When it comes to securing standard loans, opting for the services of traditional lending institutions such as banks appears to be the ideal choice. However, often the traditional method of acquiring loans does not work, especially when it comes to the needs of small businesses. Startup businesses and other small business owners need a small amount to either set up their company or meet their business needs. There are many reasons why banks cannot authorize the loan amount, one being the typical rules and regulations of banks regarding credit report and other stiff terms.
Thanks to the digitalization of each and every sector, financing has become easy with online small business lending and similar other alternate solutions. Entrepreneurs have found the Internet as a blessing to their cause and have helped themselves in securing loans from online money lenders. For more information on small business lending online, you can use the Internet and visit websites such as https://www.libertylending.com/ and discover how acquiring personal loans for businesses has now become streamlined.
When small business owners and entrepreneurs are denied financing from traditional lenders such as banks, leveraging the option of hard money lending or private lending is a smart choice. But, first, you need to understand what these options mean and how it can be the best deal for meeting your needs. Keep reading this guide that describes the important aspects of private lending and hard money lending.
Hard Money Lending vs. Private Lending: What Are the Key Differences?
Assuming the fact that you want to start your own money lending business by using your personal funding reserves, you can think of establishing your own private lending firm. The option of private lending might sound great and lucrative, but if you fail to manage the funding and putting safe systems for monitoring the loan repayments, the option can significantly turn into a great risk. From managing late monthly payments to loan collections and tracking the defaulters, getting into private lending seems to be a hectic deal.
On quite the contrary, when you opt for hard money lending business, you get to work with a chain of people that make the loan procurement process look like bread and butter. With hard money lending, you get to work with financial brokers whose job is to structure the loans properly and at a fast pace for their clients. The process of hard money lending highly lowers the risk of over expenditure and allows you to tap a great list of businesses that have been denied the approval of a business loan from traditional banks. You will find that almost all the businesses on the list were not able to fulfill the criteria laid down by banks and similar other conventional money lending institutions.
Private Money Lending
Although the fact is that private money lenders have to invest their own resources for structuring loans, the return on investment (ROI) can be exceptional and higher compared to other alternatives. Some private lenders in the industry consider their lending operations as buying bonds. In simpler terms, if you start a private lending business, you will find borrowers looking for a small amount of loan and you offer them your loan service. In return, you will manage to receive the agreed interest rate over the term of the payment along with the return of the initial investment.
A private money lender needs to determine the accurate value of the collateral that the client decides to pledge against the security of the loan that you offer him. These are basically the appraisals that you need to check multiple times via different sources in order to make sure that the collateral being put up by the client is in balance with the loan amount that you are disposing to the client.
Apart from that, as a private money lender, you will have another responsibility of managing and monitoring the insurance policies in order to make sure that your loan does not turn into a bad investment. For example, ensure that your client’s assets have fire insurance applied to them, as well as, they possess the liability insurance. This keeps the trust intact among all concerned parties, as the clients have to inform their insurers regarding the inclusion of your name to their policy. This will make certain of a reimbursement check in case of any damage to the collateral.
Hard Money Lending
Compared to private lending, hard money lending has fewer risks associated with it and has its share of rules and regulations. If you have decided to go for hard money lending, you will require to scout and establish a trustworthy relationship with loan brokers, investors, prospective clients, and accountants. In other words, getting into hard money lending means solving a puzzle where you keep various parties together and forge the loan structure and help the clients in securing finance.
The biggest advantage of hard money lending is that lenders can highlight their flexibility when offering long-term or short-term loans. Needless to say, short-term loans are basically loans with higher interest rates and fees attached to meet the instant requirement of working capital, whereas, long-term loans ensure staple profit according to the payment term.
Besides having an access to the network of various brokers and investors, hard money lenders also get to connect with legal officials and lawyers who are experts in the lending laws of your state along with the federal guidelines for lending. Stay close to the lawyers and carefully understand the underwriting procedure that will help you in getting paid.
Similar Guidelines that Both Lenders Need to Follow
Both private and hard money lenders need to scrutinize the smallest of details when processing and structuring loans to the clients. Also, secure the client portfolio in case of any need in the future. Learn from banks and see how critical they are regarding the storage of information. Finally, make sure of extending your lending radius in order to witness a rapid business development.
Hopefully, you now have a clear understanding of private and hard money lending. As more and more business owners are looking for alternative financing methods, make sure that you meet the financial needs of the clients and offer them a professional money lending experience.