We’ve written a lot about how traditional bank lending is restricted and how bank customers are turning to private sources. What does that actually mean to borrowers today? What can and can’t non-bank lenders do?
First off, traditional consumer financing is relatively easy to get. Sure, qualification guidelines for residential mortgages are tighter than, say, eight years ago, but they’re about what they were in the 1980s and ’90s, although weighted down with an overblown regulatory bureaucracy.
It’s business borrowing that’s tough. So, when your bank turns you down, what are your real-life options?
Contrary to what many may think, non-bank lenders do have underwriting criteria, and they stick to it. Often a prospective borrower may think that unregulated lenders will make virtually any loan if the interest rate is high enough. Not so, at least if the lender wants to stay in business. In one respect, private lenders are just like banks: They want to get paid back.
This doesn’t mean that they’re not more flexible than banks. They are, and vastly so. Few borrowers realize the intense scrutiny that financial institutions are under today, and how severely their freedom of action is curtailed.
Here’s an example: One private corporate capital source focuses exclusively on short-term operating capital for businesses. This company will lend up to $150,000, unsecured, for up to 10 months. It has just two criteria: time in business, and the loan amount can’t exceed the business’s average bank deposits over the past six months. Credit score doesn’t matter, debt doesn’t matter.
But this company will not budge from those two standards, no matter what other compensating factors there may be about the deal.
And then there’s so-called “hard money” real estate lending. These loans are asset based, meaning that the value of the collateral real estate determines whether or not the loan is granted. With these deals, loan to value ratios are low, with the loan seldom exceeding 60 or 65 percent of the value of the real estate, with 50 percent often the maximum. Again, the limit, whatever it may be with any given lender, is almost never exceeded.
One area of private lending that seems a bit more generous involves real estate rehab financing, often called “fix and flip.” Location and experience are major loan approval considerations for these deals, and the loan to value ratios can be higher than traditional hard money lending. A case in point: One Denver-based rehab lender will lend up to 90 percent of the purchase price of the property, and 90 percent of the remodeling cost (although the total loan can’t exceed 75 percent of the appraised market value of the finished product). The rate is at 10-12 percent, not bad for this type of lending.
Yet this lender will not touch a deal in western Colorado. Not because he doesn’t like the region esthetically, but rather because he doesn’t know the market. It’s an immutable rule: no Western Slope collateral.
During the Great Meltdown, a lot of private lenders, just like a lot of banks, went under. Their 50 and 60 percent loans turned out to be 100 or 110 percent. Those that are still in business, just like the financial institutions that survived, know what works, and they’re going to stick to it.
Often a borrower will walk out of their bank after getting a thumbs down with the hope that a great business idea, a nice personality, a smile and a shoeshine, will be enough to qualify for a loan in the private lending sector. Alas, not always so; everybody has rules.
Pat Dalrymple is a western Colorado native and has spent almost 50 years in mortgage lending and banking in the Roaring Fork Valley. He’ll be happy to answer your questions or hear your comments. His e-mail is email@example.com.
During the Great Meltdown, a lot of private lenders, just like a lot of banks, went under. Those that are still in business, just like the financial institutions that survived, know what works, and they’re going to stick to it.