Avatar's Blog

There are two types of private lenders: instutionally funded lenders and investor funded lenders. Regardless of the type of loans the private lenders makes - real estate based, equipment loans, personal loans, land, construction, factoring, or any of a thousand other types of loans, the source of funds comes from one of these two sources.

Investor funded lenders are companies formed to connect borrowers and private individual lenders. For example, private high net worth individuals who wish to invest in mortgage backed securities contact investor funded lenders to indicate how much they have to invest and, perhaps, what kind of projects they are interested in investing in. As with any investment process, there is a screening process to assure that the investor is qualified to make the investment. Then the investor remains on a list of potential investor funding sources for the company.

The investor-funded company promotes its lending capabilities and specialties to the business community, inclduing brokers and borrowers. When a loan request is submitted, if it meets the lending criteria of the lender, a prospectus is developed and 'floated' to the group of investors who have expressed interest and been qualified. The money is collected, due diligence is completed, and the loan is funded.

Investors are paid a reasonable return on their investment in the way of interest payments, the company takes a payment in the form of interest and points as well. The advantage of an investor funded lender lies in th epoosiblity that there will be greater flexibility in lending critiera, in other words, a greater likelikhood of finding private individual investors who will take on greater risk projects for a higher return on their investment. The drawbacks are that it may cost more for the loan and may take longer to get all the money collected from the investors to fund the loan.