Private lending is a unique industry, but it shares many similarities with other businesses. For example, raising capital to fund your private lending service can help you achieve your goals, strengthen your brand, and ensure continued success. Whether you’re just starting or are years into the game, an extra cash injection can make all the difference to your practice’s future.
If you’re looking to compete with big players in private lending, setting up reliable capital and investment streams is a must. Thankfully, the most successful private lenders approach raising capital in some surprisingly simple ways. However, newer lenders don’t take advantage of many of these methods, leaving them scrambling for profits.
Want to know how the most successful private lenders raise capital for their firms? In this post, we’ll discuss why raising capital is so important for private lenders, and exactly how the experts tackle this challenge.
Why Raise Capital as a Private Lender?
Raising capital refers to sourcing funding from external sources, such as corporations or private investors. This capital can come in the form of debt or equity financing.
Debt - When you’re paid debt finance, you must pay back this investment in your private loan service with interest. This means you’ll need to factor in any necessary interest payments when budgeting, but repayment terms will likely be forgiving.
Equity - Equity finance requires no repayment, meaning you can put much more into your private lending service. Equity financing comes with more risk, so if you’re getting ready to set up your service these offers may be rarer than debt financing.
Any business has strategic goals that it needs to achieve, and your private lending firm is no different. Consistent partnerships with new investors allow you to build your firm and its legitimacy and put more money in your employees’ pockets. Other benefits of raising capital include:
- A Strong Start
According to the Bureau of Labor Statistics, 20% of new businesses fail within their first year, and 45% within the first 5 years of operation. Poor financing plays a big part in these premature failures, and once a business starts losing money it’ll be far less likely to find new investors.
When it comes to private lending, less initial capital will significantly reduce the number of loans you can issue, as well as the quality of these deals. Not to mention, any debt financing you do receive will loom over your profits for much longer. A sound pool of capital can avoid these issues and ensure your private loan service is one of the 25% of businesses that make it past 15 years of operation.
- Credible Backing
Many of the larger investors will want to know if your firm is a viable option before they buy in. In this way, the more capital you raise for your lending service, the more credible your service is, and the more people want to invest. This is highly valuable when setting up a private lending firm, but can also open doors for you to scale much faster once your firm is established.
- Increased Experience
Raising capital through partnerships with those that are well-established in the lending industry can offer you both knowledge and a larger network. Common mistakes can be avoided, ensuring your firm sets up foolproof policies and maximizes profit. Should your private lending service ever face issues, you can tap into your contacts and solve problems efficiently.
How Successful Private Lenders Raise Capital
The benefits of raising capital are clear for private lenders. But, how do the most successful private lenders approach the daunting task of raising this capital? Here are their tried and tested methods:
Seek Continuous Investment
A significant pool of capital is highly important when you’re first setting up a private loan service. But, if your private lending service is well established with a few key investors, and making stable profits from interest, you may feel this sufficient to continue running your practice.
However, successful private lenders are always looking for ways to seize opportunities and become key competitors in their areas, no matter how long their private loan service has been on the scene. According to Derek Dombek from Best REI Funding in Wisconsin, consistent efforts to raise capital are vital when taking advantage of private lending opportunities.
“We’re always raising money,” Dombek explained in a conversation with the Private Lenders’ Podcast. “That’ll never end for us because in our market we’ve got a lot of room for growth, and we want that growth as long as it’s controlled.”
But, Dombek also acknowledges that larger investments from efforts to raise capital put a lot of pressure on private lenders, especially those who are struggling to find new applicants.
“The big challenge is playing that teeter-totter of how much money do you have available vs. how many applications are coming in. Do you go and raise when you can’t put that money on the street?… If you have a month where your applications are down, you start getting second thoughts. I just made another 5 million, can I really place that in the next 60-90 days?”
It’s worth noting that seeking out investors with favorable terms will mitigate pressure regarding how capital is budgeted and spent. Many investors will take little issue with their investments being reserved solely for business growth, as and when those opportunities present themselves. Clear and dedicated policies for spending will lead to more fruitful conversations with investors.
Connect With Existing Private Lenders
Jay Conner of the Private Money Authority, and author of ‘Where To Get The Money Now’, spoke to Accelerated Real Estate Investor about his favorite ways to raise capital. During the interview, Conner explained that a private lender’s community-based connections are invaluable when raising that all-important initial capital. However, according to Conner, partnerships with existing private lenders are the most generative and reliable.
“Years ago, when I started raising private money, I hired my real estate attorney’s paralegal to search local public records…we found 3 private lenders in 90 days! I said ‘there’s gotta be a quicker way to do it than that.’ So then, I hired some very sophisticated software developers. Since 2012, we have got our own private lender data fee that goes out every month and gets every closing in the nation.”
While Conner started his private lending firm in 2003, so had the capital needed to hire software professionals by 2012, his experience still speaks to the importance of ingenuity. Finding new and varied ways to locate investment leads will provide countless opportunities to raise capital. Building the necessary software to do this is a great way to invest profits or capital that you do raise.
“Another great place to find existing private lenders,” Conner continued, “are at self-directed IRA companies. These companies will have networking events, but a lot of it is now virtual. But, here’s what’s interesting: my statistics show me that 70% of people that hold and own a self-directed IRA account are looking to loan their money out.”
Getting involved in these private lending circles will help you establish a highly-lucrative network of potential investors, and solidify yourself as a contact for those looking to invest.
Prioritize Diversification and Alignment
While many private lenders will focus their efforts on real estate, diversifying the applications you receive and the deals you make can attract varied investors. Bridger Pennington, co-founder, and CEO of Fund Launch, a coaching service with 20,000 students looking to launch investment funds, highlighted this point.
“Real estate is a very obvious plan. I see a lot of real estate and hard money lenders. However, you can also lend on private businesses, on projects, on trips to the moon!”
While this may cap the contacts you make for raising real estate investment capital from private sources, Pennington explains that many investors are willing to look at a variety of deals. Diversifying can even help to hook larger investors as you’ll likely be dealing with an increased number of applications and varied repayment terms. This solidifies your private lending service as a safe investment now, and should the ever-changing market take a toll on private lenders who deal solely in real estate in the future. Pennington, however, swears by a single line to ensure capital investment from his contacts.
“This is the line that changed my life. This has led to more investors in my life than anything else. I go, ‘I get a lot of deals across my desk. I get real estate deals, different investing opportunities, and early-stage companies. If I have a good deal come across my desk, can I shoot them over your way?” Nine times out of ten that person will say yes. Who doesn’t like to look at a deal, right? Take their email down and forward them deals. One or two deals a week over three months…They know me as Bridger the investing guy, so after a few months I’ll send them my fund. ‘If you’re interested in this kind of stuff, let’s go to lunch next Thursday and talk about it further.’
This approach to raising capital can align your private lending service with investors in terms of the nature of deals you do, the volume of deals you do, and how your company operates, even before you’ve approached them for direct investment. This gives investors an overall picture of your status in the private lending industry and can take you from introductions at a networking event to securing capital. In the process, you will build a strong relationship with investors and expand your network even further.
Conclusion
Raising capital as a private investor is key to establishing your firm, scaling your fund, growing your brand and business, and finding more profitable deals. With backing from established investors, your firm’s reputation will flourish, and further investment will be easier to find and secure.
According to the experts, networking is a skill you’ll need to hone since you’ll be using it regularly while you grow your private lending firm. For those starting to form a list of potential investors to raise capital, get your foot in the door at events hosted by private lending spaces. Pitch slowly and continuously to varied investors by building up a picture of your practice. Diversify your practice and align these deals with investors who are interested in certain industries.
Finally, don’t be tempted solely to fund deals with capital raised. Raising capital helps with day-to-day operations, but is vital for long-term success. Focus on your growth, finding new leads with modern solutions, and raising capital as a secure fund for when opportunities present themselves.
Sources
https://www.businessnewsdaily.com/6363-debt-vs-equity-financing.html
https://www.investopedia.com/financial-edge/1010/top-6-reasons-new-businesses-fail.aspx#citation-1
https://www.bls.gov/bdm/us_age_naics_00_table7.txt
https://about.crunchbase.com/blog/raising-capital/
https://montegra.com/2012/10/08/source-funds-for-hard-money-loans/
https://www.youtube.com/watch?v=EHFvvCAjd_Y
https://www.youtube.com/watch?v=CB5bxDBdydQ
One comment
Kalonji Mitchell
Great insight. I will have to figure out the best avenues to network with self-directed IRA companies and their customers.
Thank you.