Are Hard Money and Private Lending the Same Thing?

Hard money lenders are private lenders in the sense that we are not publicly owned banks. However, in our industry, we differentiate between private lenders based on business models. It pays to know the difference if you are looking to fund a project by way of alternative financing.

Actium Partners operates as a hard money lender specializing in real estate loans and other similar projects. There are certain things other private lenders fund that we do not touch. However, the one thing we all have in common is that we don’t operate like banks. Still, we don’t all do things the same way.

As you read the remainder of this post, bear in mind that we are not referring to private mortgage lenders, payday lenders, etc. The private lenders to which we are referring fund projects mainly based on borrower assets rather than financial position.

How We Differ

The biggest difference between private lenders is organizational structure. There are hard money lenders made up of multiple individuals who organize a business, license that business, and subject their lending to state and federal regulations. Licensed hard money lenders are also bonded in some way, shape, or form.

On the other hand, individual private lenders may not form licensed, bonded companies. They can simply individuals who have money they are willing to lend out. In some cases, they might choose to write up formal agreements. Other times, they lend on a word and a handshake.

Here are two additional things that leave room for different business models:

  • Solid Lending Criteria – Most hard money lenders have solid criteria on which they lend. They work with established LTVs, interest rates, points, loan terms, etc. All the criteria are fully disclosed to borrowers up front. Individual private lenders may not have hard-and-fast criteria. Each loan is approached on is own merits.
  • Business Marketing – As a general rule, individuals do not market themselves as much as hard money firms. They are not employing a business model that requires marketing. It is just the opposite for hard money lender firms. Marketing is essential to our business model.

As you can see, there are some clear differences between private lending firms and individuals with money to lend. Our two business models differ quite a bit. However, we also have some things in common.

How We Are Similar

There are three areas in which nearly all private lenders are similar, beginning with the fact that all our loans are asset-based. What does this mean? It means borrowers have to produce some sort of asset to act as collateral. Our approval decisions are based mainly on the strength of said assets.

We are also similar in that:

  • our loans are backed by real estate, more often than not; and
  • together, we provide the bulk of alternative lending in the U.S.

It is worth mentioning that borrowers do not have to necessarily bring real estate to the table as their collateral. Real estate is the most common asset and the one we prefer, but other forms of collateral can be offered. One of the best things about private lending, in all its forms, is that lenders have the flexibility to consider assets on a case-by-case basis.

When you get right down to it, the big difference between different types of private lenders is business structure. It is no more complicated than that. We are all private lenders in the sense that we don’t operate as banks or credit unions. But we may have different business models and areas of lending specialty.