These guidelines will help you successfully navigate your capital options as you set up and grow your private lending business.

So, you decided to become a private lender—but that’s about all you’ve decided. There are so many “flavors” of private lenders, each doing hugely different things, that you may be overwhelmed with the choices. 

This primer will help you consider everything you can do as a private lender—from the capital side.

Will You Use Your Own Capital, or Raise Some?

First things first. You have to decide whether you are going to use your own capital or raise it. 

Using your own capital. If you use your own capital, you will have the most control—and the most options. You get to “paint the box” with whatever deals you want to fund. Ideally, you will have a strong sense of the deal or an underwriting background as part of your capital-raising repertoire. 

So, what are some of the options using your own capital affords you? 

As noted, you can create your own deals. But what if you’re tapped out of time? You can always buy (or fund) someone else’s deal. 

Raising capital. What if your deal flow is much larger than your capital? You have a couple of options.

One possibility is to leverage the capital that you do have. Leverage occurs when you take your capital and the assets you’ve originated and obtain a loan secured against them. Using your capital in this way allows it to become a much larger pool of capital you can tap into. It’s called leverage because you use your capital as a lever to a new level. 

Another possibility for raising capital is to obtain a warehouse line. What’s a warehouse line?  Simply put, it’s a short-term funding arrangement a financial institution like a bank extends to a loan originator for the purpose of funding the originator’s loan closings. After the closing, the loans are held, or “warehoused,” for a short period of time until the originator decides what to do with them.

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 it from you. The third party usually has 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 lenders such as yourself rather than originate them themselves. They rely on you for underwriting and originating the underlying deal.

Not Interested in Raising Capital or Using Your Own?

That’s OK. You don’t have to have your own capital. 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 means putting your name on the face of all 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 because it allows you to focus on what you do best—finding the best deals to originate for your lenders.

Which Is Best for Me?

Should you raise capital, use your own, or use an option like white labeling? That is a loaded question because there are so many variables. Let’s consider some of them. 

Know thyself. First, you should understand yourself and your capabilities. Are you a salesperson? An operator? A marketer? What are your strengths? What is your appetite for risk and threshold for compliance?

Your team is everything. So, who do you need on your bus? If you don’t raise capital, you will need someone who does. That also means you will need to consider giving that person a salary, equity, or both.It’s important to have this person on your team because the value of a company comes from both the origination and the capitalization of it. So, to build a lasting foundation, you need to build a company that can raise capital.

You’ll need assistance with marketing. If you don’t have someone on staff who can perform this function, you can start with a third-party marketer or retain a managed virtual employee to do it for you. 

You will also need a fund. Do you have someone who can manage the compliance issues? 

What would a reasonable investor want to know before investing with you? Do you have someone on your team who has time to answer those questions in your disclosure documents.

Next, 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? First lien? The choices are endless. Nonetheless, they are important because you need to niche 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? Any seasoned entrepreneur will tell you that your first plan will be torn to shreds in its first battle. The importance isn’t the plan, but  how you adapt it as you learn more. 

What are some of the punches you could be thrown?

Did you obtain all the necessary licensing? 

Are your loan documents“bulletproof”? 

Are you in compliance? 

Do your document retention practices hold up to scrutiny? 

Are you prepared for potential lawsuits? 

Plan for all the above, because they will all happen no matter how clean a shop you run. The difference between a well-run lending company and one that is poorly run isn’t issues with regulators and lawsuits—it’s how swiftly they can answer and resolve issues with regulators and lawyers. For example, if you record the initial interview with borrowers to ensure they understand the terms of the loan, it’s hard for a judge to say, “Nope, they didn’t understand” when the borrower’s words are recorded.

Play to win instead of playing to “not lose.” Once you have your team on the bus and you’re driving down the road, avoiding the obstacles, you must play to win. Make sure your game plan is to strive to win, not to “not lose.” 

How do you achieve your goals (win) in spite of the pitfalls? 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 and move your lending company forward with no loss of momentum.