In the realm of finance, private lending has emerged as an effective alternative to lending from traditional banking institutions, offering plenty of advantages for both borrowers and lenders alike. This practice involves individuals or entities providing direct loans to borrowers, circumventing the conventional banking system. As the landscape of finance continues to evolve, understanding the advantages of private lending becomes increasingly crucial. At Ascent Capital, we self-describe as a private lender, specializing in real estate loans for builders, developers, and investors. Let’s delve into the many benefits that private lending offers and the approach we take at Ascent Capital:
1. Flexible Terms: Private lending allows for highly customizable loan terms tailored to the specific needs of borrowers and lenders. Unlike traditional banks with stringent regulations and standardized loan packages, private lenders have the flexibility to negotiate terms such as interest rates, repayment schedules, and collateral requirements. This flexibility enables borrowers to access financing that aligns closely with their unique financial circumstances. At Ascent, we often describe our lending criteria as having to fit within a box. Our underwriting criteria are clearly defined. This dictates the types of loans we can and cannot fund. We do have flexibility within that box to bend and shape loan structure to work best for our borrowers.
2. Speed and Efficiency: One of the most significant advantages of private lending is the speed at which funds can be accessed. Traditional bank loans often entail a lengthy approval process, involving extensive paperwork and bureaucratic red tape. In contrast, private lenders can expedite the loan approval process, providing borrowers with rapid access to capital. This efficiency is particularly beneficial for individuals or businesses requiring immediate funding to seize time-sensitive opportunities or address urgent financial needs. We often describe underwriting as needing three legs. All three legs have to do their part, or the loan will not perform. The three legs are:
- We need to be able to determine the finished value of the home. Our loans are a percentage (typically 70%) of the finished value.
- We need to trust that the borrower can execute and build the home on time, on budget.
- We need to be reassured that the home fits within the design and price range of the neighborhood and that it will sell.
It’s very easy for us to make a quick decision on funding a new loan with a familiar borrower. They typically have already proven point two above. Since Ascent only lends in areas familiar to us within the Northwest region, we can be more efficient in assessing points 1 and 3. Ultimately, if we find that the direct lending opportunity doesn’t meet our criteria, we promptly decline so that the requestor may seek alternate funding. If the opportunity passes the three criteria above, we move towards data collection and closing the loan according to the borrower’s timeline.
3. Accessibility: Private lending offers greater accessibility to financing, especially for individuals or businesses with less-than-perfect credit histories. Traditional banks typically impose stringent credit score requirements and may reject loan applications based on past financial difficulties. Private lenders, however, may be more willing to consider other factors such as the value of collateral or the borrower’s overall financial situation, making financing accessible to a broader range of applicants. Ascent keeps a flat organizational structure. Our borrowers work directly with our underwriters. This direct communication is designed to efficiently transfer information and quickly come to a decision on whether or not we will fund a loan.
4. Creative Financing Solutions: Private lending fosters innovation in financing solutions, allowing borrowers and lenders to explore unconventional arrangements beyond traditional loan structures. For example, private lenders may offer bridge loans, which provide short-term financing to bridge the gap between immediate financial needs and longer-term funding solutions. Additionally, private lending facilitates creative arrangements such as equity partnerships or revenue-sharing agreements, providing alternative pathways to access capital. Within the “box” of lending criteria we mentioned above, Ascent Capital can provide flexible alternative financing. This includes providing short-term bridge, fix-and-flip, and construction loans, asset-based or hard money lending, and most importantly, creating partnerships that accommodate our borrowers’ needs.
5. Personalized Relationships: Unlike the impersonal nature of traditional banking, private lending often fosters peer-to-peer relationships between borrowers and lenders. Working directly with a private lender allows borrowers to communicate their financial objectives and concerns directly, fostering a deeper understanding of their unique circumstances. This personalized approach can lead to more collaborative and mutually beneficial lending arrangements, enhancing trust and fostering long-term relationships. Many of our borrowers are repeat customers. Our goal is to make our borrower successful. If they aren’t successful, we aren’t successful. We take a partnership approach to lending wherein both parties are expected to achieve a profitable outcome.
6. Diversification of Investment Portfolios: Private lending offers investors an opportunity to diversify their investment portfolios beyond traditional asset classes such as stocks and bonds. By allocating capital to private lending opportunities, investors can potentially achieve higher returns while mitigating overall portfolio risk. Furthermore, private lending investments are less susceptible to market volatility, providing a hedge against economic downturns and stock market fluctuations. As a lender, our income is derived from loan fees and interest income. This creates a very steady return profile. I often describe our business as supplying picks and shovels to gold miners (our borrowers). We are helping our borrowers strike gold. Since we don’t take an equity stake in the projects we lend against, we don’t participate in major uplifts that equity may experience. That said, we make a consistent monthly income based on our revenue profile.
7. Higher Returns: Private lending often yields higher returns compared to traditional fixed-income investments such as government bonds or savings accounts. With greater flexibility in setting interest rates and terms, private lenders can command higher yields on their capital, providing an attractive investment opportunity for individuals seeking enhanced returns on their investment portfolios. Moreover, the predictable cash flows generated from private lending investments can offer a reliable source of passive income. While there are many advantages for borrowers to use private lending as a resource (flexibility, speed, etc.), it typically is more expensive for them. By charging higher interest rates and fees than traditional lending sources, we are able to offer higher returns to our investors. Distributions are made quarterly, so the investment also offers a steady cash flow stream.
In conclusion, private lending represents a dynamic and versatile approach to financing that offers numerous advantages for both borrowers and lenders. From flexible loan terms and expedited funding to personalized relationships and higher returns, private lending has emerged as a compelling alternative to traditional banking institutions. As the demand for innovative financing solutions continues to grow, private lending is poised to play an increasingly pivotal role in the financial landscape, unlocking new opportunities for individuals and businesses alike.