Private vs. Commercial
The first step when sourcing out funds for any project is to determine if you need private or commercial financing; this is an important step and it is often overlooked.
Interest rates, fees, terms and repayment options can be completely different from one to the other. These factors can have drastic effects on financial projections, budgets as well as planning for the future, so it is imperative that you determine which category your deal falls into.
The other issue to consider is the fact that your project may not be eligible for commercial financing, knowing this will speed up turnaround time and prevent any wasted effort pursuing something that is not attainable.
Private financing has many names like alternative financing, non-bank financing, hard money lending etc… Ultimately, the best way to describe private financing is ‘they will fund the deals that banks and traditional lenders won’t.”
These funds typically come from a pool of investors (either individuals or institutions) managed by a firm or wealthy individuals pursuing an alternative to investing in the equity markets. The bottom line is they do not follow a rigid or “set in stone” lending platform like banks or traditional lenders; this allows for creative lending techniques and a higher risk tolerance. Their trade-off is a higher return on their investment (ROI) by accepting a greater level of risk.
High risk tolerance, less documentation, creative financing techniques, quicker turnaround, shorter terms, typically interest only payments, higher interest rates and higher fees.
Commercial financing is typically designed to fund lower risk deals. These funds are from banks, traditional lenders, low risk investment pools and finance companies (just to name a few).
Their lending platforms are geared towards long term investment horizons; therefore, because the greater risk associated with holding an investment for a longer period of time they require more documentation and have more guidelines to meet before funding.
Lower risk tolerance, greater documentation, slower turnaround, longer terms, amortized payments, lower interest rates and lower fees.