Introduction
Property developers often begin a funding search by asking which lender has the lowest interest rate. That is understandable, but it is not always the question that produces the best project outcome.
The real decision is usually broader: should the project be funded by a traditional bank or by a private credit lender? Each option has advantages, limitations and a different approach to risk. A bank may offer lower pricing and a familiar approval process, but it may also require more equity, stronger presales and stricter policy compliance. A private credit lender may provide greater leverage, faster execution and more flexibility, but at a higher cost.
Neither option is automatically better. The right choice depends on the project, the developer, the time frame, the required leverage, the strength of the exit strategy and the consequences of delay.
A low-cost facility that cannot settle on time may be far more expensive than a higher-cost facility that allows the project to proceed. Conversely, a flexible private credit structure may unnecessarily reduce profit if a bank facility is genuinely available and the project can satisfy its conditions without compromising timing.
This guide explains how bank finance and private credit differ, what each lender type typically prioritises, how developers should compare the total cost and how to determine which structure is more suitable for a particular development.
What is bank development finance?
Bank development finance is construction funding provided by an authorised deposit-taking institution under established credit policies.
Banks generally prefer projects that fit clearly within their risk appetite. They may focus on experienced developers, proven locations, conventional asset classes, acceptable builders, meaningful sponsor equity and strong repayment evidence.
The facility is commonly structured as senior debt secured by a first-ranking mortgage over the development site, together with guarantees, project account control and security over key contracts and entities.
Because banks have access to lower-cost funding, their interest rates and fees are usually lower than those offered by private credit lenders. This can materially improve project profit, particularly where the facility is large or the construction period is long.
The trade-off is that bank finance is often less flexible. The project must comply with policy limits, approval conditions and presale or prelease requirements. A transaction that sits outside policy may be declined even if it appears commercially sensible.
Bank approval can also involve multiple stages, including relationship review, credit analysis, valuation, quantity-surveyor reporting, legal due diligence and formal documentation. The process can be efficient where the information is complete, but it may be difficult to compress when settlement or construction deadlines are tight.
“The cheapest rate is rarely the cheapest capital.”
— The Australian Property Development Handbook
What is private credit?
Private credit is debt provided by non-bank lenders, investment funds, family offices, managed funds and specialist finance groups.
Private credit lenders raise capital from investors rather than relying on retail deposits. They generally price loans to reflect the project risk, leverage, term, security and expected investor return.
Many private lenders are prepared to consider transactions that do not fit bank policy. These may include higher-leverage developments, projects with limited presales, complex ownership structures, short settlement time frames, residual stock, land with approvals pending or specialised assets such as childcare centres and service stations.
Private credit is not one uniform product. Some lenders provide conservative senior debt at leverage similar to a bank. Others offer stretch senior, mezzanine debt, preferred equity or highly structured capital.
The defining feature is usually flexibility. A private lender can often assess the transaction on its merits rather than requiring it to fit a narrow policy framework.
That flexibility comes at a cost. Interest rates, establishment fees, line fees, exit fees and minimum return provisions can all be higher. Developers therefore need to assess private credit in total dollar terms and not simply compare a headline annual rate.
The fundamental difference in approach
Banks generally begin with policy. Private credit lenders generally begin with risk and return.
A bank asks whether the project falls within approved parameters for asset class, geography, leverage, presales, sponsor experience and security. If the project falls outside those parameters, the credit team may have limited ability to proceed.
A private lender asks whether the risk can be identified, priced and controlled. A weakness may be addressed through lower leverage, additional security, stronger covenants, a higher return or a more conservative exit assumption.
This does not mean private lenders accept poor projects. In many cases, they conduct detailed due diligence and impose strict conditions. The difference is that the structure may be tailored around the project rather than forcing the project into a standard policy box.
For developers, this distinction matters when the transaction is unusual, urgent or capital intensive. A private lender may find a way to fund a commercially sound project that a bank cannot approve. However, the developer pays for that flexibility and should understand exactly what is being purchased.
Cost of capital
Bank finance is generally the lower-cost option.
The interest margin is usually lower, establishment fees are often more moderate and the facility may not include minimum interest or exit fees. On a large development, the difference can amount to hundreds of thousands or millions of dollars.
Private credit pricing reflects the lender’s cost of capital, risk appetite and required investor return. In addition to interest, the facility may include establishment fees, line fees, valuation costs, legal costs, monitoring fees, extension fees and exit fees.
A minimum interest period or MOIC floor can be particularly important. If a project repays earlier than expected, the developer may still owe a minimum return. This can make a short loan more expensive than the annual rate suggests.
The correct comparison is total funding cost under the expected project program and under a delay scenario. A simple rate comparison can be misleading if one facility has lower interest but higher unused-line fees or expensive extension provisions.
Developers should also consider the cost of equity. A bank may be cheaper but require an additional $3 million of sponsor capital. If that capital is scarce or could be used on another profitable project, the lower debt cost may not produce the best overall return.
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Leverage and equity requirements
Banks generally require a larger equity buffer because they provide lower-cost senior debt.
The bank may limit the facility by loan-to-cost, loan-to-value, presales, profit margin and sponsor exposure. The result is often a meaningful cash contribution from the developer.
Private credit can provide higher leverage through stretch senior or mezzanine structures. This may reduce the developer’s cash equity and preserve capital for other projects.
Higher leverage can materially improve return on equity when the project performs as expected. However, it also reduces the buffer available to absorb lower values, higher costs or delays.
A developer should not select a higher-leverage structure simply because it is available. The project must have enough profit, contingency and liquidity to support the additional debt cost.
The best leverage level is the one that balances capital efficiency with project resilience.
Property developers often begin a funding search by asking which lender has the lowest interest rate.
Speed and certainty of execution
Private credit is often chosen because of speed.
A specialist lender may have a shorter approval chain, direct access to decision-makers and greater ability to tailor conditions. This can be valuable where a land settlement, refinance deadline or construction commencement date is approaching.
Banks can also move quickly when the project is well prepared and the relationship is established. However, policy exceptions, incomplete documentation or valuation issues can slow the process.
Developers should distinguish between an indicative response and genuine execution certainty. A lender that issues a term sheet quickly may still require extensive due diligence before settlement.
Execution certainty depends on the lender’s available capital, approval authority, valuation process, legal documentation and experience with the asset class.
A higher-priced facility that settles on time may protect a land deposit, builder price and project program. In that situation, speed has measurable economic value.
Presales and preleases
Banks commonly place greater emphasis on presales and preleases.
For residential projects, a bank may require a minimum level of qualifying presales before first drawdown. The contracts must generally satisfy requirements relating to deposits, purchaser concentration, foreign buyers, sunset dates and legal form.
Private credit lenders may accept lower presales or no presales where the project has strong market evidence, sufficient equity and a credible exit. This flexibility is one reason developers use private debt for townhouse, apartment and land subdivision projects.
For commercial projects, an executed prelease to a strong tenant can materially improve both bank and private credit options. A speculative industrial or retail project may be more difficult for a bank but still attract private credit at a conservative leverage level.
Reduced presale requirements do not eliminate market risk. They transfer more of that risk to the lender and developer, which is reflected in pricing and structure.
“Private credit buys certainty and speed; a bank buys you a lower rate.”
— The Australian Property Development Handbook
Developer experience
Banks and private lenders both care about developer experience, but they may respond differently to a limited track record.
A bank may decline a first-time developer because the transaction falls outside policy. It may require an experienced joint-venture partner, lower leverage or additional support.
A private lender may be willing to proceed if the project is strong and the risk is mitigated through an experienced builder, project manager, consultant team and additional equity.
Experienced developers are more likely to secure high-leverage private credit because they can demonstrate delivery capability and previous lender performance.
First-time developers should not assume private credit removes the need for experience. Higher leverage increases execution risk, so the lender may require a stronger team and more control.
The application should accurately explain the sponsor’s role in previous projects and how any experience gap is being addressed.
Flexibility during the project
Development projects rarely proceed exactly as planned.
Construction variations, settlement delays, valuation movements, planning changes and sales timing can all affect the facility.
Private credit lenders may have greater flexibility to approve variations, extend the term or restructure the loan. Decision-making can be faster because the lender’s mandate is more specialised.
Banks can also work constructively with developers, particularly where the project remains fundamentally sound. However, changes may require formal credit approval and continued compliance with policy.
Flexibility should not be assumed. The facility agreement determines the lender’s rights, extension pricing, default consequences and ability to require additional equity.
Developers should ask how the lender has handled similar issues in previous projects and should review the documents carefully before relying on future flexibility.
Security and recourse
Both banks and private lenders commonly require a first-ranking mortgage and broad project security.
The lender may take guarantees from the developer, directors, shareholders or related entities. It may also take security over project accounts, shares, contracts, presale proceeds and insurance.
Private credit is not necessarily more aggressive in every transaction, but higher-leverage loans can involve stronger recourse, tighter covenants and more extensive control rights.
A mezzanine lender may take second-ranking security, share security or contractual rights under an intercreditor deed.
Developers should understand which assets are at risk and whether guarantees are limited or unlimited.
The price of a facility is only one part of the risk. Recourse and enforcement provisions can have significant consequences if the project underperforms.
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Banks and private credit lenders may instruct valuers differently and may adopt different credit assumptions.
A bank may apply conservative policy limits to the valuation, exclude certain sales or use a lower completed value for credit purposes.
A private lender may be prepared to lend against a higher proportion of the same value, but it will still rely on independent evidence.
The developer should not assume that a private lender will accept an optimistic feasibility. Private credit funds need to protect investor capital and often conduct detailed downside analysis.
A strong application should test the project using lower values, higher costs and a longer program. This helps the developer compare how each lender structure performs under stress.
Which projects are better suited to bank finance?
Bank finance is often suitable for projects that are well advanced, conventional and strongly capitalised.
That is understandable, but it is not always the question that produces the best project outcome.
Examples include townhouse developments with development approval, fixed-price construction contracts, qualifying presales and an experienced sponsor.
A leased industrial project with a strong tenant and conservative leverage may also fit a bank’s appetite.
Developers with sufficient equity, strong financial statements and a proven track record can benefit significantly from lower bank pricing.
A bank facility is particularly attractive where the project has a long construction period because the interest-rate saving compounds over time.
The main requirement is that the project and sponsor can satisfy policy without creating timing risk.
Which projects are better suited to private credit?
Private credit is often suitable where the project is commercially sound but does not fit bank policy.
This may include higher-leverage developments, limited-presale projects, short settlement time frames, residual stock, land awaiting final approvals, complex ownership structures or specialised assets.
Private credit can also suit developers who want to preserve equity or avoid introducing a joint-venture investor.
A private lender may be useful as a bridge. The developer can use the facility to acquire land, complete approvals or commence construction, then refinance into cheaper bank debt once the project is de-risked.
The structure should still be supported by a clear repayment strategy. Private credit is not a permanent solution to a weak feasibility.
“Match the lender to the deal, not the deal to the lender.”
— The Australian Property Development Handbook
Worked example: bank versus private credit
Assume a developer is undertaking a townhouse project with a total development cost of $30 million and an expected gross realisation value of $40 million.
The bank offers a $20.5 million facility. The developer must contribute $9.5 million. The facility has lower interest and fees, but the bank requires a higher presale threshold and all equity to be contributed before construction debt is drawn.
A private credit lender offers $24 million. The developer contributes $6 million. The facility costs more, but it requires fewer presales and can settle six weeks earlier.
Under the base case, the bank facility produces the higher project profit because the finance cost is lower. However, the developer must find an additional $3.5 million of equity and may delay construction while completing presales.
The private facility preserves $3.5 million of capital and allows the builder to commence under the current fixed price. If delaying the project would increase construction cost by $1 million and extend the land holding period, the apparent bank saving may disappear.
The developer should model both options. The bank may be better if presales and equity are readily available. Private credit may be better if timing and capital preservation are more important than the higher funding cost.
The answer depends on the economic consequences of each structure, not on interest rate alone.
Private credit as a bridge to bank finance
Private credit can be used strategically rather than as a full-term development solution.
A developer may use a private facility to settle land, complete approvals or carry out early works. Once the project has a fixed construction price, presales or a completed lease, it may qualify for cheaper bank finance.
This strategy can reduce overall cost while preserving execution certainty at the beginning.
However, the refinance must be realistic. The developer should understand the bank’s future requirements before taking the bridge facility.
If the project fails to achieve the expected milestones, the private loan may need to be extended at a high cost.
The facility term, extension rights and exit fees should therefore allow enough time to complete the de-risking process.
The importance of lender selection
Not all banks have the same appetite, and not all private lenders provide the same product.
Some private credit funds focus on conservative senior loans. Others specialise in stretch senior, mezzanine, land, residual stock or complex transactions.
The lender should be matched to the asset class, loan size, geography, leverage and sponsor experience.
A lender that has completed similar projects is more likely to understand the risks and move efficiently.
Developers should also consider the lender’s funding certainty and reputation. A term sheet has limited value if the lender does not have committed capital or frequently changes terms late in the process.
Each option has advantages, limitations and a different approach to risk.
The funding process should be targeted rather than broadly circulated. A controlled approach protects credibility and allows genuine comparisons.
These principles come from our free guide.
Download the handbook →Questions to ask when comparing term sheets
The developer should confirm the maximum facility, LTC, LVR, equity requirement and treatment of capitalised interest.
The term sheet should explain the establishment fee, line fee, interest rate, default rate, minimum interest, exit fee, valuation costs and legal costs.
The developer should understand when equity must be injected and how cost overruns will be handled.
Presale, prelease and valuation conditions should be clearly identified.
The facility term, extension options and extension pricing are critical.
The developer should also review release prices, debt-repayment requirements, cash-sweep provisions and distributions.
Security, guarantees, covenants and events of default must be understood.
Finally, the developer should assess which terms are approved and which remain subject to credit, valuation, legal due diligence or investment committee review.
Common mistakes when choosing between bank and private credit
One mistake is assuming the cheapest lender will provide the best outcome.
Another is using private credit without modelling total cost and downside exposure.
Developers also make the mistake of accepting a high-leverage facility without maintaining enough liquidity for cost overruns.
Some wait too long for bank approval and approach private lenders only when a settlement deadline is imminent. This weakens negotiating power.
Others obtain a private term sheet but assume it guarantees settlement. Due diligence and documentation still need to be completed.
A disciplined process begins early, compares realistic options and keeps enough time to address lender conditions.
Frequently asked questions
Is private credit only for developers who cannot get bank finance? No. Experienced developers may choose private credit for speed, leverage, flexibility or capital efficiency even where bank finance is available.
Is bank finance always cheaper? It is usually cheaper in nominal terms, but the total project outcome can be affected by additional equity, presale delays and execution timing.
Can a private loan be refinanced by a bank? Yes, provided the project later satisfies the bank’s credit requirements.
Are private lenders regulated? The legal and regulatory framework depends on the lender, investors, borrower and transaction. Developers should obtain appropriate legal and financial advice.
Does private credit require presales? Some lenders do and some do not. Requirements depend on the project, leverage and exit strategy.
Can first-time developers use private credit? Potentially, but they may need more equity, an experienced team and a conservative structure.
What is the biggest risk of high leverage? The project has less capacity to absorb lower values, higher costs and delays before the developer’s equity is exhausted.
Which lender type is faster? Private credit is often faster, but a well-prepared bank transaction can also move efficiently. Execution depends on the lender and the quality of the application.
Conclusion
Bank finance and private credit serve different purposes in property development.
Banks generally provide lower-cost funding for projects that fit established policy and have strong equity, experience and repayment evidence.
Private credit provides flexibility, speed and higher leverage for projects that require a more tailored structure.
The best option is determined by the project’s economics, time frame and risk. Developers should compare total cost, equity requirements, execution certainty, flexibility, recourse and downside performance.
A funding structure should support the development rather than place unnecessary pressure on it.
BluCow Capital works with property developers to compare bank, non-bank, private credit, stretch senior, mezzanine and equity options. Early assessment can help identify which funding path is most suitable before timing pressure reduces the available choices.
Disclaimer
This article provides general information only and does not constitute financial, legal, tax, investment or credit advice. Development finance terms, lending policies and eligibility requirements vary between lenders and projects. Developers should obtain advice from appropriately qualified professionals before entering into any transaction.