Looking to Private Money Lenders During the Credit Crunch
As a nation of debtors, we are all familiar with loans in one way or another. From car loans to mortgages, most of us have been knee deep in a loan at some point. There are certain types of financing, such as hard money loans, that are less familiar.
The finance industry is a mystery to many people. When banks were failing right and left, many wondered where the money was going. As we start bailing out and recapitalizing banks with $700 billion, many are surprised to see banks are still not lending. Heck, the federal government has even sent a directive to banks telling them to do so. Notwithstanding this, money is still barely trickling into the credit market.
People and businesses in need of financing now are in a hard spot. Many have cash flow issues that need urgent financing, but banks simply are unwilling to loan money because they have collectively been burned so badly over the last couple of years. This creates a gap in the finance market. The beauty of capitalism is there is always someone willing to fill that gap.
In the current financial climate, the parties willing to fill the loan gap are known as private money lenders. These are groups that are used to providing short term financing to companies and individuals in need. Whereas they have often been viewed as lenders of last resort, they are now becoming a common funding source given the reluctance of banks to get back into the market.
Private money lenders are pretty much what the name suggests. The typically consist of a fund into which wealthy individuals contribute money. The fund then has a designated purpose such as providing short term financing on apartment projects, manufacturer cash flow situations or whatever.
You should note the repeated mention of “short term” financing. Private money is not used like traditional financing. It is not intended to cover an entire project from phase one through completion. Instead, private money is usually designed to cover a gap between periods when traditional financing can be put in place.
The current market is a perfect example of when private money is a great option for many. Let’s assume you are converting apartments into condos. The project is going to take two years. You have licensing that requires the project to be undertaken in the next 180 days. You are having problem getting financing from a bank.
Private money can be used to buy time in this situation. You can get a one year loan that lets you get started so the license doesn’t go bad. You also buy time to arrange traditional financing. Even if the banks are not currently loaning, they may be in another six months. If not, you can arrange for additional private money financing.
Is private money a good form of financing for every situation? No. It is expensive. In a market like the current one where things are very tight in the credit arena, it often makes a lot of sense.
Stephen Teak is with CommercialLoanStop.com – your resource for commercial bridge loans when the banks are not lending.
