Money Lending Business involves private and hard money lending. It is highly recommended that you know the difference between private lending and hard money lending so that you can do well in this field.
Ideally, people turn towards the major lending institutions such as banks when they want a standard and traditional loans. However, they also look for other alternative sources such as private money lenders and online lending sources such as Libertylending.com when they need smaller amounts of money in a quick time.
This because as compared to these alternative lending solutions, banks usually:
- Take a lot of time to disburse loans
- Have a lot of requirements to ensure eligibility of the borrowers and
- Often cannot put up the needs of the prospective borrowers.
This where a private lending business or a hard money lending company excels and is a popular alternative.
Private versus hard money lending
If you are interested in starting a money lending business by organizing loans utilizing your own assets as the source of money, then you must consider opening a private money lending company. Right at the very beginning, you must remember that:
- This type of business involves a lot of risks on the part of the owner
- It also needs a fail-safe system to be implemented
- Ensure that repayments are made in full and on time
- Also, be well prepared to handle late payments as well as the clients who default on loans and
- Have proper and strong collection of machinery.
On the other hand, the hard money lenders usually work with brokers as well as other sources of money broker businesses.
- This reduces their risks as it reduces the out-of-pocket spending
- It enables them to have better loans structured for their customers
- Most of the businesses typically come through accountants and capital investors.
You can also have businesses from bank referrals for those specific customers who are unsuccessful to fit in the requirements and structure of these traditional lending institutions.
Requisites of private money lending
Since private money lenders use their own funds to make the loans, the returns on it are usually higher as compared to other traditional forms of investment. It is, for this reason, most of the people are more inclined to make a foothold in the private money lending industry than giving loans to buy bonds.
- In this process, the client makes a request for a loan. The loan is provided as per the request along with an agreement. This agreement ensures that as the project or loan matures the lender gets back the return of the initial investment with an interest on the principal amount. This payment is received over a period which is usually over a couple of years.
- Private money lending also needs the ability of the lenders to appraise any collateral accurately that the client needs to put up against their loan request. It is therefore judicious to check the appraisals of the collateral with two or more different sources. This will ensure that the client is putting up an asset of requisite value that is in accordance and is comparable to the amount of money loaned out.
In addition to that, the private money lenders must also have adequate insurance policies, just in case of fire and other incidents in the assets of the clients that have been put up as collateral. They must also have liability insurance.
Therefore, while structuring a loan, it is required by the private money lender to add to the policy of the client and the insurance company must be informed about it along with the reason for making such addition. This will ensure that in case anything happens to the asset of the client, the reimbursement check is sent to the moneylender and not the client, especially if the loan is still unpaid.
Features of hard money lending
As said earlier, hard money lending has less risk as compared to private money lending but that does not mean there are no specific set of rules that governs it.
- First and foremost, the hard money lenders must initiate a rapport and maintain it with their investors, loan brokers, accountants, and potential clients as well.
- They are actually problem solvers because they bring different parties together to construct loans for clients.
- They also have the flexibility to offer both short-term as well as long-term financing. The short-term loans typically have a higher rate of interest and fees attached to it. This is because it needs immediate working capital. On the other hand, long-term loans are safer and provide a more stable and continual profit over a period of years.
The hard money lenders in addition to the network of brokers and investors also work with different lawyers who are familiar with the lending laws of the state as well as the federal rules for lending. A few of them may also work with different other hard money lenders so that they can stay acquainted with the underwriting procedures. This ensures that the money lenders, as well as the other investors, get, paid.
Similarities between them
Both private and hard money lenders alike require to document all their loans with every minute detail, even if the loans do not get finalized. This is a good practice as it enables them to have a portfolio on hand so that if ever the same clients come back for a loan at a future date, they can provide it readily and quickly.
As it is in the money lending business, there is nothing better than having adequate, if not too much information about a client.
If you are into a money lending business, there is nothing wrong with trying to increase your lending radius or your area of operation. This will ensure that you offer your services to more potential customers instead of making the mistake of limiting your operation to a constricted geographic radius, even though you are established in it.
This will ensure more potential profits for you as well as your investors along with faster business growth.