Private lending has grown significantly in Australia over the past decade. Tightening bank credit standards, rising demand for bridging finance, and the proliferation of non-bank lending platforms have created a substantial market for private lenders — individuals, syndicates, and private credit funds deploying capital outside the traditional banking system.
The opportunity is real. So is the legal complexity.
Private lenders who get the documentation right, understand their security position, and know how to enforce when borrowers default tend to fare well. Those who operate on handshakes, informal agreements, or template documents that were not drafted with their specific situation in mind often discover what they are missing at the worst possible time.
This article covers the legal essentials for private lenders operating in Australia — from the regulatory framework through to enforcement.
The Regulatory Question: Do You Need a Credit Licence?
The first — and most important — legal question for any private lender is whether your lending activity is regulated under the National Consumer Credit Protection Act 2009 (Cth) (NCCP Act).
The NCCP Act requires anyone engaging in “credit activities” to hold an Australian Credit Licence (ACL) or act as a credit representative of an ACL holder. Engaging in credit activities without a licence carries significant penalties — including criminal prosecution.
Regulated credit under the NCCP Act covers loans where:
- The borrower is an individual or strata corporation
- The credit is provided for personal, domestic, or household purposes, or to purchase, renovate, or improve residential property for investment purposes
Unregulated credit sits outside the NCCP Act and does not require an ACL. Commercial lending — lending to companies, trusts, or individuals for genuine business purposes — is generally unregulated.
The distinction is not always straightforward. A loan to an individual secured over their family home can be regulated credit, even if the stated purpose is business. The purpose test looks at the genuine purpose of the credit, not just what is written on the loan application.
Private lenders who are uncertain whether their lending activity requires an ACL — or who are transitioning from informal lending to a more systematic approach — may want to get specific advice on their licensing position before continuing to lend.
Loan Documentation: The Foundation of Every Lending Relationship
A well-drafted loan agreement is the foundation of every private lending transaction. It defines the relationship, sets the borrower’s obligations, and — critically — determines what rights the lender has when things go wrong.
A private loan agreement should cover, at minimum:
Loan amount and drawdown. The principal amount, how it is to be drawn (in one tranche or multiple), and any conditions to drawdown.
Interest. The interest rate (fixed or variable), the calculation basis, whether interest is payable periodically or capitalised, and the default interest rate that applies if the borrower fails to pay on time. Default interest in private lending arrangements is typically significantly higher than the standard rate — this is legitimate, but the rate should be clearly documented.
Fees. Establishment fees, line fees, extension fees, and any other charges should be specifically documented. Undocumented fees are difficult to recover.
Term and repayment. The loan term, the repayment schedule (interest-only, principal and interest, or bullet repayment at maturity), and what happens if the borrower wants to repay early (whether there is a break cost or prepayment fee).
Security. A specific description of all security taken — the property over which a mortgage is granted, the assets registered on the PPSR, any personal guarantees. The loan agreement should cross-reference the security documents.
Events of default. A clear, specific list of events that trigger the lender’s enforcement rights — including non-payment, breach of other covenants, insolvency events, and misrepresentation. Broadly drafted default clauses give the lender more flexibility; specific drafting reduces the borrower’s ability to argue that a default event has not been triggered.
Enforcement rights. What the lender can do on default — accelerate the loan, enforce security, appoint a receiver, exercise power of sale.
Representations and warranties. Statements made by the borrower about the accuracy of information provided, their authority to borrow, and the absence of matters that would affect the security.
Security: What Protects You When the Borrower Defaults
Private lenders almost always take security. The quality and enforceability of that security is what separates a manageable default from an expensive one.
Real Property Mortgages
A mortgage over real property — registered on the title under the relevant state’s land titles system — gives the lender a priority interest in the property. On default, the mortgagee has the power of sale — the right to sell the property and apply the proceeds to the outstanding debt.
Key considerations:
- Priority. A first mortgage has priority over subsequent encumbrances. A second mortgage is subject to the first mortgagee’s rights. Private lenders taking second mortgages need to understand the first mortgagee’s position and loan-to-value ratio carefully.
- Caveat. Where a full mortgage cannot immediately be registered (or as an interim protection), a caveat can be lodged over the property to prevent further dealings without the caveator’s knowledge. A caveat is not as strong as a registered mortgage but provides meaningful protection in the interim.
- LVR. The loan-to-value ratio is the primary credit risk management tool. Private lenders typically lend at LVRs that leave a meaningful equity buffer — protecting against property value falls and the costs of enforcement.
PPSR (Personal Property Securities Register)
For loans secured over assets other than real property — plant and equipment, vehicles, livestock, business assets, or (in some cases) shares — registration on the PPSR is essential.
A security interest that has not been registered on the PPSR may be void against a liquidator or other secured creditors if the borrower becomes insolvent. Registration must occur within specific timeframes to be effective, and the registration must describe the collateral accurately.
Private lenders extending credit secured over personal property — including general security agreements over all assets of a business — should ensure PPSR registrations are made correctly and maintained.
Personal Guarantees
Where the borrower is a company, a personal guarantee from the directors is standard practice. The guarantee makes the directors personally liable for the company’s obligations if the company cannot pay.
As discussed in the service agreements and personal liability articles in this series, the scope of guarantees — the amount guaranteed, the duration, and the events that trigger liability — should be clearly documented. A guarantee that is not properly executed (signed, witnessed, and by a guarantor who understood what they were signing) may be challenged.
Independent Legal Advice: What It Is and Why It Matters
Independent Legal Advice (ILA) is advice given by a lawyer to a borrower or guarantor, independently of the lender, about the nature and consequences of the documents they are being asked to sign.
Why private lenders need their borrowers and guarantors to get ILA:
Courts and tribunals have set aside loan agreements, mortgages, and guarantees where the borrower or guarantor was found not to have understood what they were signing — particularly where there was an element of disadvantage, vulnerability, or imbalance in the relationship.
A properly evidenced ILA certificate — issued by an independent lawyer who has explained the key terms, confirmed the borrower or guarantor understood their obligations, and noted any concerns — significantly reduces the risk that the document will be challenged on grounds of unconscionable conduct, undue influence, or non est factum (the signatory’s claim that they did not understand the document they signed).
When ILA is most important:
- Where the borrower or guarantor is an individual (as opposed to a sophisticated corporate entity)
- Where the guarantee is unlimited in amount
- Where the security includes the borrower’s or guarantor’s primary residence
- Where there is a personal relationship between the borrower and guarantor (spouse, parent, business partner)
- Where the loan terms are complex or the interest rate is significantly above market
At Envision Legal, we provide ILA to borrowers and guarantors in private lending transactions — typically on a fixed-fee basis. We review the relevant documents, advise on their effect, and issue an ILA certificate that gives private lenders confidence the transaction is properly documented.
Default and Enforcement: What Happens When Things Go Wrong
A well-documented loan gives the lender meaningful enforcement options when the borrower defaults. Understanding those options — and the sequence in which they are most effectively deployed — is critical.
Formal Demand
The first step in most enforcement sequences is a formal written demand — requiring the borrower to pay the outstanding amount (or remedy the default) by a specific date. Many loan agreements require a demand before enforcement rights can be exercised. Even where it is not strictly required, a demand creates a clear record that the debt has been formally called.
Mortgage Enforcement (Power of Sale)
Where the loan is secured by a registered mortgage over real property, the mortgagee’s power of sale can be exercised on default — subject to the requirements of the relevant state’s conveyancing or property legislation.
In NSW, for example, the Conveyancing Act 1919 requires the mortgagee to serve a notice of default and allow a default notice period before exercising power of sale. The mortgagee has obligations in exercising the power of sale — they must take reasonable care to sell at market value, and cannot simply accept the first offer to recover the debt.
Proceeds of sale are applied in a defined order: costs of sale, then the mortgage debt (principal, interest, fees), then any surplus to subsequent encumbrancers, then the borrower.
Receivership
Where the loan agreement includes a general security agreement or a charge over the borrower’s business, the lender may be able to appoint a receiver. The receiver takes control of the secured assets, manages the business (or winds it down), and applies the proceeds to the secured debt.
Receivership is typically used for larger, more complex lending situations rather than simple real property-secured loans. It requires careful legal analysis of the security documents and the borrower’s overall position.
Statutory Demand and Winding Up
Where the borrower is a company and the debt is undisputed, a statutory demand under the Corporations Act is an effective tool. As discussed in the debt recovery article in this series, failure to comply with a statutory demand gives rise to a presumption of insolvency and the right to apply for winding up.
Pursuing Guarantors
If the primary borrower cannot satisfy the debt, the guarantee becomes the lender’s primary recourse. A formal demand on the guarantor, followed by court proceedings if unpaid, is the standard path.
The strength of the guarantee claim depends heavily on the original documentation — whether the guarantee was properly executed, whether the guarantor received ILA, and whether the guarantee covers the full amount claimed (including default interest and enforcement costs).
How Envision Legal Works With Private Lenders
We work with private lenders across the full lifecycle of the lending relationship:
Before the loan: Loan agreement drafting and review, security document preparation, PPSR advice, regulatory advice on ACL requirements.
At execution: Coordinating ILA for borrowers and guarantors, reviewing executed documents, advising on settlement processes.
During the loan: Advising on covenant compliance, extensions and variations, security substitution, and refinancing documentation.
On default: Demand letters, enforcement strategy, mortgage enforcement, statutory demands, guarantor claims, and liaison with property agents and insolvency practitioners where required.
If you are a private lender looking to tighten your documentation, get ILA for an upcoming transaction, or enforce against a borrower in default, we would welcome the conversation.
This article contains general information only and does not constitute legal advice. Envision Legal accepts no liability for any loss arising from reliance on this content. You should seek independent legal advice tailored to your specific circumstances. For enquiries, contact Envision Legal.