Private Lending Red Flags for Both Lenders and Borrowers

Private lending is an alternative to traditional bank lending normally offered in the form of hard money and bridge loans. There are definite advantages to going the private route. But as with all things in the financial services sector, both lenders and borrowers need to pay close attention. Get things wrong, and the results could be disastrous.

Actium Lending is a Utah hard money lender based in Salt Lake City. The firm lends in Utah, Colorado, and Idaho. They say there are several red flags both lenders and borrowers can look for. They warn of potential danger ahead.

Red Flags for Lenders

Private lenders need to be incredibly careful about whom they take on as clients. A big red flag for them is a borrower with no verifiable track record. Competent borrowers tend to have relevant market experience and a documented budget. They are usually surrounded by experienced teams. A borrower without knowledge and experience in his back pocket is too much of a risk.

Other red flags for lenders include:

• Opaque Funding – Borrowers are expected to bring a down payment to the table. Lenders don’t need to be overly concerned with the source as long as borrowers are transparent. But if funding appears opaque, watch out.
• Incomplete Budgets – Some types of private loans need to be supported by a budget for the property in question. An incomplete budget that omits soft costs or relies on rounded numbers is reason for concern.
• Due Diligence Questions – Borrowers are expected to do their due diligence before acquiring properties and taking out loans. If there is any question that a borrower is not doing his due diligence, it could signal future problems.

The lender’s perspective is all about managing risk. Anything indicating the risk might be too high is a red flag a lender should pay attention to.

Red Flags For Borrowers

The first red flag for borrowers comes in the form of unrealistic promises. For example, a big draw for private lending is the speed at which lenders can work. A typical hard money or bridge loan can be arranged in 3-7 days. A lender promising same-day funding as a matter of course could be risky.

Funding in a day or two is always possible when circumstances warrant. Actium Lending has done it in the past. But same-day funding is not the norm. Borrowers should be wary of lenders promising.

Other red flags for borrowers include:

• Questionable Contract Language – Questionable contract language giving lenders excessive collateral rights should make a borrower cautious. Likewise for language indicating a restrictive covenant that grants a lender too much control.
• Lack of Transparency – Lenders are supposed to be transparent in everything from interest rates to fees to how loans are actually structured. Any lack of transparency on a lender’s part is cause for concern to a borrower.
• Poor Communication – Although poor communication on a lender’s part does not necessarily indicate unscrupulous business activities, borrowers should still be concerned if their lenders communicate poorly. Clear communication is critical to ensuring a hard money loan deal goes through as intended.

Actium Lending reminds borrowers that private lenders have a lot more flexibility in how they run their businesses. Therefore, it’s not unusual to find significant disparities between multiple lenders courting the same client.

Furthermore, it is imperative they are both lenders and borrowers make every effort to protect their own interests when transacting business. Private lending is an extremely valuable financing tool, but it has its share of pitfalls that are hard to avoid if the two parties are not being careful.