What it means to lend privately
This page explains how private lending works. It isn’t an offer, and there’s nothing on it to say yes to.
If you already know how this works, the last section shows you the next steps. If you don’t, the rest is worth ten minutes, because the people who get hurt in private lending are almost never the ones who understood it.
What it actually is
A property company buys something, and the money has to come from somewhere. Usually that’s a bank. Sometimes a bank won’t lend quickly enough, or won’t lend on a building in the state it’s in.
A private loan is the alternative. An individual lends money to the company, on written terms, for a defined period, and the company pays it back.
If you qualified to lend, you’d be a lender, not a partner and not a shareholder. You wouldn’t own the building, you wouldn’t manage it, and you wouldn’t be responsible for it. What you’d have is a contract with a company, and whatever security that contract gives you.
Not everyone does qualify. Financial promotion rules set the criteria for who these arrangements may be discussed with at all, they aren’t ours to waive, and meeting them is confirmed before anything else happens. The last section covers that.
Why a property company borrows this way
Rarely because a bank would refuse. More often because a bank would get there eventually, and eventually is the problem.
An owner who needs certainty on a date can’t wait on a mortgage offer. A deal that’s only a good deal because it’s bought quickly stops being one while a lender works through its process. So the company buys with cash, and the cash has to come from somewhere.
What usually happens next is a refinance. The property is bought, then mortgaged in the ordinary way, or work is done that lifts what it’s worth and then it’s mortgaged against the higher figure. The new borrowing repays the private loan. Where the property was bought well enough, or improved enough, that can return the whole of the original capital.
So the loan is doing one specific job: buying speed and certainty at the point where those are the things that make the deal possible at all. That’s also why this business has two halves rather than one, which is set out on the home page rather than repeated here.
The obvious caveat is in the section below. A refinance is a plan rather than a certainty, and when one doesn’t happen on time, that’s the date you were expecting your money back.
Why people lend privately
People lend privately because they want their money doing more than it does sitting still. Money left in an account loses a little of what it will buy every year, quietly, whether anybody is watching or not.
What they take on in exchange is risk, and more of it. Capital lent to a property company is at risk in a way money in a bank account isn’t, and there’s no protection scheme standing behind a private loan. That’s the trade. It’s the whole trade, and anybody considering it has to weigh it for themselves, which is what the rest of this page is for.
Beyond the trade, there’s a reason people choose this over the alternatives, and it’s usually that they can see it. A private loan is a written agreement with a named company, for a defined period. You can look the company up at Companies House, and you know what has to happen before your money comes back and roughly when.
Whether it’s tied to one building depends on the arrangement. Sometimes it is, and then you can look that building up and go and stand in front of it. Sometimes it isn’t. A lender may put in more than a single project needs, and the money goes to whichever project in the pipeline suits it best when that one comes through. You’d know which of the two you were agreeing to before anything was signed, and you’d be kept up to date with what the company is doing either way.
Which project suits also depends as much on the lender as on the project. How long someone wants the money working, and whether they want it paid out along the way or rolled up to the end, change which of the things in the pipeline is the right home for it. That’s worked out in conversation and written down before anything is agreed, which is the other reason a loan isn’t always pointed at one building from the start.
Part of the appeal is that the work belongs to somebody else. You aren’t managing tenants or chasing a builder, and the building itself isn’t your responsibility.
And you can ask. If a refurbishment has slipped or the solicitor has gone quiet, you can ring the person who knows and get a straight answer the same day. That isn’t true of most of the alternatives.
What can go wrong
Your capital is at risk.
A property can be worth less than expected. A refurbishment can cost more or take longer. A sale or a refinance can fall through, which pushes out the date you were expecting your money back. A borrower can get into difficulty. Security, where it exists, has to be enforced, and enforcing it takes time, costs money, and doesn’t always recover everything.
None of that’s unusual or a sign of a bad borrower. It’s what lending is. Anyone who presents private lending as safe, or as a way to get a return without risk, is either inexperienced or hoping you are.
When something slips
What goes wrong more often is smaller: a date moves. A loan runs for a defined period, agreed before anything is signed. If a refurbishment overruns, or a sale takes longer than anybody wanted, the usual consequence is that the repayment date shifts rather than the money going. Those two aren’t the same thing, and treating them as the same is how people end up frightened of the wrong risk.
And you wouldn’t be left to find out on your own. If a repayment date comes under pressure, we come to you before it arrives and we work out what happens next together. There’s more than one way through, and which one is right depends as much on what you need as on the project. What doesn’t happen is a date passing in silence.
Somebody who has worked with us
We spent months on a portfolio of forty-two properties and walked away at the last gate, after a day on site. That cost us the months, and it’s the clearest thing we can point at, because it’s a record rather than a reassurance.
Here is the other sort of evidence, with the thing that ought to come with it: if you’d rather speak to him than read him, say so and we’ll put you in touch.
“I’ve been on both sides of projects with Sara: a joint venture partner on some, a lender on others. The reason I’ve done it more than once is that nothing comes as a surprise. If a date is going to move, I hear it from her before it moves, and I get a straight answer when I ask a question. Her documentation and attention to detail are outstanding.”
Andrew Danne, who has lent on Sara’s projects more than once.
Next steps
If you have lent before and you know what you’re looking at, the next step is confirming your investor status. That’s a legal requirement rather than a formality, and nothing can be discussed until it’s done.
Which route you take depends on where you live, because the rules that apply are the ones where you are, and they differ more than most people expect.
If you aren’t sure whether this is for you, we wrote something for that. Seven questions and ten minutes. Type into it or print it, and either way nobody sees your answers but you. It ends with your own answer rather than ours, and a no is a good outcome.
This is not financial advice. Capital is at risk. Investor status is confirmed before anything proceeds.