Let’s weigh the possibilities and find out what financing option works best for your situation.
Everyone’s financial needs are different. What works for one situation may not hold water for another—so it pays to know all your options before jumping into the lending deep end. What do banks offer that private lenders don’t? What are the risks and benefits of each? When are we going to make another nautical analogy? We’ll dive into all these questions and more and make sure you’re not swimming upstream next time you need a commercial real estate loan.
Pros and Cons of Private Lending
Yes, banks are the most popular option when it comes to funding a home, investment property, or commercial property for your business—but traditional lending may not best option for every situation.
PRO: Let’s get moving
The main benefit of private financing has to be the speed of which everything happens. Funding can be secured extremely quickly and the qualification process is much less laborious and intricate when compared with traditional lending. In most situations, these deals can be completed and funded within a week or two. Compare that to the 45-60 days it takes, on average, to secure a bank or credit union loan—and the choice is clear if you’re in a rush. The application process usually takes 1-2 days, and sometimes can be completed the very same day. A quick close with a private lender can entice sellers and set your offer apart from other buyers with slower, more conventional funding.
PRO: Rely on assets—not financial history
Going hand-in-hand with snappy turnarounds is the fact that private lending is asset-based. Say goodbye to the days of relying on your credit score and financial history—private lending approval comes from the value of your asset(s) or collateral. Most private lenders won’t require tax records, paycheck stubs, list of debts and other information that can be difficult and time-consuming to gather. In addition, private lenders won’t go after your personal assets and use the real estate you seek as the loan’s collateral. It should be noted that depending on the loan-to-value ratio, you may need to cross-collateralize to secure the full financing request.
CON: Higher rates
Because banks have easy access to federal funds and their retail customers’ money—and because banks don’t pay much, if any, interest on those funds—loans from banks tend to have a lower rate than private lenders. Ultimately, you’re sacrificing conveniency for a rate that can be up to 10 percentage points higher than that of a conventional loan.
CON: Shorter terms
Most private loans are short-term and require the borrower to not only display the property’s income potential, but also present a feasible exit strategy. Basically, private lending businesses want to know how soon the property will produce a profit so they can count on a prompt repayment.