Private capital lenders are known for providing loans in a fast timeframe with minimal red tape. However, one of the key pieces of information that a private lender will want from any prospective borrower is their exit strategy because it demonstrates that the borrower has a plan to repay the loan. Although it’s necessary to customize the details of your exit strategy to each project, most exit strategies fall into one of the following five basic categories:

1. Sell the property. This is by far the most common exit strategy for private capital and hard money loans especially with commercial properties that are distressed or have a high-vacancy rate that can be turned around in the short-term (less than two years) and resold for a profit.
2. Refinance with a conventional mortgage. This is a popular choice for borrowers who want to hold onto an income-producing property as a longer-term investment. It is also a good fit for projects that need to be developed at least partway before they can pass the guidelines for a construction loan or long-term mortgage from a bank.
3. Refinance with an SBA loan. For small businesses that are purchasing their own premises but can’t qualify for an SBA loan immediately or fund one in time to purchase the property, a hard money loan can help them acquire the property, perform any necessary rehabilitation, and then refinance at a lower rate through one of the two SBA loan programs: the SBA 7(a) and the SBA 504.
4. Refinance with another hard money loan. In some circumstances, it may be possible to extend your original hard money loan with your current lender, or to obtain another hard money loan to pay off the first one. This could be necessary in the event that construction went longer than planned or other unforeseen issues make selling the property less profitable than continuing to pay the higher interest rates of private capital loans.
5. Sell off other properties or investments. This is usually the back-up strategy when other strategies fall through. If selling the property is completely untenable and the current loan can’t be extended or replaced, then the borrower can sell another property or liquidate other investments in order to pay back the hard money loan. While not the most favorable strategy for the borrower, it is still preferable to defaulting and having the property foreclosed on by the lender.

It’s important to keep in mind that while you may go into a loan with one exit plan, unforeseen circumstances can sometimes make it necessary to adopt a different exit plan when the term for the loan is actually up. Throughout the loan term, you should keep the lines of communication with your private lender open and update them if issues arise. A lender who knows about problems as they happen is much more likely to work with you to find solutions than one who is kept in the dark until it’s too late to be of any help.

If you have a private capital loan request, contact Montegra today at 303-377-4181 to find out which of our loan programs best suits your project.