This is a term I hear on a regular basis from lenders, and it makes perfect sense.  It is the common answer to the numerous 100% financing requests I get.  Its meaning is simple, in some shape or form a borrower needs to have more than simply a good idea invested in a project.  Many borrowers can’t wrap their heads around this statement because they look at their financial projections and their bottom lines are always large profit margins, however, in the immortal words of a lender whom I will keep anonymous, “it is a lot easier to cash a cheque then write one!”

When someone requires funds, the mind sets of a borrower vs. a lender are completely different.  Granted, both are looking towards the future, the borrower wants to payout at maturity and so does the lender; but this is where the similarities end.  The borrower is typically using “future value” to calculate their return, while the lender is looking at “present value” to calculate their risk.  So it comes down to opportunity cost, the lender is putting up money at a risk for a future return while the borrower is accepting money at present for future risk.  In order, for them to meet in the middle, both have to give up something; in the present the lender is giving up cash, while the borrower is giving up some form of security.  If one of these variables are missing then the equation is incomplete and therefore “dead”.

Without some sort of investment into a project, technically, the borrower has no real risk.  If the project goes belly up or if they simply get tired and decide to walk, the lender is left with a property that he or she must liquidate.  Essentially, when a borrower has something to lose then they are less likely to walk away from a project when the going gets tough, their investment acts as an anchor.

This is not to say that 100% financing is impossible, because it is. But something somewhere needs to be provided by the borrower to anchor them to a deal.  The bottom line is both the borrower and the lender are seeking to improve their financial situation, but both of them need to risk something in order to earn their expected return…without it the deal is dead!

Private financing is a “means to an end”; because of the drastic changes to conventional financing as a result of the global financial crisis; banks today do not want to expose themselves to undue risk and therefore many mortgages are turned away.  A lot of the time they state they will fund the deal afterwards (i.e. after construction or after the property has been purchased).  This is where private financing comes into play!

Private financing can be used to “bridge” a deal.  In other words, use private financing to purchase, refinance or construct, then get traditional financing down the road.  Following this method allows any project to be broken up into stages; one, being start-up (i.e. purchase the land) and two, operational (re-finance with conventional funds for long term operations).

Private money has less restrictions and guidelines which allows for more creative financing techniques.  This sort of flexibility is not possible with traditional lenders and highlights a very important fact; “not all deals are suited for traditional financing”.  This is why private financing is integral to the real estate industry because it serves a purpose; it makes projects feasible even though the traditional lenders decline to fund.

When seeking funds for a project do not assume that it is unattainable because a bank has decided to decline.  Most of the time, funding by a traditional lender is simply not practical at present but with private money and careful structuring within a short period of time (i.e. 6months to 1 year) your project will make perfect sense to a bank!

By choosing Inglis Commercial Mortgages you have the benefit of having a financing plan which covers the “Start-up and Operational” stages.  We can place funds privately and then refinance with a traditional lender in the future!