Posted by In recent years, a small number of hard money lenders have begun referring to themselves as ‘private lenders’ in hopes of escaping the hard money industry’s negative reputation. Unfortunately, doing so has created confusion. People are now asking if banks and credit unions are considered public lenders.
It is a legitimate question. If hard money lenders are private lenders, why would banks and credit unions not be public lenders?
First and foremost, the term ‘public lender’ is rarely used in financial circles. The financial sector prefers the term ‘institutional lender’ to describe banks and credit unions. Both types of lenders are financial institutions rather than companies or firms.
On the rare occasion that ‘public lender’ is referenced in financial circles, it generally refers to a government owned lender – whether it be an actual bank or some other sort of entity. The term is used very little for obvious reasons.
Funding Source Is the Key
Naming differences between private and institutional lenders is all about funding sources. When looked at it from the funding angle, the explanation becomes clear.
Private lenders like Utah-based Actium Lending source their funds from groups of private investors. Investors pool their money and entrust it to Actium to loan out on their behalf. By the way, Actium Lending is a hard money lender. I mention that because there are other ways investors can pool their money for landing purposes that don’t involve the hard money business model.
Institutional lenders, like your local bank or credit union, source their funds from depositors. You could be one of thousands of depositors that keep your local bank alive. And if you bank with a national brand, you could be one of millions. Your combined deposits provide at least some of the money your bank lends out.
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Advantages of Private Lending
Whether you are looking for a hard money loan to fund a real estate transaction or a commercial bridge loan to expand your business, there are definite advantages to private lending. Here are just a few of them:
- Speed – Institutional lenders often require from a few weeks to several months to get a loan approved and funded. Private lenders can generally take care of things in a matter of days. That’s a significant difference, especially if you’re pressed for time.
- Loan Criteria – Institutional lenders based their lending criteria on creditworthiness. They strictly adhere to it by law. Private lenders are not regulated by the same laws. Therefore, they base lending criteria on asset value.
- Regulation – Institutional lenders do business the way they do because regulations compel them to. On the other hand, private lending is more lightly regulated. This gives private lenders a lot more flexibility.
There are downsides to private lending as well. Higher interest rates are at the top of the list. Rates on private loans can be several percentage points higher. Private lending also tends to offer shorter terms, ranging from 6-36 months. But there is a silver lining: shorter terms ultimately mean lower total interest payments.
Typical use cases for private lending include business expansion, real estate acquisition, and debt restructuring. Meanwhile, small business loans and mortgages are pretty typical in institutional lending.
Both Have a Purpose
One final thing to note is that both private and institutional lending have a purpose in the grand scheme of things. Each has its pros and cons. Each has its typical use cases as well. Just remember that the key to why private lenders are referred to as such is the source of funds. It has nothing to do with private vs. public ownership.