What distinguishes private capital lenders from bank lenders? Whereas bank lenders are concerned with the risk involved in the project, the borrower’s credit score, and the borrower’s global debt picture, private capital lenders approve loan requests based on the value of the property, property liquidity, and the project’s profitability. Increasingly, even investors who can qualify for bank loans are seeking out private capital loans for their commercial investments. Here are six reasons why it’s happening:

1. Larger loan amounts are easier to obtain. There are no government restrictions on the amounts that private lenders can fund, and they have the freedom to choose to determine a property’s loan-to-value (LTV) rate based on the higher of the purchase price or the property value rather than having to use the lower of the two as banks must.
2. The borrower’s credit is less important. Private lenders aren’t restricted by credit scores because they use asset-based underwriting. This means they place more weight on a borrower’s character, the value of the property they want to buy, and what they propose to do with that property to pay back the loan.
3. Private lenders have flexible terms and creative approaches. When you submit a request for a private loan, you deal directly with the decisionmaker rather than an intermediary who has to report to a committee. This makes these loans faster to obtain and more easily customized to fit a borrower’s specific needs.
4. Private lenders are more willing to provide advice. Private lenders want you (and your project) to be profitable and usually have years of experience in the local real estate market that they will happily share with you. They can be an important, often overlooked and underused, asset to your project. Also, if a private lender is hesitant to fund your deal, it’s a good idea to ask them why and re-evaluate whether it’s really as good as you initially thought.
5. Private lenders fund where banks fear to lend. This means high-risk loan requests have a greater chance of approval from a private lender who isn’t hampered by post-recession federal regulations and requirements. This doesn’t mean that private lenders will fund every loan that comes their way, though, so be prepared to show them why yours is worth the risk. And recognize that this risk-acceptance comes at a cost: higher interest rates.
6. Private loans are not informal loans. Although private lenders promise less paperwork and red tape, this does not mean that their loans are any less binding than those offered by a bank. Legitimate and reputable private lenders will still perform due diligence to protect both lender and borrower, and the closing will involve checking title, property appraisals, promissory notes, property insurance confirmation and a deed of trust signing.

If you have more questions about private capital loans and lenders, contact Montegra at 303-377-4181.