Traditional Mortgage Companies vs. Private Lending

Debbie Wilson
LoanBiz Columnist

Article Rating , 4 out of 5 based on 1 votes

So you have a can't-miss idea for a business, and now you need to fund that dream? Find out what private lenders are looking for and what risks these loans contain. Then, consider asking your local mortgage lender to finance your new business.

Mortgage Companies and Private Lending Comparison

Mortgage companies have long been utilized as a favorite in the lending business. However, today's fast-paced world has demanded quicker and more personalized lending options. Real estate investors, developers and other entrepreneurs are walking into banks with brilliant ideas and well developed business plans and walking out without funding. They are looking to private lending as an alternative. Why? Well, risky as it may be, without private funding, many creative ideas and businesses would never come to fruition.

Who Are Private Lenders?

Most private lenders are specialists who engage in high risk ventures because they find an opportunity and accept a risk associated with a particular business or market segment. In general, they are looking for the same information as traditional mortgage lenders. They will conduct a similar due diligence in order to make their funding decision, however, they may fund a project that a bank rejects. In many cases they must come up with a creative way to structure loan repayment. Private funding may be short term, used for example in buying foreclosure property at auction, rehabilitating it, and then the loan is repaid when the property sells. Upfront fees are generally quite high and interest rates will be several points higher than traditional mortgage financing.

Private Lending Must-Knows

Before you decide to seek a private loan, consider a few important questions:
  • What is your ability to repay the loan?
  • Can you afford to take on a high interest rate, high risk loan without compromising your other financial obligations?
  • Have you developed an airtight business plan that includes contingency scenarios and realistic forecasts?
  • Are you prepared for potential financial obstacles?
  • Most importantly, have you explored other options, such as a mortgage collateralized by your current home?
If you are an entrepreneur who is unwilling to give up your dream or are unable to obtain money for some other type of sophisticated investment, private lending might be an alternative worth considering. But because it can be such a risky venture, make sure that you're willing to pay a little more, accept alternative conditions, and expect obstacles. And if you can fund your future with a traditional mortgage, that may be the superior option.

About the Author
Debbie Wilson owns and operates a lakeside resort. Her previous experience includes profitability consulting for a national healthcare company. Debbie holds a B.A. in Business Management with a minor in Physical Education.

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