Banks vs. private money: The 3 Cs
In the question of banks vs. private money, it’s easiest to start what they have in common. Fundamentally, banks and private lenders both lend capital using the 3 Cs criteria:
- Credit: The borrower’s credit score and payment history.
- Capacity: The borrowers ability to make payments.
- Collateral: The asset pledged as security for the loan.
For banks vs. private lenders and the 3 Cs, the difference appears in how they evaluate these criteria. For banks, the 2008 financial crisis resulted in heavy regulation on both approval criteria and loan terms. Their 3 C’s usually have very stringent requirements that many borrowers cannot fully qualify for, even though they have sufficient collateral.
Because private lenders are just that – private, small businesses – they are not subject to many regulations. This allows them to fill the gap left by the banking industry as it moved toward cookie-cutter, standardized products and borrower qualifications.
Private lenders will review these same three criteria, but have much lower requirements borrowers must meet. They are more willing to be flexible on weak areas if you, the borrower, look solid in other areas. Generally, private money loans are made primarily on the strength of the collateral as lenders understand that most of their borrowers come to them due to imperfections in the other areas.
This flexibility means that it’s rare for two private money lenders to require the same criteria or offer the same terms. Flexibility is both a good and bad thing. Good, because getting turned down by one private lender doesn’t mean another won’t want your deal. Bad, because this market fragmentation can make it difficult to find the lender who is right for you and your deal. It’s also the reason that Private Money Lending Guide exists – to help borrowers and lenders find each other.
Banks vs. private money: Loan process
In addition to the 3 C’s, banks and private money loan decision processes can also be very similar. They will both have:
- Applications that require supporting documentation
- Qualification guidelines
- Underwriting processes
- Loan contracts
As with the 3 Cs, private lenders are much less regulated about how they go about fulfilling these aspects of the lending process. Applications may not require quite so much supporting documentation (or are more flexible in what they accept). Their qualification guidelines will be lower and more flexible. Their underwriting processes are generally quicker, enabling them to get you to close quicker (some will not even require an appraisal). You have more room to negotiate with private lenders — almost everything is on the table. Private lenders will also have very different loan contracts that tend to change from lender to lender.
These differences are what enables the private lending industry to exist and move so much more quickly than banks, but, like the 3 Cs, come with pros and cons. This flexibility can make it very difficult to compare terms and complete due diligence, so it’s important to keep a close eye on loan process from start to finish.