Reference
Commercial Lending
Glossary
Plain English definitions of the terms used in commercial lending, private lending, and mortgage broking across Australia. Bookmark this page or link directly to any term.
ABN (Australian Business Number)
A unique 11-digit identifier issued by the Australian Business Register to businesses operating in Australia. Required for all commercial borrowers when applying for a business loan. An active ABN is typically a prerequisite for accessing commercial lending products.
ACL (Australian Credit Licence)
A licence issued by ASIC that authorises a person or entity to engage in credit activities under the National Consumer Credit Protection Act. Most private lenders lending to companies and trusts for commercial purposes operate outside NCCP, but brokers referring consumer deals still need an ACL or authorised representative status.
AML/CTF (Anti-Money Laundering / Counter-Terrorism Financing)
Legislation and compliance obligations that require lenders and financial services providers to verify customer identities, monitor transactions, and report suspicious activity. All Australian lenders, including private lenders, must maintain AML/CTF programs and carry out Know Your Customer (KYC) checks before settlement.
AVM (Automated Valuation Model)
A technology-driven tool that estimates property values using data such as recent sales, property characteristics, and market conditions. AVMs allow lenders to assess security values quickly without a physical inspection, often enabling same-day credit decisions on straightforward deals.
Borrowing Entity
The legal entity that takes on the loan obligation. In commercial lending, this is typically a company (Pty Ltd) or a trust (family, unit, or discretionary). Individual borrowers are less common in private commercial lending because most products are structured for business purposes only.
Bridging Finance / Bridging Loan
A short-term loan designed to bridge a temporary funding gap, most commonly used when a borrower needs to settle on a purchase before selling an existing asset. Bridging loans typically run for 1 to 12 months, with interest capitalised and repaid at exit. They are one of the most common private lending products in Australia.
Broker Commission
The fee paid to a mortgage broker for introducing a borrower to a lender and facilitating the loan. In private lending, broker commissions are typically paid upfront at settlement and calculated as a percentage of the loan amount. Some lenders also pay trail commissions for the life of the loan.
Caveat Loan
A short-term loan secured by a caveat placed on the title of a property rather than a registered mortgage. Caveats are faster to lodge than mortgages but offer weaker security for the lender. Caveat loans are typically used for urgent, small-value, short-duration funding needs.
Clawback
A contractual provision that requires a broker to return part or all of their upfront commission if the borrower repays the loan early, typically within the first 12 to 24 months. Clawback protections exist to prevent churning, where brokers refinance loans purely to generate new commissions.
Commercial Mortgage
A mortgage secured against property where the loan purpose is business-related rather than personal. This can include purchasing commercial premises, funding business operations, or refinancing existing commercial debt. Commercial mortgages can be secured by residential, commercial, or industrial property regardless of the loan purpose.
Cost of Funds
The interest rate or cost a lender pays to access the capital it lends out. For private lenders, cost of funds may come from investor capital, warehouse facilities, or internal balance sheets. The difference between cost of funds and the rate charged to borrowers is the lender's margin.
Credit Impairment
Any negative mark on a borrower's or guarantor's credit file, including defaults, judgments, bankruptcies, or late payments. Private lenders often have more tolerance for credit impairment than banks, making them a viable option for borrowers who cannot access mainstream finance.
Debt Service Coverage Ratio (DSCR)
A financial ratio measuring whether a borrower's income is sufficient to cover their debt repayments. Calculated as net operating income divided by total debt service. A DSCR above 1.0 means income exceeds repayments. Many private lenders do not require DSCR assessment on short-term interest-only loans.
Discharge
The process of removing a mortgage or security interest from a property title after the loan has been fully repaid. Discharge involves the lender signing a release document, which is then lodged with the relevant state land titles office. Discharge fees are commonly charged by lenders.
Due Diligence
The investigation and verification process a lender undertakes before approving a loan. In private lending, due diligence typically covers identity verification, property valuation, title searches, company/trust structure review, and assessment of the borrower's exit strategy.
Equity Release
A loan that allows a property owner to access the equity (value above existing debt) in their property as cash. Equity release is commonly used by businesses to fund operations, acquisitions, or investment without selling the underlying asset. Maximum LVR policies determine how much equity can be released.
Establishment Fee
An upfront fee charged by the lender to cover the cost of setting up a new loan. Establishment fees in private lending are typically expressed as a percentage of the loan amount (e.g. 1.5% to 3%) and are often capitalised into the loan so the borrower does not need to pay them out of pocket at settlement.
Exit Strategy
The borrower's plan for repaying the loan at or before maturity. Common exit strategies include sale of the secured property, refinance to a bank or another lender, or receipt of expected funds (e.g. settlement of another transaction). A clear, credible exit strategy is one of the most important factors in private lending credit assessment.
First Loss
The tranche of capital in a lending structure that absorbs losses first if a borrower defaults. In a warehouse or fund structure, the first loss investor takes the highest risk in exchange for the highest return. First loss positions are typically held by the lender or its principals to align interests with senior capital providers.
First Mortgage
A mortgage that holds priority over all other mortgages and security interests registered on a property title. In the event of a default and forced sale, the first mortgage holder is repaid before any second or subsequent mortgage holders. First mortgages carry lower risk and therefore attract lower interest rates than subordinate positions.
GST Registration
Registration for the Goods and Services Tax with the Australian Taxation Office. Businesses with annual turnover of $75,000 or more must register for GST. GST registration status is relevant in commercial property transactions as it affects settlement figures, input tax credits, and the margin scheme.
Guarantor
A person or entity that agrees to be responsible for a borrower's loan obligations if the borrower defaults. In commercial lending, directors of the borrowing company typically provide personal guarantees. A guarantor's assets and creditworthiness strengthen the lender's position beyond the property security alone.
Interest Capitalisation
An arrangement where interest accrued on the loan is added to the principal balance rather than paid periodically by the borrower. Interest capitalisation is standard on bridging loans and short-term private loans, meaning the borrower makes no repayments during the loan term and settles the full balance (principal plus capitalised interest) at maturity.
Interest Only (IO)
A repayment structure where the borrower pays only the interest component each month, with no reduction in the principal balance. Interest-only terms are common in commercial and private lending, particularly for short-term facilities where the borrower plans to repay the principal as a lump sum at the end of the term.
Loan Management Fee (LMF)
A monthly or ongoing fee charged by the lender to cover the administration and management of the loan during its term. The LMF is separate from the interest rate and is typically expressed as a monthly flat fee or a percentage of the loan balance.
Loan to Value Ratio (LVR)
The ratio of the loan amount to the assessed value of the security property, expressed as a percentage. For example, a $700,000 loan against a property valued at $1,000,000 represents a 70% LVR. LVR is the primary risk metric in property-secured lending. Lower LVRs mean more equity protection for the lender and typically attract better pricing for the borrower.
Maturity Date
The date on which a loan term expires and the full outstanding balance becomes due and payable. If the borrower has not repaid or refinanced by the maturity date, the lender may charge default interest, issue a notice of demand, or commence enforcement action against the security property.
Mortgage Manager
A company that originates and manages loans using funding provided by a third party such as a bank, warehouse facility, or private investors. The mortgage manager handles the customer relationship, credit assessment, and loan servicing, while the funding party provides the capital. This model allows businesses to operate as lenders without needing their own balance sheet.
NCCP (National Consumer Credit Protection)
The Australian legislative framework governing consumer credit, administered by ASIC. NCCP requires responsible lending assessments, licensing, and disclosure obligations for loans made to individuals for personal, domestic, or household purposes. Loans to companies and trusts for commercial purposes are exempt from NCCP, which is how most private commercial lenders operate.
Non-Bank Lender
A lender that is not an authorised deposit-taking institution (ADI) regulated by APRA. Non-bank lenders do not hold banking licences and cannot accept deposits. They source funding from private investors, wholesale markets, or warehouse facilities. Non-bank lenders often serve borrowers who fall outside traditional bank lending criteria.
Postcode Category
A risk classification assigned to geographic areas based on property market liquidity, population density, and historical price volatility. Lenders use postcode categories (e.g. Category 1 for metro, Category 2 for regional, Category 3 for rural) to set maximum LVRs, pricing, and eligibility criteria. Properties in lower-risk postcodes typically qualify for higher LVRs.
Prepaid Interest
Interest for the full loan term that is deducted from the loan advance at settlement rather than collected as periodic payments. The borrower receives the net amount after deducting prepaid interest and fees. This structure is common in short-term private loans and gives the lender certainty of return regardless of early repayment.
Principal and Interest (P&I)
A repayment structure where each periodic payment includes both an interest component and a portion that reduces the principal loan balance. Over time, the proportion allocated to principal increases. P&I repayments are standard for longer-term loans but less common in short-term private lending.
Private Lender
A non-bank entity that provides loans using private capital rather than depositor funds or government-backed securitisation. Private lenders typically offer faster turnaround, greater flexibility on credit assessment, and a willingness to consider scenarios that banks decline. They operate at higher interest rates to compensate for the increased risk and cost of capital.
Progressive Drawdown
A loan facility where funds are released in stages as milestones are met, rather than as a single lump sum at settlement. Progressive drawdown is commonly used for construction, renovation, or development projects. Each drawdown is typically subject to an inspection or progress claim verification before funds are released.
Refinance
The process of replacing an existing loan with a new loan, often from a different lender. Borrowers refinance to secure better terms, consolidate debts, access additional equity, or transition from a short-term private loan to a longer-term bank facility. Refinance to a mainstream lender is one of the most common exit strategies for private loans.
Risk Fee
An additional fee charged by the lender to compensate for elevated risk factors in a particular deal. Risk fees may apply when a loan exceeds standard LVR thresholds, the borrower has credit impairment, the security property is in a higher-risk postcode, or the exit strategy is less certain. Risk fees are typically capitalised into the loan.
Second Mortgage
A mortgage that ranks behind an existing first mortgage on the same property. In a default scenario, the second mortgage holder is only repaid after the first mortgage holder has been satisfied in full. Second mortgages carry higher risk and therefore attract significantly higher interest rates and fees than first mortgage positions.
Secured Loan
A loan backed by collateral, most commonly real property in the case of commercial and private lending. The security gives the lender the right to sell the asset to recover the outstanding debt if the borrower defaults. Secured loans generally attract lower rates than unsecured loans because of the reduced risk to the lender.
Self-Declaration (Income)
A method of income verification where the borrower declares their income on a statutory declaration or self-certification form rather than providing traditional evidence such as tax returns or payslips. Self-declaration is commonly accepted by private lenders, particularly when the primary repayment source is asset sale or refinance rather than ongoing income.
Settlement
The process of finalising a loan transaction, during which the lender advances funds, the mortgage is registered on the property title, and the borrower (or vendor) receives payment. Settlement is coordinated between the lender's and borrower's solicitors or conveyancers, and typically occurs electronically via the PEXA platform in Australia.
Term (Loan Term)
The duration of the loan from settlement to maturity. In private commercial lending, terms typically range from 1 to 24 months. Shorter terms (1 to 6 months) are common for bridging loans, while longer terms (12 to 24 months) suit construction or development facilities. Extensions may be available subject to lender approval and additional fees.
Valuation
A professional assessment of a property's market value, conducted by a certified valuer or via an automated valuation model (AVM). Valuations are used by lenders to determine the security value and calculate LVR. Full valuations involve a physical inspection, while AVMs provide desktop estimates based on comparable sales data.
Warehouse Facility
A revolving line of credit provided by a bank or institutional investor to a non-bank lender, enabling the lender to fund loans at scale. The warehouse provider takes senior security over the loan portfolio, while the non-bank lender retains the first-loss position. Warehouse facilities allow private lenders to grow their loan book beyond their own capital base.
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