Site icon Tony Clifton

Dos and Don’ts of Private Money Lending

Borrowing money is not to be taken lightly, and neither is lending it. You should only be willing to lend money you can afford to lose, like any other investment, but when you are a lender you’re working directly with people and that changes the investment dynamic considerably. Money lending can be tricky and potentially costly if you don’t know how to go about it, so here is some advice to keep in mind.

Decide on a Niche

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Having specific loan ranges that you deal with will help you secure a place in the local market. You might only have a specific range of loan amounts that you are able to service since that money will likely come from private money stakeholder investments in your company.

You will additionally be generally more experienced in servicing loans within your preferred range, and this will likely result in a better lending experience for the end-user. Additionally, you should try to keep your loans sequestered to a particular locale so you can work on getting a good market share.

For example, resources like “pacificprivatemoney.com” is easy to remember and people who live in northern California ‚Äî their main area of operation ‚Äî are more likely to use it as a result. Lenders are primarily investors, and you are more likely to get quality investments if you stick around and build your reputation than you are if you try to spread your efforts too thin.

Lending Ethics

Private lending, or even just the financial sector in general, can be a tricky subject to approach for some people, so it is important to set standards for yourself. “Moral Hazard” is a term that describes the possibility that someone might enter a lending agreement in bad faith, and there are steps you can take to make your lending process as transparent as possible.

Stakeholders in your company will have an easier time justifying the funding of mortgage brokers if you don’t do anything that reduces your financial risk at the stakeholders’ expense, for example. You might also get a bad reputation if your local office makes a deal with an otherwise well-intentioned political candidate that is still trying to figure out how to run for office that could be interpreted as illegitimate.

Ultimately, so long as you accept that every party to a financial deal of this sort should face some sort of risk and this is reflected in your borrower-lender relationship, you keep your business as transparent as possible, and your lending agreements are not deemed illegal by the courts, your career as a private lender should continue relatively smoothly from an ethical standpoint.

Running the Business

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A money lending business is still a business, with all the business processes that come along with it. The first thing you should do is have a business plan. This is the most important part of running any business, as it determines where you plan on going and how you want to get there. There is quite a lot that goes into running a business, and if you aren’t already familiar with how businesses work the challenge can be daunting.

The good news about this is that there is lots of information available online already on the subject of running businesses, from making business plans to marketing to figuring out the basic functional requirements of keeping your business afloat. If you don’t already have a business degree or have a team member who does, you absolutely should do as much research on running a business as you can. Figuring out the next step for a mortgage broker can also be as easy for you as it is for a software startup to google “what is requirements gathering in software development?”

Stay Informed

The global landscape changes daily, and what may have been a good deal for everyone yesterday may not be such a good idea today. As many as 20% of small businesses fail within their first year, and while in some cases this is due to poor management or planning in others it can simply be the result of a market that can’t support the business. This number rises to 50% of small businesses after five years, and 66% after 10.

Developments for mortgage vendors to stay on top of include real estate investment strategies, the health of the real estate market, and risk-appropriate lending practices. You could even potentially try to take steps to prevent housing bubbles in the future and inform borrowers of best practices that help with this. Few people who dealt in real estate in some capacity were unaffected by the housing bubble burst in 2007, and if it can be prevented in the future all the better.

Market and Lend Effectively

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No single lender can lend to everyone, and you need to make that clear. A lender can decide to focus their efforts in a particular region while occasionally servicing people or businesses in other regions, but don’t be afraid to refer to other lenders if you don’t think you can give someone the best lending experience you can.

Brokering deals can get messy if too many brokers are involved as well, and you might end up losing out in the long run if you choose to lend in a way that makes it more expensive for the borrower. Instead, you should try to foster goodwill with other lenders outside your realm of specialty. Originating loans rather than brokering them is an effective technique that will make sure both you and the borrower arrive at the best deal possible.

Regardless of the specific function that your private lending operation serves, there is still a lengthy list of requirements that you have to pay attention to if you want to come out on top. Following the blueprint of a successful business takes a lot of work, and even if you don’t quite run the business the right way the first time you will still be in a good place to continue your business if you play your cards right.

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