projected drawdown profile, not merely the total facility amount. A realistic model should include establishment time, construction, contingency, practical completion, titles, settlements and a buffer. If the project is delayed beyond the funded term, the borrower may need to contribute additional equity or seek an extension at extra cost.
Loan maturity is a risk-management tool. A term that is too short may create avoidable refinancing pressure, while an excessively long term may increase cost. The appropriate term should reflect realistic delivery and exit timing rather than the most optimistic programme. Developers should also understand extension fees, default interest, minimum interest periods and lender discretion before signing a term sheet.
“A weak application does not become strong just because a private lender is more flexible.”
— The Australian Property Development Handbook
How private lenders price risk
Pricing usually reflects the lender’s view of probability of default, potential loss, complexity, capital usage and the work required to manage the facility. Interest rate is only one component. Establishment fees, line fees, exit fees, valuation costs, legal expenses, quantity-surveyor fees, unused line fees and minimum interest can materially affect total cost.
A higher-risk loan may be priced more heavily, but pricing cannot cure structural weakness. If the project has no credible exit, insufficient equity or an unresolved cost-to-complete shortfall, the lender may decline regardless of the proposed return. Conversely, a well-structured project may achieve better pricing through lower leverage, stronger presales, additional security or a shorter and more certain exit.
Developers should compare facilities on total cost and flexibility. A slightly higher interest rate may be commercially preferable if the lender provides a larger facility, faster execution, fewer presale requirements or greater certainty of drawdown. Equally, a cheap-looking facility can become expensive if it contains restrictive release prices, high extension fees or a minimum interest floor.
Worked example: how a private lender may assess a townhouse project
Consider a developer proposing a 20-townhouse project with a total development cost of $16 million and an expected gross realisation value of $21 million. The developer requests a $12.8 million facility, equal to 80 per cent of total development cost and approximately 61 per cent of gross realisation value.
At first glance, the project shows a $5 million development margin before tax, which appears strong. The private lender then applies a downside test. It reduces expected revenue by 7.5 per cent, increasing selling and holding costs, and adds 5 per cent to the remaining construction budget. The stressed gross realisation value falls to approximately $19.43 million, while total cost rises to around $16.8 million. The stressed profit is therefore about $2.63 million before tax and before any additional delay interest.
The lender also examines peak debt. If the full $12.8 million facility is drawn and capitalised interest increases the balance, the stressed loan-to-value ratio may approach the lender’s maximum. The lender may respond by reducing the facility to $12.2 million, requiring an additional equity contribution, increasing contingency or requiring a minimum level of presales before full construction drawdown.
The decision is not based on one ratio. The developer has completed three similar projects, the builder has a strong balance sheet, the site is fully approved and the valuation supports the base sales prices. These strengths may justify proceeding. However, the lender still structures the facility so that the project remains fully funded under a realistic downside case.
This example shows why a private lender can be both flexible and conservative. It may accept a higher loan-to-cost ratio than a bank, but it will closely control the risks that make the higher leverage possible.
Red flags that can cause a private lender to decline
Private lenders can move quickly, but they are unlikely to proceed where fundamental information is unreliable. Common red flags include unexplained differences between the feasibility and valuation, insufficient evidence of equity, unpaid creditors, unresolved litigation, tax arrears, unrealistic construction programmes, weak builder information and an exit strategy that depends on untested assumptions.
Another major warning sign is a funding request that changes repeatedly without explanation. Changes are normal during a transaction, but the developer should clearly show why costs, values or facility requirements have moved. A lender is more comfortable with a transparent revised feasibility than with figures that appear designed only to produce the desired loan amount.
Excessive complexity can also reduce lender appetite. Multiple ownership entities, undocumented related-party loans, unusual profit-sharing arrangements and competing security interests can make enforcement difficult. Simplifying the capital structure before approaching the lender can improve both execution speed and certainty.
These principles come from our free guide.
Download the handbook →How developers can improve a private credit submission
The strongest private credit submissions make it easy for the lender to understand the project, identify the risks and see how those risks are controlled. A concise transaction summary should explain the borrower, site, approval status, development scope, total cost, value, requested facility, equity contribution, construction programme and exit strategy.
The financial model should reconcile with the valuation, building contract, quantity-surveyor report and funding request. Sponsor financial information should clearly show the source of equity and available liquidity. Planning documents, titles, contracts, presales, leases and consultant reports should be complete and current.
The submission should also acknowledge weaknesses. If the project has limited presales, explain the sales evidence, target market and fallback strategy. If the sponsor is stepping up in scale, show the experience of the builder, project manager and consultants. If the exit relies on refinancing, provide a stabilised income model and a conservative refinance assessment.
A private lender does not expect perfection. It does expect preparation. The more accurately the developer identifies the real risks and proposes workable mitigants, the easier it becomes for the lender to structure a facility with confidence.
Questions developers should ask a private lender
Risk assessment should work both ways. Developers should understand not only whether the lender will approve the transaction, but also how the lender will behave during construction and if the project experiences delay.
Important questions include how the lender calculates loan-to-cost and loan-to-value, what costs are included in the facility, whether interest is capitalised, how drawdowns are approved, what quantity-surveyor reporting is required, how cost overruns are treated and whether presale or leasing conditions apply.
Developers should also ask about minimum interest, extension rights, default interest, release prices, early repayment, valuation review rights, lender consent requirements and the circumstances in which the lender can stop funding. A facility can appear attractive at approval but become difficult if these operational terms are not understood before documentation.
Finally, the developer should assess the lender’s experience with the relevant asset class and project type. A lender that understands subdivisions, apartments, industrial projects or specialised assets is more likely to anticipate practical issues and make timely decisions during the facility term.
Frequently asked questions
Are private lenders less strict than banks? Private lenders are often more flexible on policy, leverage, presales and transaction complexity, but they still conduct detailed risk assessment. They may accept risks a bank will not, provided those risks can be structured, priced and controlled.
Do private lenders always charge much higher interest? Private credit is generally more expensive than traditional bank development finance, but total cost depends on leverage, term, fees, risk and structure. The relevant comparison is the total commercial outcome, not interest rate alone.
Can a first-time developer obtain private development finance? It is possible, particularly for a straightforward project with sufficient equity and an experienced team. The lender will usually place greater weight on builder quality, project management, liquidity and contingency.
Will a private lender fund without presales? Some will, depending on location, product, market depth, leverage, sponsor experience and exit strategy. The absence of presales usually increases the importance of conservative valuation, stronger equity and evidence of buyer demand.
What is the most important factor in private credit approval? No single factor determines approval, but repayment certainty is central. The lender needs confidence that the project can be completed and the facility repaid even if values, costs or timing move against the base case.
How quickly can private development finance be approved? Private lenders can often move faster than banks, but speed depends on the completeness of the information, valuation, legal due diligence, planning status and complexity of the transaction. A well-prepared submission is the best way to shorten the process.
Final thoughts
Private lenders do not succeed by ignoring risk. They succeed by selecting risk carefully, pricing it appropriately and structuring facilities that protect capital while allowing viable projects to proceed.
For developers, the practical lesson is that private credit should not be treated as a last-minute source of money for an incomplete project. It is most effective when the lender is approached with a clear feasibility, credible valuation, realistic programme, proven equity, strong delivery team and well-supported exit strategy.
A private lender may be willing to provide greater leverage, accept fewer presales or finance a more complex asset than a bank. In return, the lender will expect transparency, disciplined reporting and evidence that the project can absorb adversity. Developers who understand this approach are better placed to obtain terms that support the project rather than merely fill a short-term funding gap.
How BluCow Capital can help
The right funding strategy depends on the project, sponsor, asset class, stage of approval and exit. Early review can help identify issues before they become urgent and improve the quality of the submission presented to lenders.
This article provides general information only and does not constitute financial, legal, tax, credit or investment advice. Lending criteria, pricing and structures vary between lenders and transactions. Developers should obtain advice appropriate to their circumstances before entering into a finance arrangement.