Private Lenders vs Banks – A beginners guide

private lenders v's banks

Choosing the best lender for your business loan is not as simple as it looks. For example, do you go through a bank or a private lender?

In most instances, a business will get a loan through a bank, but the other option of going through a private lender may be a better decision.

This article will examine the pros and cons of obtaining your business loan through a bank vs a private business lender. Of course, both have their pro’s and cons, but at least you’ll know the difference between the two loan types and what’s the right fit for your business.

Private Lenders vs Banks

What is the difference between private lenders and banks?

Private lenders essentially do not hold a banking license and are not regulated by APRA. They are private individuals or businesses with excess funds to loan to businesses, and in most cases, the loan is secured against an asset, such as a property. They are also known as non-bank lenders and are traditionally more flexible in loaning money to businesses. Most people will turn to private lenders like us at Sparrow Loans when one of the major Australian banks has declined their business loan applications. With banks declining about 25% of loan applications in the SME space, more businesses are choosing to go straight to a private lender when the timing is important. Private lenders will take a close look at the businesses trading and credit history but will be much more accommodating in getting the loan across the line. There are some great examples of case studies where we have been able to help businesses get a loan when they were refused by the bank, which you can read here.

Also, read Buying property using a private lender – tips for beginners.

It is important to note that private lenders are still bound by the law. So if you decide to choose a private lender for your financing, you know that you are protected under Australian Law. In addition, the Australian Banking Association and ASIC both have their codes of practice for private lenders and banks. So, if you’re worried that you are not protected under Australian Law if you use a private lender, don’t be. Your rights as a consumer are protected if your funds are for personal use! Nevertheless, as a business borrower, there are fewer protections than an individual borrower. This is because businesses are assumed to be more savvy and experienced than consumer borrowers and less regulation in this space helps facilitate timely business transactions without onerous red tape.

Banks are known as traditional lenders, and most people will know them as either Westpac, Commonwealth, NAB or ANZ. Most likely, they will have their business banking accounts with these institutions, so logically, it’s the first port of call for a loan. However, banks can be pretty inflexible and rigid when it comes to loaning out money, especially for a business which means many people turn to other funding sources such as private lenders. In addition, most banks will turn down borrowers because of poor credit history.

Private Lenders vs Banks: Pros and Cons

When looking at private lenders vs banks, it’s a good idea to know the pros and cons of each.

Private lenders


  • They might be able to offer competitive monthly interest rates.
  • The criteria for lending are far are more flexible. You might have a bad credit rating, but private lenders will use an asset as security against the loan, meaning you’ll more likely end up with the loan approval.
  • They consider your business needs and are not as bound by banking protocols as traditional lenders are.
  • They will offer a more personalised approach to their lending.
  • They can respond quickly without the long turnaround times of the banks.


  • There are many private lenders in the market, so you have to do your due diligence and make sure you go with a trustworthy private lender.



  • Bank loans can offer competitive interest rates.
  • In a crisis like COVID, banks are a very stable option.


  • They generally have less flexibility when offering a loan.
  • Banks can be complicated to deal with and require mountains of paperwork. They can be rigid, stifling and often to the letter, and in uncertain times, this is not the best way to run your business. If you need funds and money for things like business tax debts or a small business loan, you might not be able to rely on your local bank.
  • They can take upwards of 4 weeks to assess a loan application.

Based on the above, you can see the massive difference between banks and private lenders. Of course, both can loan your business money, but this depends on your past and current economic situation.

Thinking About Taking Out A Business Loan?

The initial loan application process is more or less the same between private lenders and banks, and as a borrower, you’ll need:

  • Supporting documents showing business income and expenses as well as previous tax office returns
  • There are predetermined mandatory requirements that you will have to meet, such as an ABN, all directors and owners of the business to be Australia-based, current Australian business address & must be in business for at least 12 months.

Poor Credit Score

One of the main differences between banks and private lenders is your credit score. Banks will scrutinise a poor credit score in detail, while private lenders will filter a poor credit rating and not harshly judge the lending criteria; so long as the loan is secured against an asset and the exit strategy makes a lot of sense. In addition, private lenders will consider the business’s current circumstances and try to work out a deal, whereas banks see things as black or white. A bank’s stricter lending policies can hamper a business’s future potential, so a private lender is such a great alternative option.

If you are looking to take out a business loan, then speak to the experts at Sparrow Loans. We are here to help you grow your business in these very uncertain times.

About the author

Ulrika Lobo

Ulrika Lobo is the lending specialist at Sparrow Loans and has over ten years of experience in the commercial business loan space. Ulrika co-founded Sparrow Loans to provide Australian SMEs with a faster and easier way to access finance. Ulrika is responsible for managing the lending process from underwriting to execution and settlement and post-settlement support.