Private vs. Public Hard Money Lending Options

Money lending is one of the world’s oldest professions. Thankfully, today (most) lenders are not interested in a pound of flesh for collateral, but rather, income-producing real estate. In the case of a construction loan, where there is no income until after completion of the project, lenders look to factors such as location, market value of similar structures, and the developer’s track record. So if you have your eye on a special property, what are your options for lenders?

Public Lenders

Pros: Public lenders, like banks, are usually the first destination for a borrower. Banks offer the lowest interest rates on the market and reasonable payback terms. They usually enjoy a sufficient financial cushion so a borrower can reassess the debt during the loan duration and make changes to interest payments where necessary.

Cons: There are two major disadvantages when borrowing from a bank: timing and inflexible policies. From the day a borrower first requests a loan from a bank, it could take up to nine months before the funds are actually transferred. Six months is considered quick for a bank. Also, working with banks often involves a lot of red tape and indiscriminate policies like early prepayment penalties and other such fees.

Private Lenders

Pros: Private lenders are quick and boutiquey. From the day a borrower requests funds, the approval can take place easily within a few days and the money can be transferred in as little as two weeks, depending on the due diligence involved. The small, intimate nature of most private lenders allows them to custom build a loan program and payback plan for each borrower. There is no red tape. Also, private lenders generally do not want to own the property; they prefer for the borrower to keep the loan alive in order to finish the project as planned. This creates an added incentive to work with a private lender. Of course private lenders are also easier to reach and provide more satisfactory customer service due to their boutique operation.

Cons: The major disadvantage of working with a private lender is the notoriously higher interest rate. This is the price one has to pay for quick, flexible loans.

If time is on your side, it is probably better to receive funding from a bank simply because you can keep more of the money in your pocket. However, if time is of the essence, then going with a private lender, at least until the bank loan comes through, is a no-brainer. Check out our Commercial Lending page  to learn more.