There are two options to choose from if you want to start your own business of lending money. These options are private money lending and hard money lending. These types of money lenders are doing well in the finance market because major lending institutionssuch as banks and even a few non-bank sources such as online lenders are great sources for standard loans only.
However, when it comes to any smaller amounts of loans, people look for alternative lending solutions because banks and the major institutions usually cannot and do not accommodate the needs of any prospective yet small borrower. This is where the private lending or hard money lending companies flourishes.
The difference between the two
In order to make the right choice between the two, you will first need to know the difference between private lending and hard money lending.
- Setting up a private money lending companyis good to start especially if you are interested in lending and structuring loans by utilizing your own funds as the primary source of money. However, this type of business involves a great amount of risk on your part as the business owner. Therefore, it is necessary that you have a foolproof and a failsafemoney lending system implemented. This will ensure that the payments are made on time. It will also allow you to handle late payments if any, the clients who default on your loansand in collections.
- Hard money lenders, on the other hand, will essentially work with the brokers and different other sources of money agents and businesses so that they can structure the loans for their clients. This type of business has fewer amounts of risks involved in comparison to private money lending. It also reduces the outofpocket spending by a significant margin. You will get most of your businesses through the capital investors, the accountants, and even from different useful bank referrals for customers who fail to fit within the structure and meet the requirements of a conventional money lending institution such as any nationalized bank or other online money lending sources such as https://www.libertylending.com/and others.
Therefore, know about your ability and working process to make the right choice between the two types of money lending business.
Know the returns
The returns of private money lending can be very high as compared with any other forms of investment even though a private money lender will utilize own funds for loans.
- There are private lending companies in the industry even compare giving loans to buying bonds. When a client requests for a loan and you give them the money as requested, you make an agreement that when and as the project or purchase of your client matures, you will geta specific return on the initial investment in addition to the interest agreed upon over the specific payment period which is typically made over a period of years.
- It is also required in private money lending that you appraise any collateral accurately that a client may putup against the loan requested. This will reduce the risks involved to a negligible percent. It is wise and prudent to get your appraisals checked with two or more different other sources. This will ensure that the client is genuinely putting up an asset that is worthy enough and is comparable to and higher than the amount of money you are lending.
- In addition to all of this, you as a private money lender will also need to keep up with the insurance policies. It is important that you make sure that the assets of your clientsare adequately insured against fire and other hazards and at the same time have enough and proper liability insurance.
If you want to succeed as a private money lender then while structuring a loan insist that your clients adds you to their insurance policy and at the same time inform the insurance company about it and the reason you are being added. This way, you will make sure that the reimbursement check is sent to you if anything happens to the asset that is used for collateral during the loan tenure.
Features of hard money lending
When you look at it deeply you will see that hard money lending also has its own set of rules though it is far less risky than private money lending.
- First and foremost, the hard money lenders will initiate and maintain a good rapport with the investors, accountants, the loan brokers, and most importantly the potential clients.
- These lenders have this unique ability to bringvarious parties to one table and structure loans for their clients and solve any problems that may be within.
- They are also very flexible and may offer shortterm as well as longterm financing.
- A shortterm loan will usually have a higher fee and interest rate associated with it due to the immediate requirement for working capital. On the other hand, the longterm loans will provide them with a steady profit over the course of time.
- In addition to the network of investors and brokers, the hard money lenders will also work with different lawyers who are familiar with the lending laws of the state as well as the federal regulations for lending money.
Most importantly, hard money lenders are most familiar with the underwriting process that ensures that the other investorsget paid along with them.
Commercial lending business
Well, you may also try out commercial lending if you are interested in starting a money lending business and have the desired funds, an in-depth finance training and knowledge. Commercial money lending normally involves a person acting as a liaison between the business owners and the money lenders. They help in reaching an agreement.
Most people who enter this field of commercial business lending work for a very small fee. However, they end up earning a handsome margin since the amount involved is very high.
Now that you know the differences, take time to introspect and choose the right type of money lending business.