The Rise of Non-Traditional Lenders

Entrepreneurs and investors have access to a wide range of opportunities through non-traditional lenders.

last updated Wednesday, October 2, 2024
#Private Lending #Due Diligence

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John Burson

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The last decade has witnessed an evolution in real estate investor financing. Private lenders, who often operate away from the limelight, are among the leading players in the silent revolution. The Great Recession largely catapulted their prominence in financial circles.

After the economic downturn, the biggest challenge for investors was traditional lending institutions' new, strict regulations. This included rules such as the Dodd-Frank Wall Street Reform and Consumer Protection Act in the U.S. and the laws affecting global banking, such as the Basel III accords and industry regulations.

The effect is that today, banks do not have as much money to invest in commercial real estate, fuelling the rise of a new marketplace. Alternative funding provides new funding for commercial mortgage brokers.

New Institutions

The changes in commercial real estate result from traditional financial institutions' new opportunities to invest their money. These individuals work with non-bank lenders who decide on the funds' disbursement. The lenders pool together resources, which can run into billions of dollars.

These private lenders do not face the same risk-taking limitations as banks, giving them access to diverse opportunities. Additionally, the funds come from multiple sources, limiting an individual's financial risk.

The revolution has its limitations. In its early years, private lending faced reputational hiccups when dishonest lenders charged upfront fees and disappeared or denied the loan on "due diligence." Borrowers also feel that paying due diligence fees guarantees them a loan. Such fees are equivalent to appraisal fees and are required for valuation.

Many borrowers today still adhere to past norms, where they did not have to pay any fees to access loans. This was possible due to bank requirements such as opening an account for the project to generate long-term business for the bank and insurance from the Federal Deposit Insurance Corp. In worst-case scenarios, the government would bail out the bank.

Available Options

Brokers can get clients on board if they first present the best financing option. If both parties have all the information, the process can kick off immediately. In case of eventualities, the broker should have backup financing options for the borrower. The presentation should take place before the meeting with the lender to limit obstacles for the borrowers as they progress through the lending process.  

The new generations of non-bank lenders offer all types of loans, services, arrangements, and combinations—similar to banks. They also offer a 90 percent loan-to-cost financing option. Most lenders also require very few cash outlays while guaranteeing borrowers' property ownership.

Commercial real estate deals can access financing options, including well-presented venture capital projects. As financing from non-traditional lenders increases, alternative lending is becoming more permanent in the market, especially for real estate investments.

 
 
 

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