When Private Lending and Hard Money Aren’t the Same Thing
Research hard money lending and you will discover plenty of posts that describe hard money lenders as private lenders. That they are. However, there is more to the story. All hard money lending is technically considered private lending. But all private lenders are not hard money lenders.
If you’re confused, think of it in terms of sports. All football games are sporting events, but not all sporting events are football games. Private and hard money lending works the same way.
More about Private Lending
The term of ‘private lending’ is more or less a generic term used to distinguish a particular type of lending from commercial and retail bank lending. The distinction is found in the source of lender funds.
Private lenders are investors who loan their own money. By contrast, banks loan money received from others. Investment banks loan money provided by investors; commercial and retail banks loan money that comes from depositors. In every case, the bank is loaning money that belongs to someone else. Private lenders loan their own money.
In a strictly technical sense, anyone with extra money can be a private lender. If you have ever floated a loan to a family member, you’ve technically acted as a private lender. The thing about private lending is that it may or may not be regulated, depending on who is making the loan, who is receiving it, and how the loan is structured.
Organized Private Lenders
The vast majority of private lenders that operate as business ventures are legally organized in one way or another. Some are structured so that their customer-facing operations are rather bank-like. Some are organized as private companies that focus on one particular sector – like real estate for example.
With legal organization comes regulation. Because private lenders organized as businesses are recognized legal entities, they must follow a certain set of rules that govern private lending. Those rules vary by state. In most states, the rules governing private lenders are much less stringent than those applied to banks.
More About Hard Money
Hard money lending is private lending in the sense that lenders are loaning out their own money. What makes this form of lending unique is found in its name. Hard money is loaned out on the basis of hard assets that act as collateral. For example, consider Actium Partners out of Salt Lake City, Utah.
Actium Partners does a lot of real estate lending in the Salt Lake City area. They lend to clients based on the collateral those clients put up to secure their loans. They might have a client looking to purchase a piece of property with the intent of developing it. Actium Partners will look at the value of that property in relation to the amount being borrowed. Upon purchase, Actium puts a lien on the property in order to protect its own interests.
Hard Money Regulations
As hard money involves hard assets, there are regulations in play. Once again, regulations vary by state. Some states require that hard money lenders at least have real estate licenses. This makes sense given that the vast majority of hard money lending is related to real estate investing.
Hard money lenders are also regulated in terms of how they can proceed in the event of default. They must follow legally enforceable processes for seeking payment, repossessing the property, and so forth.
Both private and hard money lending provide funding to clients outside of the traditional banking system. Needless to say that there is enough business out there to make private and hard money lending worthwhile.