Private Commercial Lenders vs. Bank Loans
Everybody knows you can get investment loans from a bank. But besides banks, there is the option to turn to private commercial lenders. In areas where banks can’t or won’t write loans, private lenders can help.
The great thing about private commercial lenders is that funding can be secured relatively quickly compared to waiting on approval from the bank. Because of that, the process is less time-consuming and not as complex. Also, private lenders have the ability to be more flexible with their loan money.
1. Difference Between Bank Loans and Private Lenders
There are few important differences between bank loans and private loans. Most banks are regulated by the government which can make financing complex loans difficult. Projects must be clean and straightforward for banks to lend the money. Complicated situations related to personal or business credit can lead to the bank rejecting your loan.
In contrast, private loans are funded by independent companies or individuals. They assess your project entirely for the merits of it. The assets you present as collateral and your personal history go a long way in determining whether a loan is granted. Overall, private commercial lenders will be able to provide more flexibility with your terms and conditions.
2. The Process of Requesting a Loan from a Bank
When asking a bank for a commercial real estate loan, investors should build the portfolio of the project you want to finance, then talk to a credit executive. Investors present evidence of the assets they have as collateral and the plan for development. If the loan is approved and backed by investors, the loan will be deposited into your bank account. But if your loan doesn’t get approved, you need to start the process over again and try again with a different bank which can be frustrating.
3. The Process of Requesting a Loan from a Private Lender
Private lenders require you to fill out a loan application and statement of information in order to better understand your financial situation. Don’t be afraid to be honest about problems you may have with credit, collateral or the title. Private lenders are good about working with clients to solve the problems that stand in the way of receiving loans. Once your file is approved and ready to be generated, look over everything before signing. Once the documents are signed, the private lender will have funds wired and the loan process will be begin at the discretion of the investor.
4. Pros and Cons of Private Lenders
The tradeoff with using a private lender is that interest rates tend to be higher than those you would find in a bank. The primary reason is because loans that cannot be funded by a bank tend to be riskier. Private corporations or individuals use higher interest rates to offset the additional risk they take on.
On the flip side, private lenders can finance investment projects quickly because they are less regulated by banks. Instead of an investor applying then waiting for underwriting, some of these private lenders are able to accomplish it all in-house, significantly speeding up the process.
Private commercial lenders can be a great choice for both investors who are struggling to secure bank financing, and for those looking for quicker access to funds. If you have a solid development project, but are running into other hurdles, you should consider turning to a private lender to grow your investment portfolio.