Private capital lending is an attractive way for individual and institutional investors to borrow money. It offers a more flexible and personalized approach to financing than bank loans. In addition, there are several economic sectors in which private capital borrowing is extremely prevalent. Our financial experts here at Titan Funding have put together responses to some of your most common queries about private capital lending and how it works.
Who Uses Private Capital Loans?
Private capital lending is generally used by individual investors, such as high-net-worth individuals. They use it to fund investments in real estate, private equity, and debt markets. Private capital is also frequently used by institutional investors. These are organizations that invest funds on the behalf of others, like pension funds and insurance firms.
The process of securing a private capital loan is different from securing a traditional bank loan. Instead of focusing on a borrower’s credit rating and income, private capital lenders offer loans backed by a particular asset. This may be a house, apartment building, or piece of infrastructure. The main concern for the lender is the potential of the asset to produce a return on the investment, which will benefit them and the investor.
Since the loan is backed by a particular asset, the lender has the option of assuming control of the asset if the investor defaults on the loan. For instance, if the investor uses the loan to buy a house, the lender could sell the house to recoup its losses if the investor fails to make good on their loan repayments.
Lenders will typically lend up to 65% or 70% of the asset’s quick-sale value. This term does not mean the market valuation of the asset, but rather the amount the lender could get if they have to sell the asset within a few months to cover a default.
Lenders and borrowers can also agree to add other terms to a loan through negotiations. These terms can include payment schedules, the overall length of the loan, and any fees or charges associated with late payments.
What Are the Advantages of Private Capital?
One of the main benefits of private capital is that lenders have considerable expertise in the fields where they operate, like real estate and infrastructure. This expertise allows them to provide loans tailored to the investor’s needs, rather than the standardized loans that customers get from a bank.
For example, if an investor wishes to buy an apartment building, they may also need to renovate it to generate higher returns from increased rent payments. A traditional bank loan would only provide the funds necessary to buy the building. However, a private capital lender could also consider the renovation cost as part of the loan, since the lender also has an interest in the building generating higher rates of return.
Another advantage of private capital is that lenders can be flexible with loan terms. They work on a much more personalized basis with investors than banks do with their customers. Loan terms can be adjusted to take account of a particular investor’s needs. In addition, private capital lenders tend to make loan decisions more rapidly than banks, which is crucial for an investor if they need to move quickly to secure the purchase of an asset.
A third advantage is that the approval process for a private capital loan is straightforward. Private lenders don’t have to follow a large number of regulations or guidelines when approving a loan application. As long as they have the collateral provided by an asset, proof that the investor owns equity, and evidence that the investor can make regular payments, the lender can quickly move to give the loan the go-ahead.
A further benefit is that an investor can develop a trusted partnership with a lender who has extensive knowledge in the area in which they invest. Over time, the close relationship that develops between the investor and the lender can open up possibilities for more favorable terms on future private capital loans. The lender may also be more willing to work with the investor to help them grow their business if they have a long partnership with them.
Finally, if you make regular payments on your loan, you can boost your credit score. A higher credit score will come in handy if you want to secure a bank loan or another type of financing in the future. In addition, you may find it easier to secure a private capital loan from another lender if you have a record of making on-time payments from a previous loan. Some lenders even ask for your previous payment history, which could give you the chance to push for more favorable terms.
How Are Private Capital Investments Managed?
Private capital investments are usually managed by a fund manager, who is also known as a general partner. The investor is referred to as a limited partner.
An investor may be one person or entity, or they can be a group of investors. The general partner or fund manager assumes the role of collecting the capital from investors and investing it in an agreed-upon way. In this structure, the investor doesn’t have direct control over investment decisions, but they can provide guidance on how they want their funds to be invested.
A general partner is usually paid a fee for managing an investment. This fee typically equates to 2% of the total capital invested. When an investment agreement comes to an end, the general partner generally requests a performance fee worth 20% of the profits, while 80% flows back to the investor.
Discover Your Private Capital Investment Options at Titan Funding
If you are thinking about investing in real estate, we are here to help. Our knowledgeable team of financial experts at Titan Funding in Florida can provide you with terrific private capital lending opportunities. If you still have questions about private capital lending, feel free to contact us. One of our team members will have your query answered promptly and professionally.