A Private Lender’s Due Diligence Checklist to Minimise Risk Before You Lend

Introduction

Private lending offers attractive returns, but every loan carries the risk that the borrower cannot repay, the security is compromised, or the funds are tied to unlawful activity. Conducting due diligence across borrower identity, financial capacity, title searches, PPSR checks, and insolvency verification helps private lenders minimise these risks before committing capital, and private lending lawyers can help ensure your due diligence process leaves no gaps.

This article sets out a practical checklist for lenders so you can systematically assess each borrower, protect your security position, and make informed decisions about whether and on what terms to lend.

Interactive Tool: Check Your Due Diligence & Risk Before You Lend

Verifying Borrower Identity & Financial Capacity for Private Lending

Confirming Borrower Identity Through 100-Point ID Checks

A private lender must verify each borrower’s identity using government-issued photo identification such as a passport or driving licence. Reaching 100 points of ID is the bare minimum legal obligation when the loan is to be secured by mortgage. This verification check also serves as a trigger for discovering whether the borrower is foreign and subject to additional controls.

Face-to-face verification of identity should be conducted wherever possible. The safest approach in any due diligence process is to assume all documents are fraudulent until proven otherwise, and certified copies of originals, or sighting the originals in-house, helps mitigate this risk.

Assessing Financial History, Credit Reports & Repayment Capacity

A lender conducting due diligence on a borrower’s financial capacity should request several key documents to assess cash flow and stability, including:

• comprehensive financial statements;
• 6 to 12 months of bank statements;
• credit history and credit scores through a reputable agency such as Experian; and
• tax returns for the past 2 to 3 financial years to confirm income sources.

Calculating the borrower’s debt-to-income ratio offers a clear picture of repayment capacity against existing obligations. Details of outstanding debts and credit commitments must also be obtained.

In addition, the following searches on every borrower — using their full legal name and date of birth — are mandatory and cannot be skipped:

• bankruptcy searches; and
• PPSR searches.

Verifying the Loan Purpose & Controlling Fund Disbursement

Understanding why the borrower needs the funds is central to risk assessment in private lending. Common purposes include:

• refinancing;
• business investment; or
• property purchase.

A private lender should request a detailed explanation of how loan funds will be used. If the purpose is refinancing, the details of existing loans being repaid must be verified.

Disbursement controls help minimise the risk of funds being misused. Effective safeguards include:

• directing payment to third parties — such as outgoing mortgagees or for adjustment payments on the secured property — to prevent misappropriation; and
• for business purposes, requesting and assessing a business plan for viability.

Property Title, Encumbrance & PPSR Searches on Security Assets

Title Searches to Confirm Ownership & Detect Fraud Risks

A title search on any property offered as security confirms that the borrower actually owns the asset they are pledging. Without verified ownership, a private lender cannot obtain enforceable mortgage security, which is the foundation of any secured loan.

The same fraud-detection principle applied to identity documents — treating all documents as potentially fraudulent until independently verified through certified copies or in-house sighting of originals — should be extended to title documents to catch discrepancies before funds are advanced.

Identifying Existing Mortgages, Charges & Prior-Ranking Interests

A lender conducting due diligence must check for encumbrances registered against the security property, including:

• existing mortgages;
• charges;
• writs;
• warrants; or
• other encumbrances.

Rates and land tax searches should also be obtained to confirm there are no outstanding liabilities attached to the property.

Prior-ranking interests can seriously undermine a lender’s priority position if the borrower defaults. Where a prior mortgage exists, the lender should obtain consent from the prior mortgagee and, in many cases, negotiate a deed of priority between mortgagees to formally establish each party’s ranking.

PPSR Searches & Registered Security Interests Over Related Entities

A PPSR search on every borrower, using their full legal name and date of birth, is a required step in the due diligence process. This search reveals whether the borrower has already granted security interests over their personal property to other creditors.

A private lender should also consider taking a registered security interest over related parties who benefit indirectly from the loan — such as collateral companies or trusts — by way of a PPSR All-PAP charge.

Where land is taken as mortgage security, the mortgage should include a clause requiring it to flow through to any subdivided lot created from the parent parcel.

Independent Valuations, Building Inspections & Marketability Assessments

An independent professional valuation confirms the market value of any security property and should ideally be arranged at the borrower’s expense, with costs capitalised into the loan value. Building and pest inspections uncover structural or infestation issues that may not be visible but could affect the property’s worth.

The lender should also confirm zoning, planning permissions and permitted use of the property, particularly if it is not the borrower’s principal place of residence. Assessing whether the property is marketable in the event of default is a practical safeguard — if the lender must sell, the property needs to attract buyers.

Insolvency, Legal Capacity & Existing Obligations Checks

Bankruptcy, Insolvency & Wind-Up Register Searches

A private lender must search insolvency and wind-up registers to confirm the borrower is neither bankrupt, insolvent, nor facing proceedings that could place them in either position. This step applies regardless of whether the borrower is a company, trust, or individual.

The risk being caught is that if proceedings are on foot to appoint a liquidator or bankruptcy trustee, the lender’s rights are in imminent mortal peril. Conducting due diligence on every borrower means court registry searches and bankruptcy searches must always be completed using their full legal name and date of birth.

Confirming the Borrower’s Legal Capacity to Enter a Loan Agreement

Confirming a borrower has legal capacity to enter a loan agreement is a foundational due diligence check that is often overlooked — and incapacity can and does void loan agreements. A private lender who skips this step risks discovering the entire transaction is unenforceable.

For corporate borrowers, two key steps should be taken:

• Obtaining an ASIC extract verifies registration details and reveals any regulatory actions, restrictions, or compliance issues; and
• Reviewing the company constitution may uncover delegated powers or internal compliance requirements that must be satisfied before the loan can be properly executed.

Checking for Ongoing Litigation, Court Judgments & Existing Guarantees

A private lender conducting due diligence should search court registries for every borrower — whether company, trust, or individual — to confirm they are not being sued and have no outstanding court judgments or regulatory proceedings against them. In addition, existing financial obligations and guarantees for other loans must also be investigated, as these directly affect repayment capacity.

If proceedings are discovered, the lender should:

• Request copies of court documents to understand the borrower’s role in the litigation; and
• Where a matter is said to be finalised, ask for evidence bearing the original seal of the relevant court, such as a Notice of Discontinuance.

Corporate Borrower Compliance Including Trust & ASIC Reviews

When lending to a corporate borrower, a private lender’s due diligence process should include:

• Reviewing board resolutions or shareholder meeting minutes that authorise the loan transaction; and
• Confirming the company is in good standing with regulatory authorities, appropriately licensed for its industry, and adequately insured, which protects the lender from being exposed if business risks materialise.

Trust structures require additional checks, including:

• Requesting a certified copy of the trust deed and verifying that the trustee has authority to borrow on behalf of the trust; and
• Ensuring appropriate trustee resolutions authorising the loan are passed to ensure the borrowing is valid and enforceable.

Source of Funds, Source of Wealth & AML Compliance in Private Lending

Understanding the Difference Between Source of Funds & Source of Wealth

Source of funds refers to how and where the money for a specific transaction was obtained — not merely which bank account it came from.

Common sources include:

• salary and wages
• business income
• proceeds from the sale of assets
• dividends
• gifts and inheritance

Source of wealth looks at where the customer’s entire net worth originates from over time, drawn from all economic, business and commercial activities. A source of wealth check is appropriate when a private lender has doubt about a borrower’s overall financial background and how they accumulated their assets.

Collecting & Verifying Source of Funds Documentation

Establishing a borrower’s source of funds involves collecting and, where appropriate, verifying information using reliable and independent sources. Under Section 28 of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) (‘AML/CTF Act’), verification must be appropriate to the customer’s money laundering and terrorism financing (ML/TF) risk level.

Documents used to verify source of funds include:

• bank statements
• payslips
• tax returns
• sale and purchase agreements
• loan agreements
• investment and capital gains statements
• trust deeds and trustee distribution minutes
• probated wills
• court orders
• compensation or insurance payouts
• proof of gifted funds
• formal statutory declarations

What Happens When Source of Funds Cannot Be Established

When a borrower’s source of funds cannot be established during initial customer due diligence where required, the designated service must not be provided. In addition, the lender should consider whether a suspicious matter report (SMR) needs to be submitted to AUSTRAC.

If the lender decides to continue the relationship after being unable to verify the source of funds, the reasons for that decision must be documented. Furthermore, the customer’s ML/TF risk rating should be raised and enhanced ongoing monitoring applied, including more frequent KYC reviews and closer transaction scrutiny.

How Due Diligence Findings Shape Loan Terms & Commercial Arrangements

Making the Go or No-Go Decision Based on DD Outcomes

A private lender conducting due diligence must synthesise findings across all workstreams — borrower capacity, title and encumbrance searches, PPSR checks, insolvency verification, and source of funds — into a single, documented decision, and thorough legal due diligence for private lenders depends on getting every one of these steps right.

The due diligence process should produce a clear recommendation to proceed, renegotiate, or decline the loan entirely.

Certain findings demand an automatic decline. As discussed above, insolvency proceedings on foot to appoint a liquidator or bankruptcy trustee place the lender’s rights in imminent mortal peril.

Other findings that also warrant declining include:

• legal incapacity;
• unverifiable source of funds; or
• evidence that the borrower does not own the security property.

Every finding and the rationale behind the decision must be documented for transparency.

Adjusting Loan-to-Value Ratios, Interest Rates & Repayment Structures

Due diligence outcomes on collateral quality and borrower financial capacity directly influence the commercial terms a private lender offers. Stronger collateral positions, clean title searches, and verified repayment capacity may support more competitive pricing, while adverse findings warrant conservative structuring.

Terms calibrated in response to DD findings include:

• Loan-to-value ratio caps: which tighten when valuations reveal lower marketability or prior-ranking encumbrances
• Interest rate pricing: reflecting the risk premium identified through credit history and financial capacity reviews
• Repayment schedules and financial covenants: adjusted to match demonstrated cash flow patterns and debt service headroom

How DD Feeds Into Security Documentation & Conditions Precedent

The security package a private lender assembles flows directly from due diligence outcomes. A deed of priority between mortgagees must be negotiated where prior-ranking interests exist, as identified during encumbrance checks. The mortgage clause requiring security to flow through to subdivided lots, and PPSR All-PAP charges over related entities, should also be included as outlined in the PPSR searches above.

Conditions precedent — requirements satisfied before funds are advanced — are shaped by DD findings. These may include:

• confirmed title clearance;
• a registered mortgage;
• a satisfactory independent valuation; and
• insurance certificates of currency.

Who Bears Due Diligence Costs & How Expenses Are Managed

Common commercial practice in private lending passes due diligence costs — including valuations, building inspections, and search fees — to the borrower. As noted in the valuations section above, these expenses are often capitalised into the loan value, so the borrower does not need to fund them out-of-pocket before settlement.

The arrangement for the borrower to bear these costs serves both the lender’s need for an objective assessment and the commercial principle that the borrower seeking finance carries the cost of establishing creditworthiness. This arrangement should be clearly documented within the loan agreement.

Insurance Requirements, Independent Legal Advice & Other Protections

Requiring Adequate Insurance Coverage on Security Property

A private lender conducting due diligence should confirm that adequate building insurance covers any security property the borrower offers. In addition, the lender should hold the power to:

• request their interest be noted on the policy;
• obtain a certificate of currency from the borrower; and
• compel additional coverage as the property’s value or use changes over time.

The lender should also verify that the borrower uses reputable and solvent insurers throughout the loan term. Requiring life insurance or income protection insurance for individual borrowers is standard in many countries — particularly in Europe — but remains less common in Australia, given that most retail superannuation funds include total and permanent disability and death cover.

Independent Legal Advice for Borrowers as a Risk Transfer Mechanism

The recommendation that the borrower obtain independent legal advice on their obligations under the loan agreement has become an increasingly common requirement in private lending. This step functions as a highly effective risk transfer mechanism, and many private lenders now expressly require it rather than merely suggesting it.

A solicitor’s certificate confirming the borrower understands their obligations provides an additional layer of protection. Requiring independent advice shields the lender against later claims of misunderstanding or unconscionable conduct that could undermine enforceability of the loan.

Character References & Industry Reputation Checks

A private lender can request references from reputable sources who know the borrower professionally or personally. These character assessments add a qualitative dimension to the due diligence process that financial documents alone cannot provide.

Investigating the borrower’s industry reputation is particularly relevant when lending for business purposes. Softer checks of this kind complement the financial and legal due diligence workstreams, helping the lender build a fuller picture of the borrower’s reliability before committing capital.

Conclusion

A methodical due diligence process — spanning borrower identity and capacity, title and encumbrance searches, PPSR checks, insolvency verification, and source of funds assessment — protects a private lender’s capital at every stage. Each finding should directly inform the loan decision, the commercial terms offered, and the conditions precedent to advancing funds.

GRM Law advises private and non-bank lenders across Queensland and Australia on structuring loans that reflect verified risk. Reach out to our team to discuss how we can support your lending transactions with thorough legal due diligence from our private lending lawyers.

Frequently Asked Questions

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