As a hard money lender, you know that raising capital is crucial for success. However, raising capital can be challenging for even the most experienced lenders. In this post, we'll will provide some strategies for raising capital for your hard money lending business.
Build Trust with Professionalism
No matter how high the returns you promise to your investors, one of the most critical elements of raising capital is developing trust with your investors. The best way to build trust is by demonstrating professionalism. Show investors your loan management system, walk them through your origination and servicing processes, and give them a demo of your professional investor portal. Show investors that you have the financial systems and controls to responsibly handle their investment. If these are areas of your business that you think you can improve, check out Baseline's Loan Management System.
Be Consistent
A common mistake that lenders make is forgetting what they promised to different investors. Most lenders do this because they don’t want to appear inflexible. But it can have the opposite effect. You can avoid this by being consistent with the terms and structures you offer, across the board. Having conviction in your ask signals to investors that you understand the market and are not desperate for capital at any cost. Being consistent will allow you to find investors that are the best strategic fit for your business.
Have a Clear Pitch
Assume you are raising money from a local high net worth individual, and your pitch is something like this:
"Acme Lending LLC is a hard money lender that offers investment purpose loans to real estate investors. We’re looking to raise one million dollars and will pay a yield of 8% to 10%."
This pitch isn’t terrible. It explains the type of business you operate, the amount you’re seeking, and an estimated rate of return. But let’s make it better.
"Acme Lending LLC is a hard money lender that offers investment purpose loans to real estate investors in South Florida. We have successfully originated more than 1,000 loans over the last 5 years. Our business has grown exponentially in the last six months due to our online marketing efforts. To service this growth, we are looking to raise one million dollars to originate asset backed loans that will earn you a yield of 8% per year.”
The second pitch demonstrates your track record, why you need to raise capital, and provides a concise rate of return.
Establish a Track Record
This may seem like a chicken and egg problem. But one of the safest and quickest ways to build a track record without raising your own capital is by partnering with an institutional note buyer. This type of arrangement is usually referred to as correspondent lending, where you act as a correspondent lender for an institutional note buyer. As a correspondent lender, you are the face of the transaction, which allows you to keep your relationship with the borrower while having the note buyer provide the capital behind the scenes. Once you have built a track record, you can now pitch to investors and use your correspondent experience as your track record.
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