For Mortgage Brokers: Why Borrow from Non-Bank Lenders?

In recent years, the appetite of major banks for construction lending has been steadily declining. This trend has created a significant gap in the market, which private lenders, like Bowery, are filling.

Non-bank lenders offer flexible, commercially viable solutions which makes them an attractive option for developers facing stringent conditions from traditional banks. With a growing share of the commercial real estate debt market and a focus on relationships, private lenders provide essential alternatives for developers and investors.

The fall of banks in construction lending.

Banks have become more conservative in their approach to construction lending. The primary reason behind the declining appetite is the return on capital. Property development often delivers the lowest return on capital for banks while carrying the greatest risk. As a result, banks are mitigating risk and ensuring higher capital return through stringent terms and stricter lending criteria.

Whether it’s for land subdivision, site acquisition, or apartment construction, developers are often met with more red tape to cut, more hoops to jump through, and less support. For example, banks typically offer Loan-to-Value Ratios (LVRs) and Loan-to-Cost (LTC) ratios around 65% to 80% of the project cost. Consequently, developers must contribute more equity to their projects, making it more challenging to secure financing from traditional banks.

 

The rise of non-bank lenders.

As traditional banks continue to tighten their lending criteria, private lenders like Bowery are becoming an increasingly attractive option for developers. Where banks fall short, non-bank lenders take the time to understand the market, sales trends, and demand for specific products in a given location. This allows them to offer more flexible financing options and commercially viable solutions. 

By the end of 2023, non-bank lenders provided $74 billion in commercial real estate debt, representing a 16% share of the $447 billion Australian market. This significant contribution highlights the growing impact non-bank lenders have in the construction financing landscape (more on the rise of non-bank lenders in this Medium article).

 

The advantages of working with private lenders.

When it comes to construction financing, the process of dealing with non-bank lenders can be significantly different — often better — than working with traditional banks. From funding approval to emotional impacts, relationship dynamics, and business outcomes, here’s why non-bank lenders offer a superior experience.

1. Presales.

One of the most common stringent terms imposed by banks is the requirement for pre-sales before lending to developers. Banks rely on a rigid matrix that mandates a certain percentage of debt coverage, regardless of market conditions. This often poses a significant barrier for developers, particularly in high-end luxury markets where buyers prefer to see completed projects before committing.

Without the cumbersome pre-approval processes that banks have, private lenders can make decisions quickly and efficiently. This accelerates the approval process and reduces the stress and uncertainty for developers, providing them with more peace of mind. Consequently, builders can start projects and attract buyers during the construction phase, and this allows buyers to see and experience the finished product before making a purchase.

2. Flexibility & commerciality.

Although banks and non-banks adhere to similar documentation and compliance standards, the solutions private lenders offer are notably more flexible and adaptable. With greater scope over lending conditions, these quality counterparties can adopt a more commercially driven approach, supported by extensive industry knowledge and readiness to take calculated risks.

3. Rapid payments.

Non-bank lenders are nimble when it comes to processing payments. Unlike banks, which can be slow and bureaucratic, non-bank lenders can pay builders quickly, often within 24 to 48 hours. This rapid payment process alleviates cash flow pressures on builders, ensuring that projects progress smoothly without unnecessary, stressful delays.

4. Collaborative, proactive problem-solving.

The relationship with a private lender is typically more supportive and collaborative. Private lenders work closely with developers to understand their needs and provide tailored solutions, especially when it comes to construction delays and cost overruns — unlike banks, which often rely on rigid processes and a hands-off approach.

This relationship-based approach ensures that both the lender’s and the developer’s investments are protected, and projects can continue without significant disruptions. For example, Bowery provides additional support to cash-poor developers and works with builders and project managers to expedite progress and meet deadlines. This mitigates risks, ensures cash flow challenges are managed effectively, and fosters a more supportive financing environment so projects stay on track.

5. Direct access to decision makers & transparent communication.

With banks, the common experience is that everything seems clear and straightforward upfront. However, once the process moves ahead, it often feels like decisions are being made in a “dark room” with little to no visibility for the developer. This lack of transparency can lead to uncertainty and frustration. 

In dealing with non-bank lenders, developers often interact directly with the decision-makers, such as the owners or senior executives of the lending company. This “skip-the-queue” access means communications are clearer and decisions can be made swiftly, without needing to go through multiple layers of approval. 

With open communication and a consultative approach, developers are always informed about the status of their project. Any issues that arise can be promptly addressed, making the process faster and less stressful. It also means the lender can better understand pressing needs, challenges, and priorities. As the relationship grows, the lender can intuitively problem-solve and offer more personalised solutions, keeping projects on track.

6. Reduced stress & anxiety.

On an emotional level, working with a private lender can significantly reduce the stress and anxiety associated with securing financing. The transparency, direct communication, and reliability of private lenders create a more positive and reassuring experience for developers. This emotional support can make a substantial difference in the overall success and satisfaction of the project.

The key takeaways.

Working with private lenders for construction financing offers numerous advantages over traditional banks. Non-bank lenders:

• Eliminate the need for pre-sales, offer rapid payment processing, and adopt a commercially driven approach to lending. 
• Support developers with direct access to decision-makers, transparent communication, and a collaborative problem-solving environment. 
• Provide a more efficient, flexible, and supportive experience. 
• Reduce stress and anxiety for developers, ensuring projects stay on track and are completed successfully. 

The overall process with private lenders is more responsive, transparent, and tailored to the needs of developers, making it an excellent alternative for construction financing.

Which lender will you choose?

Choose construction finance that doesn’t disappoint.  

If you’ve been burnt by the major banks before, you’re not alone. More and more developers and mortgage brokers are turning to transparent private lenders, like us, for construction finance solutions that don’t disappoint. Choosing Bowery means developers enjoy faster payments, flexible problem-solving, and collaborative support, keeping construction projects on track. Talk to our directors to experience the benefits for yourself.