In short
A bank lends money its depositors placed with it. That is why it is licensed, supervised and constrained in what it may hold — and why some perfectly sound borrowers are declined, or cannot be reached in time.
Private capital fills that gap. Which means the return on a private loan is compensation for a risk, an inconvenience or a delay that somebody else would not take on. Knowing which of the three you are being paid for is most of the work.
01What a bank actually is
A bank takes money from the public, promises to repay it, and lends it out. The money it lends is not its own.
That is why banking is licensed. Under the Banks Act, nobody may conduct the business of taking deposits unless registered, and contravening that is an offence. The thing the Act reserves is the combination: accepting deposits from the general public as a regular feature of a business, and using that money to grant loans.
02Why banks leave gaps
Not because they are foolish. Because of what they are.
| The constraint | What it does to a bank | The gap it leaves |
|---|---|---|
| Capital rules | Certain lending is expensive to hold against regulatory capital | Loans that are sound but costly for a bank to carry |
| Standardised credit policy | A borrower who does not fit the model is declined by the model | Good borrowers with unusual circumstances |
| Time | Committee cycles and internal process take weeks | Anything genuinely urgent |
| Deal size | Small and medium loans cost nearly as much to assess as large ones | The middle of the market |
| Security preferences | Residential and commercial property are well understood; many assets are not | Lending against stock, equipment, invoices or future levies |
None of those gaps is about the borrower being bad. They are about the borrower being awkward for an institution built on standardisation. That is a real and respectable reason for a market to exist.
03So where does the return come from?
There are only three honest answers, and a fourth dishonest one.
- Risk. You are being paid to take a chance somebody else declined. This is legitimate, and it is only a good deal if the price matches the chance.
- Inconvenience. Your money is committed, illiquid and unsellable for a period. You are paid for giving that up.
- Speed or specialism. You can do in a week what an institution does in two months, or you understand an asset a bank does not. You are paid for the capability.
- Or: somebody else's money. If the return is funded by new participants rather than by a borrower, it is not lending. Lesson fifteen is about recognising that.
A rate on its own tells you nothing. 18% a year is cheap for one borrower and reckless for another. The question is never is the rate high? It is is the rate high enough for this risk, and can I survive the case where it is not paid?
04A private borrower is not a worse borrower
This is worth saying plainly, because the opposite assumption is common and it leads people to misprice in both directions.
A body corporate that needs a roof repaired before its levies come in is not a credit risk in the ordinary sense. It is a timing problem. A developer who needs bridging for six weeks while a transfer registers has an asset and a date, not a weakness.
Equally, some private borrowers are in front of you precisely because every bank said no, and said no for sound reasons. Both kinds exist in the same market, described in the same language. Weeks two and three are about telling them apart.
05Where you fit, as the one supplying capital
You are not a bank, and the comparison flatters nobody. A bank has hundreds of loans, a credit department, recovery infrastructure and regulatory capital. You have one loan, or a handful.
What you do have is the ability to say no, to take as long as you like deciding, and to lend only on terms you understand. Those are not small advantages. They are the whole of your defence, and the rest of this course is about using them.
Next: the question everybody arrives with. Is this legal, and must I register?