So, you decided to become a private lender and that’s about all you’ve got decided. Are you trying to figure out the “perfect setup” to determine what you want? Let’s dig into this, as we have so many flavors of private lenders doing very different things, that I will attempt to put in just one article everything you can do and consider as a private lender… from a capital side.
First, I’m going to use terms that are important to the private lending industry. When they’re bolded, that’s the term, followed by the definition immediately after the usage of the term.
Are You Going to Have Your Own Capital or Raise Some?
First things first. You have to decide whether you are going to have your own capital or want to raise it. If you want to raise your own capital, then you will have the most control in your lending life. By raising your own capital, you get to “paint the box” with whatever deals YOU want to fund. Ideally, you will have a strong sense of the deal or underwriting background to add to your capital raising repertoire.
Also, you have the most options with your own capital. Do you want to create your own deals? What if you’re tapped out of time? You can always buy (or fund) someone else’s deal. And if your deal flow is much larger than your capital? You can obtain leverage. Leverage occurs when you take your capital and assets you’ve originated and obtain a loan secured against those assets. This usually lets you take some capital and have it become much larger pool of capital for your use. Hence why it’s called leverage – you use your capital as a lever to a new level.
You could also obtain a warehouse line from a bank and utilize their money more than yours. With a warehouse line you have several options. For instance, you could sell the note to a third party. Selling the note means you sell the promissory note and assign the entire loan document set to a third party willing to buy them from you. The third party will usually have a box they expect your loan to be in before they buy it. So called “buy boxes” could be limited on LTVs, property type, borrower type, etc. These aggregators will take your loans and others and either keep them on their balance sheet or securitize them. Aggregators are companies that buy loans from other lenders such as yourself rather than originate them themselves. They rely on you for underwriting and origination of the underlying deal.
Not interested in Raising Capital or Have Your Own?
That’s okay. You don’t have to have your own capital. In fact, I feel like being a private lending broker is one of the few businesses that you need very little capital to start! I know some of you just doubted me there, but, in California, for instance, you can get a lending license (specifically the California Department of Real Estate Broker’s license) for the $300 application fee it takes to process your license (plus, of course, the educational requirements, etc).
Without capital, you’re going to have to place your loans with someone. You could become a correspondent lender and white label your product. White labeling is where you put your name on the face of all of the lending products, but you are backed and will subsequently sell to an unnamed party. You could also be a correspondent lender and sell to an aggregator, table funder or other third party.
If you are deal-minded, this might be the best option for you as it allows you to focus on what you do best – finding the best deals to originate for your lenders.
Which is Best for Me If I Could Do Either?
That is a loaded question and has a lot of variables, but let’s discuss the considerations you should have. For one, you should really understand yourself and your capabilities. Are you a salesperson? Operator? Marketer? What are your strengths? What is your appetite for risk and threshold for compliance?
Your Team Is Everything – Who Do You Need On Your Bus?
A broker, as noted above, has a very low threshold to enter the business. That also means low overhead – your overhead is only as large as you need it to be, since you could outsource every function except sales to someone else. However, the value of a company comes from both the origination and the capitalization of it, so if you want to build a lasting foundation, you’re going to want to build a company that can raise capital.
If you don’t raise capital, you’re going to need someone who does. That also means you will need to consider giving them a salary, equity, or both. If you don’t have marketing, you can start with a third-party marketer or obtain a managed virtual employee to do it for you. This also means you will need a fund. Are you ready for the compliance necessary to do so? What would a reasonable investor want to know before investing with you? That’s what you have to answer in your disclosure documents.
Where are you driving to?
Next, you need to figure out where you want to go. Do you want to be in the bridge space? DSCR? Hotel? Construction? Commercial? And where will you play in those spaces? Mezzanine? 1st lien? The choices are endless, but important as it is 2023, and you need to get niche with your products to dominate the lending game.
Who will you need to help you on that front? An orchestra of sales, marketing, and operations will be necessary to pull it all off.
Where are the stop signs?
Mike Tyson is famous for saying “Everyone has a plan until they are punched in the face.” What’s your plan for when you get punched in the face? As an entrepreneur of over 20 years, I know for a fact that your first plan will be torn to shreds in its first battle. The importance isn’t the plan, but what you learn from and adapt with it. Did you obtain all the necessary licensing? How about your loan documents – are they bulletproof? Compliance? Document retention? Lawsuits?
Plan for the above, as they will all happen no matter how clean of a shop you run. The difference between a well-run lending company and a poorly run one isn’t in the regulators and the lawsuits that come – it’s how they can swiftly answer and resolve these issues with regulators and lawyers. For instance, a few of my clients are famous for recording the initial interview with the borrowers to ensure they understand the terms of the loan. Hard for a judge to say “Nope, they didn’t understand” when they have their words recorded before them.
Play to win instead of playing to not lose.
Gather your team on the bus, start driving, avoid the obstacles, and then play to win. Make sure your game plan is striving for winning, not for “not losing.” How do you achieve your goals in spite of the pitfalls along the way? How do you move forward when the entire world is pushing you back? Have a plan ready and expect the punches. If you do, you’ll move around obstacles easily with no loss of momentum in moving your lending company forward.
If I can be of service in any way, let me know.
I am here to help you. If I can introduce you to your next business partner, vendor, capital provider, or deal flow, please reach out to me. If I can help you, I will, because while this business aggregately is very large, it is still a very small industry, and I can’t wait to help you succeed. Contact me at anthony@geracillp.com or direct at (949) 204-0488
