Any business needs customers to grow and succeed, and private lending is no different. Borrowers are the bread and butter of the lending industry, creating demand and driving the lending process. However, where private lending differs from other businesses is that the transaction isn’t quite so quick or simple.
When you lend to a particular borrower, you’re entering into a contract that can last years. Depending on the borrower, it could even impinge on your practice’s future. This is why finding ideal borrowers is a core component of any successful private lending service. But how do you know if a borrower is right for you?
In this article, we’ll be taking a closer look at why finding the right borrower is so important, how you can define your ideal borrower, where you can look to advertise to potential borrowers, what you need to build a thorough assessment process, and how you can maintain relationships with your borrowers. Let’s dive in…
The Benefits of Finding Ideal Borrowers for Private Lenders
The importance of finding ideal borrowers cannot be overstated. If you’re open to lending to those with unsatisfactory or no credit histories, you’ll likely have a lot of borrowers coming your way. Lending to every borrower without proper assessment can expose your practice to the risks of poor credit and untimely repayments. Falling victim to these risks will leave your practice stagnant and may even result in losses.
On the other hand, finding ideal borrowers can bring a host of benefits to your lending practice. These include:
Risk Mitigation - It may go without saying, but borrowers who fit into stringent criteria before lending will help to mitigate the risk of repayment extensions and defaults, ensuring your lending service’s future.
Increased Profit - Leading on from that, borrowers who are most likely to make their loan and interest repayments promptly will contribute to your profit and pool of lending capital, allowing you to take on more borrowers.
Enhanced Portfolio - Quality borrowers help you build a portfolio of quality loans. This improves your practice’s reputation and increases credibility, especially when it comes to attracting lending partners or investors.
Regulatory Compliance - Private lenders are subject to a myriad of laws and regulatory procedures. Lending to ideal borrowers who fit established criteria can help ensure that you stay within the bounds of the law.
Competitive Advantage - With a combination of the above benefits, you’ll gain a competitive advantage in the lending market. Borrowers who seek out reputable lenders rather than definite loan approval will choose your practice over other options.
How Private Lenders Establish Borrower Criteria
Now that you know why finding ideal borrowers is important and how it can bolster your lending practice, it’s time to establish your criteria for borrowers. Here is a step-by-step process that you can use to ensure an applicant is ideal…
- Define Your Lending Objectives
If you haven’t already, it’s a good idea to set out the type of loans you’d prefer to offer. You may want to target certain industries and loan purposes, such as real estate loans, small business loans or personal loans. If you’re just starting out, set out a maximum amount you’d be willing to lend. Finally, determine the geographic area you’ll be lending within, as this will help with marketing and networking.
- Determine Your Risk Tolerance
Any loan is going to carry some deal of risk, so determine how much risk you’d be willing to take on before you start lending. To do this, assess your available capital and how much you’d like to retain at any one time. Next, consider current market conditions in your chosen industry. For example, if you’re looking to lend for real estate, weigh your loans against popular mortgage options. Finally, determine your desired ROI to set base interest rates that can mitigate risk.
- Establish Key Borrower Traits
After you’ve defined your lending objectives and determined your risk tolerance, you’ll need to seek out borrowers who align with these expectations. Basic borrower characteristics you may want to consider are the stability of their income, and depending on what types of loans you’d like to offer, their industry experience and business track record.
- Lay Out Credit Requirements
Next, you’ll need to go in-depth on certain areas of borrower criteria, the main one being their credit history. Having credit requirements for your practice will weed out less-than-ideal borrowers and ensure your investments are sound. Consider factors such as minimum acceptable credit scores, length and depth of credit history, debt-to-income ratios, and what documentation you will require borrowers to provide to prove these things.
- Collateral Requirements
If you are offering secured loans, you’ll need to lay out your practice’s policies regarding collateral assets. Ideal borrowers will be able to offer collateral that aligns with these policies. Determine what assets your practice will legally be allowed to take as collateral, and set out guidelines for the minimum value of assets, how this value will be determined, and what condition the assets should be in.
- Regulatory Compliance
Finally, and perhaps most importantly, all loans will need to be compliant with regulatory standards for the private lending industry. To comply with these regulations and laws in your jurisdiction, you must do your due diligence when assessing potential borrowers. Make sure your practice has policies regarding pre-loan interviews and documentation collection to protect your capital if something does go wrong.
How Private Lenders Find Ideal Borrowers
After you’ve established what kind of borrower aligns with your expectations, you’ll need to find them. Tried and tested digital marketing practices, such as setting up a site that lays out your information for potential borrowers and using targeted online ads, are a sound first step. However, there are other ways you can seek out ideal borrowers, such as:
Networking and Referrals - Networking with professionals in your chosen industry, such as mortgage brokers or property developers, can provide you with potential borrower opportunities through referrals.
Attending Industry Events - Similarly, frequenting events in your relevant industry can help you find engaged and active borrowers. Getting involved with investment seminars and property auctions can also help you build a network of valuable partnerships in your chosen industry.
Opening Online Enquiries - While opening loan applications to any and every borrower may not be the best way to find ideal clients, opening your inquiries can be. You can filter these inquiries to present ideal clients with a loan offer and welcome their application. The inquiries you don’t immediately want to engage with can be stored for a time when your practice is more stable.
How Private Lenders Assess Borrowers
Once you’ve found a borrower who you believe you’d like to lend to, you’ll need to perform some checks to ensure they are ideal for your practice. These include:
- Review of Credit History and Scores
Contact credit bureaus to obtain relevant credit reports for your borrower. Assess their credit history and its length, their payment history, and any outstanding debts and delinquencies to ensure they align with your expectations. File these documents appropriately should they need to be referred to at a later date.
- Verification of Income and Analysis of Financial Statements
Evaluate the stability and consistency of your potential borrower’s income to determine whether repayments will be made in a timely and complete manner. Request pay stubs, bank statements for the previous 6 months, or tax returns. It’s also a good idea to contact their employer directly to confirm employment and verify these documents if possible.
- Personal Interviews
Though everything may line up on paper, one of the easiest and most efficient ways to determine if a borrower is ideal is by meeting them in person. You can discuss your expectations and they can lay out their plans for how the loan will be used and repaid. These meetings also add a personal element to the process and ensure you’ll be able to communicate effectively with your borrower.
- Background and Reference Checks
It’s recommended that you conduct a background check on potential borrowers, with their knowledge, to verify their identity, check for criminal history, and comply with regulations regarding due diligence. You can also request that they provide names and contact details for references. At least one of these should be from a previous lender, so you can get an insight into the borrower’s repayment habits.
- Continual Evaluation and Adjustment
When your initial assessment of a borrower is complete, this should not be the end of the evaluative process. Regular meetings ensure you’ll be made aware of any change in your borrower’s circumstances that could affect repayment. You can also proactively address any potential issues when it comes to compliance with loan terms, and adjust terms to keep your partnership mutually beneficial.
Building Relationships with Borrowers as a Private Lender
Many major financial institutions also follow the above steps to seek out and assess ideal borrowers. So, how can private lenders stand out from banks and keep hold of ideal clients? Here are a few of the main methods private lenders use:
Personalized Approaches - Though a bank’s loan officers meet with potential borrowers, these interviews are often by the book. When partnering with a private lender, borrowers benefit from a more personalized approach and aligned interests with their lender. By listening to your borrowers’ goals and preferences, you can tailor your loans and provide personalized advice and guidance, something they will rarely get from major financial institutions.
Flexible Loan Solutions - Private lenders have a lot more leeway in terms of their loans than other types of lenders. It may be the case that each borrower, so long as they are ideal in terms of income and credit history, may require different loan and repayment terms. Responsiveness to borrower needs and willingness to work with them to find the best solutions will strengthen your relationship and ensure both parties get what they need.
Clear and Transparent Communication - Finally, while more traditional lending routes may leave borrowers on hold to customer service all day, as a private lender you can communicate with borrowers as often as is necessary. With far fewer invested parties in the chain, your communication can be as clear and transparent as possible, with all the answers available when borrowers have questions or doubts. This not only builds trust but also helps to gain feedback from borrowers on their lending experience.
In Conclusion…
Finding ideal borrowers is a vital part of the private lending process. Ideal borrowers ensure you continue to make a profit, add credibility to your portfolio and practice, and help you operate within the bounds of the law.
Determining what kinds of people you’d prefer to lend to is the first step to success. Lay out your ideal borrower’s loan type, amount, term, financial security, and potential collateral. Conducting in-person interviews and verifying with employers and referees are effective options for assessing borrowers. Be sure to keep information gained during your due diligence and assessment process on hand should you ever need it.
Communicate clearly, work to understand their needs, and personalize their loans based on these factors to build a strong ongoing partnership with ideal borrowers. By maintaining these relationships and prioritizing borrowers that work for your practice, you can maintain your standing and even thrive in the private lending industry.
Sources
- https://www.forbes.com/sites/forbesbusinesscouncil/2022/09/06/why-private-lenders-need-to-embrace-the-benefits-of-better-inclusion/
- https://cdn2.hubspot.net/hubfs/3035666/01_Offers/Assetline%20Private%20Lending%20eBook.pdf
- https://loanatic.com/personal/5-criteria-that-banks-and-lenders-use-to-assess-borrowers
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- https://www.forbes.com/sites/forbesbusinesscouncil/2021/11/09/going-private-a-first-timers-guide-to-private-lending-for-real-estate/
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