What Kind of Funding is Right For You? Banks or Private Loans?

A lot of work goes into commercial real estate investment.

Investors have a lot to consider – from location to loans, many decisions have to be made. When it comes to financing, there are so many possible options available to commercial borrowers today. When navigating a new deal, investors need to be sure that they’re choosing the best financing option for both themselves and the project at hand.

The two most popular borrowing resources for CRE investors are either banks or private loans. To gain a better understanding, let’s explore the positives and negatives that come along with both options.

Private Lending

Benefits

In the last few years, private lending has grown in popularity amongst investors. One reason is that private lenders are usually more apt to provide flexible payment options. Borrowers can negotiate their payment plans and operate with more freedom than when working with a bank.

Another positive element that comes along with private banking is that the borrowing process is known to be much faster and easier. There are less stringent rules, so private lenders can offer their clients greater ease and convenience compared to traditional banks.

Also, private lenders have lower up-front costs, which can help investors reduce some of the initial expenses.

Negatives

When it comes to interest rates, private lenders tend to be on the high side. Private lenders are under pressure to set heightened interest rates to help repay the funds borrowed to fulfill a loan.

Investors need to keep in mind that most private loans are meant to be short-term. That means that you’ll need to have a clean exit strategy set in place – even during the initial application project.

Traditional Banking: Perks and Drawbacks

Benefits

Most investors choose to do business with banks, as they’re the most popular source for commercial mortgage originations. Banks have high esteem amongst investors for their reliability and line of benefits.

As stated above, banks oftentimes offer the lowest interest rates on the market. Compared to private lenders, banks have a far greater supply of liquid cash flow supplied from both their clients and federal funds.

Investors looking to lower the total payback prices should consider working with banks.

Negatives

Besides their strong reputation and enticing interest rates, borrowing from a bank isn’t always easy. Borrowers need to keep in mind that doing business with banks comes along with a unique set of challenges.

Banks have an incredibly strict borrowing policy, fueled by specific regulations that leave no room for negotiations. Banks also run applicants through intensive screening, so eligibility isn’t granted to everyone. Those who are approved must go through an arduous sign-up period, consisting of different levels of clearance and piles of paperwork.

Banks aren’t as easy and customizable as private lending, but do offer cost-effective aspects that qualifying borrowers should consider.

Investors need to spend time on due diligence before choosing their next financing route. Each project is unique and requires different flexibility, monetary support, and time thresholds. To meet these diverse needs, make sure you choose the perfect funding resource. 

For more CRE investing insights, explore the NAI Global blog.