What’s the difference between a Bank and a Private Lender?

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This question reminds me of a joke I used to tell as a kid:

“What’s the difference between a bicycle and a duck?” Answer: They both have wheels, except for the duck.

Private commercial real estate lenders are like banks because they both make loans on commercial real estate, but only one of them is a bank.

Why Banks Matter

Bank relationships do matter. In an environment where banks aren’t making many new loans (like our current economy), having a strong relationship with a banker at the right bank can benefit a borrower with better loan rates, better loan terms and greater flexibility on the part of the lender. A good banker can be an advocate for a commercial borrower and help with the overall wealth-building strategy.

Two very key points:

Banks, by definition, hold depositors’ money. Therefore, there are tons of federal and state regulations designed to protect the depositors’ money. These regulate and govern what a bank can and cannot do with that money. In particular, when a bank makes a loan, they must keep a portion of depositors’ money on reserve against that loan.

And further, when the bank sells the mortgage along with other similar mortgages to entities that create securities (called commercial mortgage backed securities) that are sold on the open market, there are more regulations that limit the kinds of loans the bank can make and riskiness of those loans.

So why private commercial lenders?

Here’s the big difference.

Private commercial lenders do not take deposits. They either lend their own money, or they have already raised the money they are lending out through a private placement. Since they are effectively lending their own money, or their fund’s money, there are vastly fewer regulations governing what they can and cannot make loans against. Of course, they still must follow prudent lending practices and be responsible to their investors, but compared to banking regulations, private lenders have much more latitude in the types of loans they can make.

Secondly, private lenders, for the most part, are portfolio lenders. This means they are keeping the mortgage and servicing it themselves, not bundling it with other mortgages and selling the bundle on Wall Street. This removes a lot of restrictions on the private lender and gives the borrower more flexibility and the ability to negotiate with the lender and come to terms that are agreeable to both parties.

In fact, one of the things you’ll find about private lenders is they have a mindset of win/win. As one of my lenders says, “I want to close this loan faster than the borrower does.” After all, lenders are in business to make money. And the way they make money is by lending to borrowers with great projects.

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Sofia Capital Ventures works with both private bank and non-bank lenders. We are your Concierge for Private Commercial Lending. We offer a free loan request evaluation and loan placement with a commercial lender who will be a great fit for your project. Contact us today and let’s get started!