Private lenders are in a unique position to help struggling businesses get back on their feet.
As the global economy reels from a tumultuous and pandemic-ridden year, many businesses are on the lookout for financing to jumpstart their activities. Just like homeowners, many of these businesses will need access to mortgage facilities. Among all sectors, the ones belonging to manufacturing, construction, or other hard industry companies will need additional funding. They will try to resume production to pre-pandemic levels or fix their plants that were neglected during months of lockdowns.
Small and medium enterprises can choose to avail of traditional business mortgages. These are like home mortgages, except that they are made for business purposes and backed by commercial properties. A commercial mortgage is typically used for purchasing or improving commercial properties. Businesses can also take out short-term commercial or hard money loans to fund immediate business requirements.
It is where a private mortgage can help. This type of short-term, secured loan typically runs for one to three years. Many small and medium enterprises avail of this loan because they may choose to delay payment of the principal. Monthly payments by borrowers will only cover the interest. The principal will be paid at the end of the term. Also, banks have strict guidelines when lending money. On the other hand, a private mortgage lender would look past the borrower’s credit rating and instead turn their attention to the value of the commercial assets used as loan security.
With a gap in the financing market today, private lenders are in a unique position to help struggling businesses get back on their feet and make money in return. In that regard, these lenders are vital for the revival of the economy.
Private Mortgage Lending For The Hard Industry
Lending companies are like banks. They allow other people to borrow money. For the purposes of this article, private mortgage lenders focus on businesses and other investors, particularly in the hard industry. This means that loans are provided for use in commercial ventures. Like home mortgages, a private business mortgage is also secured by the borrower’s assets. Such assets or collaterals can be commercial real estate or even pieces of machinery owned by the borrower. Essentially, private mortgage lenders provide an alternative to traditional financing methods, like the ones offered by banks or even government-backed agencies.
The Need For Private Mortgage Lenders
There was a time when business financing or loans can only be availed through financial institutions and government-backed facilities. But because of issues like money laundering and ballooning bad debts or unpaid loans, traditional financial institutions now have strict criteria that prospective borrowers need to meet before loans are issued.
The problem is that many businesses need timely access to funds if the wheels of commerce were to continue turning. For example, a manufacturing concern will turn to a private lender to avoid cash shortage after upgrading equipment. Also, new entities that still don’t have a credit history, much less a solid business track record, are often turned down when going for traditional financing.
Private mortgage lenders, especially those focused on manufacturing or hard industry, are indispensable as they grant business financing with less stringent standards. Average manufacturing businesses can easily access much-needed funds to acquire and fix machinery or fund the weekly payroll. In return, the lender earns interest income and acquires commercial assets owned by borrowers who forfeit their loans.
How To Become A Private Mortgage Lender?
There is no doubt that private lenders are crucial for many business entities, particularly hard industry players that often need quick cash to keep their operations afloat. That said, there is a demand for private mortgage lenders. Apart from the potential to earn a sizeable income, these lenders can derive satisfaction in knowing that they are helping businesses and the economy.
If you are considering being involved in private money lending for the hard industry, here are some essential steps you need to take.
- Plan your company structure – Check if you can operate a lending business as an individual, a limited liability company, or a corporation.
- Register and certify your business – Having limitless funds to lend to companies does not automatically make you a lender. Make sure your business is above board. Register with governing departments and obtain necessary permits. Certified Mortgage Brokers are trusted more by potential borrowers. With proper certification, you can grow your business quickly and enjoy preferential treatment in the lending market.
- Sign up for sufficient insurance coverage – Lenders face the risk of having borrowers who can’t pay back loans. Even if commercial assets or machinery back the loans you issued, you don’t want to be overwhelmed with non-performing assets that do not give you any income. Minimize your exposure to bad debts by taking out enough insurance coverage for your lending business.
- Hire a lawyer – Any business can use a good lawyer, more so if you are a lending company. As a private mortgage investor, you will deal with all sorts of legalities and fine prints. A good lawyer can help you review and negotiate contracts.
- Learn how to evaluate borrowers – Some borrowers can be tricky. Before doing business with people, learn how to size up potential borrowers if they can repay their loans or run out on you.
- Learn how to assess risks and investment returns – There are risks and rewards involved in a private mortgage lending business. By getting to know the numbers, you can come up with attractive rates to offer without sacrificing your earning potential.
- Grow your network within the lending industry – No lender is an island. Networking with other private lenders can help you grow your business by giving you access to more projects that may require funding or even allowing you to join forces with other small lenders. Plus, networking will help you familiarize yourself with best practices in the industry.
- Connect with more prominent financing companies – You don’t have to put all your money on the line when lending funds to borrowers. Many private lenders act as loan underwriters for large financial institutions. Besides, getting support from big banks will give you more access to funds you can then lend to your borrowers.
Who Can Become A Private Mortgage Lender?
Investing in a private mortgage lending business can be lucrative, more so if you cater to business entities. Unfortunately, not everyone can become a private mortgage lender for the hard industry. To be successful in this business, you need to know how to evaluate risks and take advantage of opportunities in the manufacturing, fabrication, and other vital sectors within the hard industry. Still, becoming a private lender may suit you if you have the following qualities:
- You are already an investor, and you want to expand your business portfolio.
- You have a sizeable amount of cash at your disposal.
- You are a trust fund beneficiary, or you control such a fund, and you want to grow it.
- You are on the lookout for an investment opportunity that will provide you passive income via interest earnings.
- You are engaged in manufacturing or construction, and you want to help other players in your industry.
All things considered, private money lending will suit you if you have the funds or access to financing. Borrowers in need will require cash of different amounts that can run up to thousands or even millions of dollars. Lending money will require considerable capital on your part.
Other than the actual cash that you will grant borrowers, you also need to have reserve funds to cover expenses and bad debts from defaulting borrowers. It would be counterintuitive, if not downright embarrassing, if you join the lending business only to close shop when one or two borrowers cannot pay back their loans. It would be best to have a long leash and a lot of patience as a private lender.
Insider Tips From Seasoned Private Lenders
- Start Small
Again, you will need a sizeable amount of ready cash to be a private mortgage lender. You never know when a borrower in need will come knocking on your door. Be that as it may, you want to start small. Find an amount that you are comfortable lending out, and make sure to stick to it.
It may be tempting to have more borrowers so that you can potentially earn more interest. But spreading yourself thin can be bad for business in the long run. Always balance your finances with the amount of risk that you can handle. If a manufacturing concern wants to borrow way above your limit, do not hesitate to refer them to bigger lenders.
- Choose Your Deals
This one is strongly associated with starting small in this business. Not all borrowers are worthy of your time and investment. Other than the interest income or rate of return that you could potentially earn, it would help if you also considered the efforts involved for every possible deal. Are the borrower’s collateral assets readily convertible to cash if the borrower defaults? Is it smart to push through with a big interest deal but suffer cash flow problems of your own for a few months?
To last in the private lending business, you must learn how to make critical decisions that are not solely based on the rate of return. After all, unlike banks, private lenders can be creative with the terms they offer. It means you have more elbow room to design a loan facility for each borrower.
- Know Everything About The Businesses You Fund
Successful private lenders make it a point to know their borrowers and the industry they focus on. This is the only way to ensure that the borrower will repay the money you lent. Trust may be useful, but it’s hard to come by in the private lending business.
Knowing the industry that you will focus on is also essential. You will get to know your borrowers better by asking the right questions. To ask the right questions, you need to understand how their businesses work.
For example, suppose you’re a private lender focused on the construction industry. You will have a rough idea of how much a typical construction borrower needs for payroll, machinery repair, or equipment acquisition. Also, if that borrower defaults, you’d know what to do with the construction-related assets that were used as collateral. Imagine if you’re coming from the tech industry, and suddenly you become the owner of a dozen units of jackhammers because your borrower did not pay the loan. What would you do to make sure such machines do not turn into non-performing assets? Knowing the industry is essential when making crucial lending decisions.
- Focus On Local Businesses
Most enterprises would dream about bringing their businesses beyond their city or state. Some even work hard to conquer international markets. But as a private mortgage lender, it’s more advantageous to focus on the hard industry businesses within or near your area.
For one, borrowers in your area are the low-hanging fruit. You don’t need to spend much to market to them, and you can efficiently deal with them. Moreover, in a lending business, you want to get to know your borrowers and talk to them face to face as much as possible. Why? Because there’s huge money involved. By focusing on the local market, there’s a good chance you know the people who run the businesses. So, that’s a foot in the door for you.
- Work With A Team
You don’t have to do things alone in your lending business. Remember, a private lender is like a bank, but only smaller. So, you can expect a lot of paperwork in all your dealings.
It would help if you had someone to keep track of all your documents to ensure you are getting paid correctly and on time. In case a borrower defaults and you need to go to court, you need to present documents as proof. That requires time and effort. Having someone do the job can make things easier for you.
Also, you need someone to follow up on collections. Not all borrowers would remember to send you the checks to pay their loans. You need to hire employees in your lending business.
Private mortgage lending allows you, the investor or lender, to act as a financing facility for other businesses. A lender who specializes in the hard industry focuses on manufacturing, fabrication, and even construction concerns. Anyone can become a private mortgage lender, but you are more suited for this kind of business if you have sizeable amounts of ready cash. Borrowers in need want to get their proceeds fast and with less friction. Otherwise, they would have gone to traditional banks in the first place.
If you decide to become a private lender, you need to follow some steps to make sure your business is above board. Like any other business, you need to get to know the ins and outs of mortgage lending. Always remember that this business has its risks. Getting into the lending business unprepared can end in huge losses.
Ralph Keller is a successful blogger who regularly creates and publishes content on finance and business. Ralph aims to help his readers improve their financial health by providing high-quality content on these topics.