Business funding success starts with choosing the right tools. From private credit to bonds, Australia’s funding landscape offers unique advantages over Europe and the US. In this article we explain Australia’s debt markets and provide tips on how your firm can benefit.
Here’s how Australia compares:
1. Bond Markets
- Australia:
- Size: $1.3T (RBA, 2023).
- Access: Large corporates dominate. SMEs use private placements for tailored deals.
- Example: A Brisbane energy firm raised $50M via a private bond placement at 6% interest.
- US:
- Size: $52T (Federal Reserve, 2023).
- Access: Robust for mid-market firms, but crowded and competitive.
- Europe:
- Size: $18T (ECB, 2023).
- Access: Favors green/sustainability bonds, excluding many SMEs.
Key Insight: Australia’s smaller bond market offers niche opportunities for certain mid-market corporates through flexible private deals.
2. Private Debt & Promissory Notes
- Australia:
- Private debt hit $120B in 2023 (RBA), focusing on SMEs in mining, tech, and logistics.
- Promissory notes are rare but growing in property and infrastructure.
- US:
- Private debt exceeds $1.2T, with promissory notes common for short-term cash needs.
- Europe:
- Private debt reached $400B (ECB, 2023), targeting green energy and mid-sized firms.
Case Study:
A Sydney logistics firm secured $8M via private debt at 9% interest. A broker matched them to a lender specialising in transport-sector deals, saving many months of DIY search time and acceptable rates and terms.
3. Repurchase Agreements (Repos)
- Australia:
- Usage: Banks and funds dominate the $45B repo market (RBA). SMEs rarely qualify.
- US:
- $4.5T repo market fuels liquidity for large corporates.
- Europe:
- Strict regulations limit SME access to the $1.8T repo market.
For an increasing number of Australian businesses, private credit is the go-to funding solution. Private equity is also increasing in popularity for firms happy to share some ownership. For more information about this see our private v public equity article.
Why Private Credit Dominates Australian Business Funding
Business funding increasingly relies on private credit due to:
- Bank Retreat: BASEL III rules pushed banks toward safer loans, abandoning SMEs.
- Superannuation Fuel: Australia’s $3.5T pension pool drives private credit demand.
- Flexibility: Lenders offer hybrid structures (e.g., revenue-sharing loans) and faster approvals.
Global Yield Comparison (2023):
- Australia: 9–12% (RBA).
- US: 7–10% (Federal Reserve).
- Europe: 6–9% (ECB).
Why Higher in Australia?
Risky SME focus and less market saturation.
Navigating the Minefield: Key Risks in Private Credit Agreements
When entering a loan agreement with a private credit provider, businesses must exercise caution to avoid costly pitfalls. Here are the key risks to watch for and how to mitigate them:
1. High Interest Rates & Hidden Fees
Private credit loans often carry higher interest rates than traditional bank loans (e.g., 9–15% vs. 5–8%). Private credit providers each have their preferred lending niche and if you don’t exactly fit it you may incur a fee penalty. Speaking to an industry expert is the best advice. Additionally, watch for:
- Origination fees (1–5% of the loan amount).
- Prepayment penalties for early repayment (e.g., 2–5% of the outstanding balance).
- Late payment fees or default interest spikes (e.g., 18%+).
Mitigation:
- Compare offers from multiple lenders.
- Negotiate caps on fees or interest rate adjustments.
- Seek assistance from an industry expert.
2. Restrictive Covenants
Private lenders may impose strict covenants that limit your business’s flexibility, such as:
- Financial ratios (e.g., minimum EBITDA or debt-to-equity ratios).
- Operational restrictions (e.g., bans on asset sales or new debt).
- Reporting requirements (monthly financial updates).
Example:
A breach could trigger default, forcing immediate repayment.
Mitigation:
- Avoid overly rigid terms.
- Ensure covenants align with your business’s cash flow cycle.
3. Collateral Requirements
Private lenders often demand personal guarantees or asset liens (e.g., property, equipment). If you default, they can seize these assets.
Risk:
Over-collateralisation can jeopardise personal or business assets.
Mitigation:
- Limit collateral to essential assets.
- Negotiate release clauses for collateral as the loan is repaid.
- Seek the assistance of an industry expert to secure the best terms.
4. Balloon Payments
Some loans include balloon payments—a large lump sum due at the end of the term. This can strain cash flow if not planned for.
Example:
A 1M loan with monthly interest−only payments and a 1M balloon payment after 5 years.
Mitigation:
- Opt for amortising loans (equal principal + interest payments).
- Secure refinancing options in advance.
5. Lack of Flexibility
Private credit agreements may lack repayment flexibility, leaving businesses vulnerable during downturns.
Private credit agreements often lock businesses into rigid repayment schedules, with fixed monthly or quarterly payments. Unlike bank loans, which may offer payment holidays or adjustable terms during hardships, private lenders rarely build in flexibility. This can cripple cash flow during downturns, recessions, or unexpected crises (e.g., supply chain disruptions). For example, a retail business with seasonal revenue might struggle to meet fixed winter repayments if summer sales slump. Without renegotiation options, missed payments trigger penalties, damage credit scores, or even default.
Mitigation:
- Negotiate grace periods for missed payments.
- Include revenue-linked repayment terms (e.g., repayments adjust with cash flow).
Case Study:
A Melbourne hospitality group renegotiated its private credit terms during COVID-19, switching to 3% of monthly revenue repayments. This saved the business from liquidation.
Why This Matters:
Flexibility isn’t a luxury—it’s survival insurance. You may have hit roadblocks along the way to securing the funding your business needs however it is important that you do not relax on the terms you agree to with your ultimate funder. Always consult experts to avoid one-size-fits-all traps.
6. Opaque Terms & Predatory Practices
Some private lenders use complex jargon or bury risks in fine print. Others engage in predatory tactics, like:
- Loan flipping (pressuring borrowers to refinance repeatedly, incurring new fees).
- Equity grabs (converting debt to equity if terms are breached).
Mitigation:
- Work with a specialist broker to decode terms.
- Avoid lenders refusing to explain conditions clearly.
7. Impact on Future Financing
High debt levels or restrictive covenants can hurt creditworthiness, making future loans or equity raises harder.
High debt levels or overly restrictive covenants can severely damage a company’s credit worthiness, creating long-term hurdles for future financing. Credit rating agencies like Moody’s and S&P penalise firms with debt ratios exceeding industry benchmarks (e.g., a debt-to-EBITDA ratio above 4x in retail vs. 6x in mining). Lenders and investors view such imbalances as red flags, signaling higher default risk or operational inflexibility. For example, a tech startup with a 5x debt-to-equity ratio (vs. the industry average of 2x) may struggle to secure venture capital or refinancing. Similarly, breaching covenants (e.g., failing to meet a minimum liquidity ratio) can trigger defaults, penalties, or forced asset sales.
Industry Benchmark Risks:
Exceeding sector norms without justification—like taking on debt for low-ROI projects—can erode investor trust. For instance, a manufacturing firm with a 3x debt-to-equity ratio (industry average: 1.5x) might face downgrades, raising its cost of capital by 3–5%.
Mitigation Strategies:
- Monitor Leverage Ratios: Align debt levels with industry standards (e.g., using tools like the Altman Z-score for risk assessment).
- Negotiate Covenant Flexibility: Ensure covenants allow room for strategic pivots (e.g., temporary EBITDA dips during expansion).
- Pre-Approved Refinancing: Secure backup credit lines to avoid liquidity crunches.
- Consult a specialist broker: to model debt’s impact on future funding.
Case Study:
A Brisbane logistics firm breached its debt service covenant during a fuel price spike. Lenders froze its credit line, forcing a fire sale of assets. A broker later renegotiated terms, restoring liquidity.
Why This Matters:
Creditworthiness isn’t just about today—it’s about preserving tomorrow’s options.
8. Regulatory Gaps
Private credit is less regulated than bank lending, increasing risks of predatory terms as outlined above.
Mitigation:
- Verify lenders are registered with ASIC (Australia) or equivalent bodies.
- Avoid unregulated offshore providers.
The Broker Edge: Securing Optimal Business Funding
Debt markets are fragmented and complex. For example:
- Private Credit: Over 200 lenders in Australia, each with niche criteria (e.g., industry, loan size, loan purpose).
- Bonds: SMEs face high compliance costs and investor skepticism.
- Repos: Limited to large players like banks.
Without Expert Guidance, Businesses Risk:
- Mismatched Applications: Targeting lenders outside their niche.
- Higher Costs: Accepting rates 10–20% above market averages.
- Hidden Risks: Overlooking restrictive covenants or balloon payments.
Case Study:
A Melbourne manufacturer needed $5M for expansion. Banks said no. A broker secured private credit at 7% interest, avoiding a 12% bank offer.
What’s Next?
Don’t Navigate Business Funding Alone
Convergent Capital Corp’s pre-vetted experts are available to assist you in navigating the dangers:
- Match you to industry experts with direct experience in your need.
- Negotiate rates 10–15% below DIY deals.
- Simplify compliance and risk management.
🔗 Click here to book a confidential discussion.
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- Funding’s New Frontier: How Private Credit Defies Banking Limits
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- The Superannuation Secret: Fueling Growth in Commercial Lending
