Private Commercial Loan Structure Fundamentals for Australian Lenders

Introduction

Private lenders in Australia—including non-bank lenders and specialist funds—provide commercial loans that offer speed and flexibility beyond what traditional bank lending allows. Every facility rests on a handful of building blocks: the parties, the loan amount, the term, the pricing, and the security package underpinning it all.

This article examines those fundamentals alongside the structural distinctions that shape risk and return, from secured and unsecured facilities through to senior and subordinated debt, the capital stack, and how origination choices ultimately affect enforcement.

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The Building Blocks of a Private Lending Facility

Identifying the Parties to Your Private Loan Arrangement

Private lenders in Australia provide loans to entities holding an Australian Business Number (ABN), typically companies or trusts structured for business or investment purposes. The borrower does not always need to be actively trading — many are property-holding entities — but must have a legitimate commercial purpose behind the loan.

A guarantor may also be party to the arrangement, undertaking to repay the debt if the borrower defaults. This additional credit support can improve loan terms or enable a larger advance than the borrower’s standalone profile would permit.

How Loan Amount Term & Repayment Profiles Are Structured

Non-bank lending in Australia typically operates on shorter timeframes than traditional banking facilities, with private loans commonly structured for six months to three years. These facilities are designed to fill funding gaps, including:

• bridging between settlements;
• financing time-sensitive acquisitions; or
• providing a tailored loan for working capital while longer-term finance is arranged.

Repayment profiles vary with the deal’s purpose:

• Interest-only arrangements preserve borrower cash flow during the initial period, deferring principal reduction.
• Principal-and-interest repayments reduce the outstanding debt on a set schedule.
• Staged drawdowns release funds against agreed milestones rather than as a single lump sum, a structure common in construction and development finance.

Pricing Fees & Interest Rate Considerations for Private Lenders

Private lenders charge interest rates above those offered by traditional banks, reflecting the added risk and flexibility they provide. Rates are shaped by the quality of the security, the borrower’s exit strategy, and the loan term.

A lender’s true return depends on more than the headline rate. Establishment fees, ongoing facility fees, and early termination charges can materially shift the effective cost of the loan. Comparing offers using the Annual Percentage Rate (APR) — which bundles interest and all fees into a single figure — gives a clearer picture of the facility’s real economics than relying on the advertised rate alone.

Designing Security Packages that Protect Your Position

A non-bank lender in Australia protects its position through security structures matched to the transaction’s risk. A first mortgage gives the lender primary security over the property with first priority on sale proceeds. A second mortgage ranks behind another lender and is often used for bridging or top-up finance.

Caveat loans offer a short-term alternative, secured by a caveat lodged on the property title. The quality and value of the security directly determines the loan-to-value ratio (LVR) and the maximum advance a lender can prudently extend. Asset-backed arrangements using real estate, vehicles, or other valuable assets broaden the security pool further.

Understanding the Structural Distinctions Between Loan Types for Private Lenders

What Private Lenders Need to Know About Secured & Unsecured Loans

A secured loan requires the borrower to pledge business assets — such as property, vehicles, or equipment — as collateral against the debt. Because the lender’s risk is reduced by this security, secured loans typically carry lower interest rates, higher borrowing limits, and longer repayment terms than their unsecured counterparts.

An unsecured loan does not require collateral and relies instead on the borrower’s cash flow, trading history, and credit profile. Approval tends to be faster, making these loans suitable for short-term needs like stock orders or managing cash flow gaps. Interest rates are generally higher and loan sizes smaller to reflect the increased risk the lender accepts by not holding security over an asset.

Senior Debt & Subordinated Debt Ranked by Priority

Senior debt holds the first claim on a borrower’s assets and cash flows. Lenders in this position benefit from the lowest risk exposure and receive priority repayment if enforcement becomes necessary.

Mezzanine and subordinated debt ranks behind senior lenders in the capital structure. This type of debt carries higher risk, commands higher interest rates, and is often used to bridge equity shortfalls in acquisitions or developments. Mezzanine providers may also seek equity kickers or warrants to boost their overall return, reflecting the additional risk they accept by standing further back in the repayment queue.

Bilateral Lending & Syndicated Facilities at a Glance

Most non-bank lending in Australia operates on a bilateral basis — a single lender, whether an individual or a private company, providing funds to a single borrower. This structure keeps documentation simpler and decision-making faster, which suits the typical private lending timeframe of six months to three years.

By contrast, arrangements involving multiple lenders pooling funds into a single loan appear less frequently in private lending. Most private lenders in Australia favour direct, single-lender-to-borrower structures that allow quicker decisions and closer relationships between the parties than more complex multi-lender facilities require.

How the Capital Stack Shapes Risk Return & Priority for Private Lenders

The Position of Senior Debt Mezzanine Finance & Equity in the Capital Stack

The capital stack is structured in three layers, each with a different position and risk profile:

• Senior debt: occupies the top of the capital stack and holds first claim over a borrower’s assets and cash flows. This layer is typically secured against property or other tangible collateral, giving senior lenders — including private lenders in Australia — the strongest recovery position if enforcement occurs.
• Mezzanine or subordinate debt: ranks below senior debt and is used to bridge equity shortfalls in acquisitions or development projects. Providers of this finance expect higher returns than senior lenders and may seek equity kickers or warrants as compensation for the added risk.
• Equity: sits at the bottom of the stack, bearing the highest risk but also offering the greatest return potential, since equity holders recover only after all debt claims have been paid.

How Priority Ranking Affects Your Risk Exposure & Potential Returns

A lender’s position in the capital stack directly determines both the security of its capital and the yield it can expect. Senior lenders, holding first-ranking security over a borrower’s assets, accept lower interest rates in exchange for greater certainty of repayment.

By contrast, those positioned further down the stack — such as mezzanine providers and equity investors — face greater exposure if a borrower defaults. This increased enforcement risk is balanced by higher interest rates on the loan and, for mezzanine finance, potential equity-like upside through warrants or conversion rights.

Matching Loan Structures to Working Capital Property & Development Deals

Structuring Loans for Working Capital & Business Expansion

Businesses with uneven revenue cycles need access to capital that adjusts to their cash flow rather than locking them into fixed repayments. A line of credit or overdraft facility allows a borrower to draw funds up to an approved limit, repay, and redraw as needed, with interest payable only on the amount actually used.

These revolving facilities suit a range of scenarios, including:

• seasonal businesses;
• short-term bridging between receipts; and
• growth opportunities requiring quick capital.

Private lenders in Australia can structure these facilities with security over business assets or on an unsecured basis for borrowers with strong trading histories. However, unsecured lines typically carry higher rates and lower limits than secured arrangements.

Property Acquisition & Investment Loan Structures

Property acquisition financing through a non-bank lender in Australia typically follows one of two paths. Standard commercial property loans offer terms of 20 to 30 years with deposits ranging from 20 to 40 per cent of the property value, suiting long-term investment holds.

Private lenders in Australia also provide shorter-term bridge facilities — commonly six months to three years — for time-sensitive acquisitions. These can be structured as:

• first mortgage loans with primary security;
• second mortgage loans ranking behind another lender for top-ups; or
• caveat loans offering short-term solutions secured by a caveat on title.

Interest-only repayment periods during the initial term help preserve borrower cash flow while the investment strategy plays out.

Development & Construction Financing Considerations

Development and construction financing operates differently from standard term lending. A non-bank lender in Australia releases funds in stages against verified construction milestones rather than advancing the full loan amount upfront, aligning drawdowns with the project’s physical progress.

Interest is typically capitalised during the build phase, meaning the borrower makes no repayments until construction completes and the facility converts to a standard commercial loan. Lenders require several things before approving these facilities, including:

• detailed budgets;
• contingency plans; and
• experienced project teams.

This reflects the higher risk and complexity of development lending compared to completed-property finance.

Regulatory Obligations for Australian Private Lenders

AML/CTF Compliance & AUSTRAC Reporting Requirements

Lending activity by private lenders in Australia falls within the scope of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) (‘AML/CTF Act’). A non-bank lender must implement an AML/CTF compliance framework that responds to the money laundering and terrorism financing risk in its loan portfolio and business operations.

Key obligations include:

• enrolling with AUSTRAC;
• adopting a risk-based AML/CTF program; and
• conducting customer due diligence on borrowers.

Under Section 41 of the AML/CTF Act, a lender must submit a suspicious matter report (SMR) if it suspects information may be relevant to investigating a crime. Lenders must also submit threshold transaction reports for cash transactions of $10,000 or more and annual compliance reports.

APRA Registration (FSCODA) and AFSL Considerations

Entities engaged in providing finance must register with the Australian Prudential Regulation Authority (APRA) and submit periodic reports under the FSCODA. The regime generally applies once a $50 million debt threshold is met.

FSCODA was expanded in 2018 to bring non-bank lenders in Australia under APRA’s oversight, after the regulator identified that their lending could materially contribute to risks of instability in the financial system. The Banking Act 1959 (Cth) was also amended at that time to give APRA the power to make rules where it considers a non-bank lender poses such risks.

An AFSL is generally not needed for providing credit facilities, but may be required when operating a credit fund that issues fund interests or provides custody services.

Consumer Protections & FIRB Approval in Private Lending

Providing credit to consumers is highly regulated, with the National Consumer Credit Protection Act 2009 (Cth) (‘NCCP Act’) requiring a licence and imposing responsible lending and disclosure obligations. Consumer protection regimes also extend to small business lending even where no NCCP Act licence is needed.

In addition, the unfair contract terms provisions under the Australian Securities and Investment Commission Act 2001 (Cth) (‘ASIC Act’) (ASIC Act) apply to both consumer and small business contracts. Misleading and deceptive conduct standards under the ASIC Act also apply, regardless of customer type.

For a loan involving foreign persons, many private credit funds are classified as foreign government investors, triggering FIRB approval requirements unless the moneylending exemption applies to the security held for the lending agreement.

How Structuring Choices Affect Enforcement & Debt Recovery

Security Enforcement Rights & the Impact of Priority Ranking

A first mortgage holder holds primary security over the property and can enforce directly against it, selling the asset to recover the outstanding loan. A subordinate lender — such as a second mortgage holder — ranks behind the senior lender and only receives sale proceeds after the first-ranking claim has been fully satisfied.

Where the senior lender’s debt consumes most or all of the sale proceeds, the subordinate lender may recover little or nothing. Private lenders in Australia taking second-ranking security should assess whether the property’s equity buffer is sufficient to cover both the senior debt and their own exposure before committing to the loan. A caveat loan, secured by a caveat on title, offers a short-term alternative but provides weaker enforcement rights than a registered mortgage.

Cross-Collateralised Structures & Multi-Asset Default Risks

Cross-collateralisation uses multiple properties as security for a single loan. This structure can improve the LVR and allow a borrower to access larger sums by consolidating assets under one facility.

The trade-off emerges at enforcement — a single default places every secured property at risk. These arrangements involve more complex legal arrangements than single-asset securities, and a non-bank lender in Australia needs to weigh whether the added complexity is justified by the commercial benefit. In practice, unwinding a cross-collateralised structure during enforcement can delay recovery and increase legal costs compared to enforcing against a single property.

Covenant Breaches & Their Consequences at Enforcement

Loan covenants — such as LVR maintenance thresholds, minimum income requirements, and financial reporting obligations — act as early warning mechanisms for lenders. A breach signals that the borrower’s financial position may be weakening before repayment defaults actually occur.

A covenant breach typically gives the lender the right to accelerate the loan, demand full repayment, or commence enforcement against the security. These provisions are tested most acutely when rising interest rates or market downturns place pressure on the borrower.

Private lenders in Australia should model covenant pressure points at origination to understand where their facility may come under stress before the borrower falls behind on payments — private lender and non-bank finance lawyers can assist in stress-testing these variables before the facility is settled. Key variables to test include:

• vacancy;
• interest rate rises; and
• delayed sales.

Conclusion

Every layer of a private lending facility — the parties, terms, pricing, security, and its ranking within the capital stack — directly shapes the risk a lender carries and the return it can expect. Those structuring decisions are tested most acutely at enforcement, where priority position and security quality determine whether capital is recovered or lost.

GRM Law’s private lender and non-bank finance team advises on facility design, regulatory compliance, and enforcement strategy across Australia. Reach out to our private lender and non-bank finance lawyers at GRM LAW today to discuss how your next facility can be structured with clarity and confidence.

Frequently Asked Questions

Disclaimer: This is general information only and is not legal advice. For advice on your circumstances, contact GRM LAW.