Private Lending 101: Is All Private Money Hard Money?

I have noticed a trend beginning to emerge in hard money lending. Lenders are starting to rebrand themselves as private lenders. They talk about private lending rather than hard money. I get why, but I still don’t think it’s a good thing. It only adds to the confusion already associated with hard money.

The added confusion leaves some people believing that all private money is hard money. But that is no truer than saying all dogs are labradors. Think about it. All labrador retrievers are dogs, but not all dogs are labrador retrievers. The dog population includes hundreds of breeds.

Likewise, all hard money is private money. But the opposite is not true. There are plenty of private lenders offering loans that are not structured as hard money loans. The line of distinction is collateral.

Hard Money Is Asset-Based

A genuine hard money loan is an asset-based loan. The best way to explain this is with a real-world example from Salt Lake City’s Actium Partners. Actium officials love to recount a story involving a client who needed a hard money loan to close on an apartment complex. The need was urgent enough that Actium funded the deal in less than one business day.

All of that aside, the apartment building being acquired acted as collateral for the loan. The loan was a true hard money loan in every sense of the term. Hard money is so named because approval is based on hard assets. In this particular example, the hard asset was the apartment complex.

Private lending may or may not be asset-based. Lenders can do whatever they wish. You might have a single individual who loans money to a friend looking to start a business. They utilize a loose contract that does not include provisions for repossessing collateral in the event of default. By definition, their agreement does not constitute a hard money loan.

Other Notable Differences

Even though the dividing line between private and hard money is collateral, there are some other differences that hold true most of the time. A few of them are described below. Note that every rule is subject to its exceptions.

1. Loan Purpose

The vast majority of all hard money loans go to real estate investors looking to obtain additional properties. They could be investors acquiring long term investments or developers who purchase properties to flip them. Hard money loans that do not go toward property acquisition are typically utilized to fund business needs.

Private money loans are not really subject to any restrictions in terms of purpose. If somebody wants to borrow and someone else is willing to lend, just about any funding need could be addressed.

2. Lender Structure

Where private lenders tend to be individuals or small groups of investors with small amounts to lend, hard money lenders tend to be organized as companies licensed by their respective states. The companies manage lending funds that can easily exceed hundreds of millions of dollars.

3. Targeted Customers

Finally, hard money lenders tend to target customers in a specific niche. Actium Partners targets commercial real estate investors. Conversely, private lenders do not tend to have narrow targets. They will lend to entrepreneurs, investors, startups, developers, etc.

The fact that some hard money lenders are rebranding as private lenders does not mean that private money is always hard money. Hard money lending is a distinct type of lending that relies on private money. As such, it is fair to say that hard money lending is a variety of private lending. But other types of private lending are out there.

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