Private lending is a lucrative business to venture into and can be very beneficial for both the investor and the lending company. The return on investment can be high for the risk the investor is taking.
In order to be a private lender, you need capital to lend. But how do you get the money? Here are some of the ways you can raise capital for your private lending business. Get ready to take some notes!
Friends & family
Start with the people closest to you. It’s a great idea to go to friends and/or family to build credibility. Make sure you feel comfortable in the business before asking them to invest their money.
In order to feel more confident, you should have a track record where you’ve been involved in loans in some capacity or have a really good understanding of the business, and know how to properly assess loan opportunities. For those looking for ways to build a track record, you can begin by brokering deals to other lending companies. This will help you understand how other lenders are assessing loans.
Find investors through referrals
Referral sources from friends and family are going to be the easiest way to grow your investor pool. The way to convince them to send referrals is simply by doing a great job and asking for referrals. It is very rare that people will send you referrals without you asking for them.
What you will notice when asking is that most people want to help and want to see you succeed. As long as they feel you are doing a great job, they will be happy to make introductions. Another source of obtaining referrals can be people in other industries who are experts in their field. You can refer business to them and they will refer business to you. Building relationships is imperative.
Host speaking events/lunch & learns
Host events such as ‘lunch & learns’ where investors can attend out of interest, and you can speak with them about the opportunity to invest. A topic you can speak about would be something like, ‘How to make a return on your investment’ or ‘How I made 10% a year investing in mortgages’. Market your event and hope for a good turnout!
Warehouse lines/lines of credit
You can always go to the bank and open up additional access to capital with a line of credit or a warehouse line to fund your deals. Bank interest rates are lower than private interest rates, so you will end up ahead and make the spread. Some people utilize their lines of credit to fund the loans and then sell them off to an investor to free up the capital again. Do this over and over again and the sky is the limit on how much volume you can do.
Use social media
Social media is a great way to find investors as well. Share posts that say you are looking for investors. Post about things they would find interesting and obtain value from. Interact with potential investors on social media through industry hashtags and mutual connections, and build relationships digitally. We would suggest using social media platforms such as Instagram, LinkedIn, and TikTok.
Always remember to take the necessary precautions as you set up each investor. Get to know them, understand their risk appetites, let them know nothing is guaranteed, and get them to sign the proper documentation for your protection. Giving fair warning and having disclosures documented in your investor agreements will protect you if a loan your investor is in is non-performing or takes a loss.
When speaking to our clients, we are told that raising money is not difficult if you have good deals. There are always people that will want to invest in great loans. Lending is a bit of a balancing act. You don’t want to raise capital if you have no deals, and you don’t want to have deals and no access to capital. You need to be prepared in advance and able to act quickly.
In conclusion, there are many ways to raise capital for your private lending business and it is key to lend this money like it’s your own. Take the necessary precautions and keep the right balance between investors and deals in the pipeline.
No matter what avenue you decide to use in order to raise capital, make sure you feel confident with these deals and are willing to put your own money into them. A good future practice is as follows: if you have adequate funds, send your borrower or broker the commitments before you even have an investor. This means that even if all of your investors say no to the deal, you’re still willing and able to do it yourself. This shows that you have skin in the game and truly live by the meaning of “lend the money like it’s your own”.