All You Need to Know About Private Lending

Investing in commercial real estate is a goal for many people, but few can realize it owing to a lack of cash.  A great option to bring this dream to life is to find favorable lenders for a mortgage, whether you are using a conventional bank or a private lender.  

You might be familiar with the process of obtaining loans from banks and credit unions but not so much with obtaining a commercial mortgage loan from a private lender. This article will provide you with an in-depth understanding of private lending in commercial real estate.  

At the end of this article, you will have gotten a clearer understanding of: 

  • What a private lender is 
  • How private money lending works 
  • Why you may want to consider using a private lender 
  • Risks as well as the benefits you stand to gain when you use a private money lender 
  • Differences and similarities between private money lending outlets, conventional banks, and credit union companies 
  • And how to find money lenders that are suitable for your needs  

What is Private Lending and How Does it Work 

Private money lenders are simply non-institutional money lending outlets. Private lenders can be individuals, a group of individuals, or financial institutions. 

Private money lenders generally provide funding for a variety of purposes to borrowers. They offer both personal loans and commercial real estate or mortgage loans.  

Private lenders can be individuals or a financial institution that is not a bank or a credit union. Individual lenders may be people who prefer to invest their money in private lending rather than leaving their money to sit in the bank where it will not yield as much interest. Some financial institutions also operate private money lending investments.  

Obtaining a loan from a private lender works just like with an institutional lender. The lender funds your mortgage, and the lender makes a profit off your interest. Similar to using an institutional lender, a private lender will want to check your financial records and earning power to ensure you can repay the loan. State laws regulate banks and credit unions. Private lending is also regulated, although the regulations are not as strict as with a conventional lender.  

The Benefits   

Private lending is a great way to quickly get funds for your commercial real estate project and for lenders to make money. There are several benefits of it to both the borrower and the private lender, and some of them are: 

Benefits to the Borrower: 

Less Formal Application Process 

A huge benefit you stand to gain from using a private lender is the less formal application process. Mortgage application processes with private lenders tend to be more informal and less tedious than conventional banks and credit unions. While it is advantageous that government agencies insure institutional mortgages, a downside is that the process of applying for a commercial loan is tedious and strict. With private lenders, the process is way more informal and less arduous. 

Faster Processing  

Loans from a private lending investment outlet are generally faster to process than institutional lenders. If you’re lending from a bank or credit union, you need a lot of patience. Funding usually comes in after you have gone through a tedious application process. Sometimes, it is not approved after putting in all the effort and investing time, money, and energy into the loan application.    

Unfortunately, time is of great importance when bidding for your dream deal. In comparison with institutional lenders, private lenders have quicker funding processes. Loans are approved more swiftly, and you can get on with your next commercial real estate transaction.  

Flexible Qualification Demand 

If your financial records are not easily accessible, then private lending may be an excellent option for you. Institutional money lenders are more structured and will not give out loans if you do not have easily accessible financial records. This is especially useful for self-employed people and freelancers.  

Furthermore, private lenders are lenient when you do not have a perfect credit history and are more willing to give you a chance than institutional lenders with a stricter qualification demand. 

Customizable Loan Agreements 

Loans from private lenders are generally more customizable. Private Lenders are usually more willing to tweak certain things to ensure that your loan is tailored to fit your purpose and meet your specific needs. 

Benefits to the Private Lender:  

Wide Profit  

The first benefit of private lending is the returns on loans given out. As a lender, you get to make a profit off your money, and investing in a private lending business is more profitable than leaving your money in the bank. An added advantage is that compared to conventional money lenders such as banks and credit unions, you get to set a higher interest rate which means more profit for you.  

Collateral is available if a borrower default  

In a situation where the borrower defaults in loan repayment, a private lender may seize the collateral to prevent being at a loss.  

You get to help people  

As a private lender, you don’t just get monetary profits; you also get the satisfaction of helping people secure their commercial real estate transactions. What is better than making people feel good and making money while at it

The Risks 

Despite these vast advantages of borrowing from a private money lender, there are risks associated with private lending, which may affect both parties (the borrower and the private lender).  

Inability to Pay Back the Loan 

Sometimes a lender fails to do their due diligence and hands over a loan to a borrower who cannot repay the loan. This is perhaps the worst risk for a lender, a borrower who refuses to repay the loan. Even when the lender takes legal action, they may not be able to recover the full amount that the borrower owes. To avoid being in such a situation, private lenders must do a proper assessment of the borrower and ensure that they can repay the loans taken.  

Extreme Interest Rates 

The borrower is also exposed to certain risks, such as excessive interest rates. Generally, when it comes to loans, the higher the risk, the higher the interest, and because most private loans are high risks, the interest rates are also high.  

Fewer Regulations 

Though subjected to state usury laws and regulated to an extent, private loans are not as heavily regulated as loans from banks and credit unions. The lender may take advantage of this and set high-interest rates. Yes, the lender is still subject to state usury laws and cannot exceed the limit set by law. Still, some lenders take advantage of the lax regulation on private lending investments and devise new ways to take extra money from borrowers. 

Hidden Obligations in the Agreement  

Another risk involved with private lending is when borrowers do not properly peruse the loan agreement and unknowingly sign up for more than they bargained for. To eliminate the risk of this happening, borrowers must ensure that the loan agreement is appropriately examined to ensure that they are on the same page as the lender and that the private lender is not offering them more than they can handle. 

Things to Consider Before you Invest in a Private Loan 

Having gotten information on how private lending works, here are essential factors you should consider before investing in a private loan: 

Things to Consider for the Borrower: 

Make sure you’re choosing a credible private lender  

Generally, financial institutions and private lending investment companies tend to be more credible. They also usually have formal settings with friendlier interest rates. It is highly advisable to use a mortgage broker. Mortgage brokers serve as intermediaries between the two parties. Using a mortgage broker has numerous benefits and is an easy way to find credible lenders.  

Consider the interest rates of the lender  

You want to borrow from a lender with favorable interest rates. Also, it is vital to conduct proper research on the additional costs. Some loans have low-interest rates, but the additional costs are outrageous. Make sure to ask questions and only take loans when satisfied that the loan will suit your purpose and is reasonable. 

Things to Consider for the Private Lender: 

Capital 

This is an obvious factor. You must have sufficient capital to invest in private money lending. The profit may not come fast enough, so you want to ensure you’re investing money you won’t need for a while.  

Friendly state usury laws and loan regulatory bodies 

It’s vital to ensure that the usury laws in the state you desire to operate in are friendly and favorable to private money lenders.  

Appropriate loan recovery methods 

Many money lenders get into serious trouble for going about loan recovery in unlawful ways. Talk to your lawyer about the options available for loan recovery and ensure they are friendly enough for your business if your borrower defaults. 

How to Find the Best Private Lenders for Your Needs?  

If you’ve decided to borrow money from a private lender, you might wonder how to find one. Below are ways to find the best private lender for your needs. 

Recommendations from family and friends  

One way to find private lenders is through family and friends. Those who have used a private lender could recommend their top choice. You can also ask coworkers and associates who have used private lenders in the past for help. 

Personal research 

A great way to find the best private lender that’d lend you money for your commercial real estate project is by doing a simple search online. The best private lenders will have a website you can visit to learn more about their service. 

A commercial mortgage broker with a Finance Lobby account is the best individual to assist you in finding a private lender. This is because a broker who has a Finance Lobby account has access to the largest network of lenders in the country, including the best private lenders for your commercial real estate deal. A mortgage broker’s responsibilities include screening private lenders. 

How Does One Become a Private Lender or Start a Private Lending Company? 

One does not automatically become a private lender by having a lot of money to borrow. Certain things need to be put in place to ensure the smooth running of your individual or corporate lending business.  

These are vital steps to take to establish a private money lending business: 

  • Register your company and fill in applications to get the necessary licenses   
  • Do enough research about your legal obligations as a lender and your options for debt collection. Better still, hire a lawyer. 
  • Expand your network to stay afloat in the lending industry. It is always a good idea to sign up with commercial mortgage brokers. That way, you find borrowers whose needs you can meet and make a good profit while at it 

Conclusion 

Private lending is a great way to get funds to complete your next commercial real estate transaction. Lenders can earn interest on their money by lending funds to people to complete real estate transactions. If you are interested in private lending, visit our website to Get Started.

September 26, 2022

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