You might have the best business plan in the world and all the drive to be successful that a person can have, but there are always limits to what you can do with your own resources. We’ve all been there. You start out, pick up a property or two here and there, market like you should, and at some point you hit a wall. The well of capital runs dry and that leaves you with some serious decisions to make. This concept of “What now?’ is not often addressed in real estate books or seminars and leaves many investors frustrated when they reach this point in their business. So, what do you do?

The idea of raising business capital is the answer to this dilemma and there are several ways to do it. One is to work with either local or national lenders to establish business lines of credit. Some of these are very simple and require no more than a business entity and decent personal credit. Others may require asset verification and can become larger and larger over time. A second option is to attract and raise private money.

Private money has been a foundational element of new businesses for a long time. What do you think fueled the ‘dot com’ boom in the late 90′s? Much of the capital that poured into the tech industry during this time period was private money and a lot of people and businesses got wealthy as a result. It is not at all uncommon for a business to seek and raise capital to support its growth and development, so why should your business be any different? When investing correctly, I believe that you can offer private lenders a much safer return than any stock in the stock market.

If you need capital or simply would rather not use your own, then this is a topic you need to pay close attention to. Since many investors attract capital from individuals who are not formally licensed to loan money, the term that is often used in real estate is a ‘private mortgage lender’. Over the next few posts we’ll explore some of the intricacies of raising such funding for your own business and how your credibility affects this process.

Finding Private Mortgage Lenders

One of the greatest things about using private lenders is that they can come from almost anywhere. They can be friends, family, or Joe Blow down the street. They could be conspicuous high earners like doctors or lawyers, or the millionaire farmer who still drives the ratty old pickup truck everywhere he goes. They could be obvious (like your professional team members) or completely unexpected, like someone you’re sitting next to on a plane. You just never know and you need to be prepared for whatever circumstances come your way.

The critical first step to finding private mortgage lenders is to start acting like a businessperson who is looking for venture capital. Chances are a private lender is not going to come up to you one day and ask if you need money. I’m sure that has happened in the course of investing history, but it is not common and you shouldn’t expect it to work like that. Your microphone should be on at all times, and you should be networking your business regularly. Be ready to talk shop, promote what you do, and be ready to talk the business of private mortgage loans when the topic does come up.

As you might expect, a big part of your success with private mortgage lenders will be your perceived credibility. You’ve probably heard of the term “credibility kit” before. A basic credibility kit for the real estate investor has a number of advantages, including:

• Being able to present a basic summary of your business to others.
• Being a foundation for your marketing program.
• Offering an organized business summary to bankers, private lenders, and other team members.

All of these advantages are equally important. I believe it is important to briefly discuss some of the primary components of a credibility kit, so you can begin to assemble yours as soon as possible. There is no universally recognized template for such a kit but the following list will give you a good idea of how to get started. A good credibility kit includes:

• A nice cover letter that introduces you and your business
• A summary of your business philosophy, focus areas, and experience
• Examples of how you market your business
• Deals you have completed (if applicable)
• An excerpt or full copy of a business plan
• Testimonial letters and recommendation letters.

These components together paint the picture that your business is for real, has focus/direction, and is well organized. All of these convey serious credibility and this is why the credibility kit is such a useful tool for your business. Not only will your own kit make you accountable to its contents and help you focus your efforts as your business grows in success, it will also give you a tremendous amount of confidence.

This type of kit is perhaps most useful because private lending prospects will likely want to see something about you before offering their funds. When you have something to offer them that describes who you are, what you do, and a little about your business vision, you’re well on your way. Once you can engage a prospect in the subject of money, you need to know what terms are to be agreed upon and that is my next subject for discussion.

Previously, I discussed being prepared to gain business capitol. The first step is to act like a person who is actively looking for it and constantly networking. Secondly, you should have a credibility kit assembled and ready to go; ready to hand out when the opportunity arises. That doesn’t mean leaving it sitting on a shelf at home or desk at work ready to send, but physically on you to offer immediately to a potential private lender. Timing can be critical.

Once you have your foot in the door, you’ll need to be ready to seal the deal with a prospective private lender. It is important that you capture their interest first, before ever putting a live deal in front of them. This is for two key reasons. First, you want them to see value in your business, not just a single deal, since this lends itself (no pun intended) to future deals beyond the first one. Second, and perhaps more importantly, capturing their interest before putting their funds into a specific deal keeps you in better compliance with securities laws. Hence, handing out the credibility kit and capturing their interest immediately.

OK, I know I just popped open can of worms there, didn’t I? Securities laws? Before you get nervous, let me give you the quick highlights. When you capture interest from a private lender, they’re only seeing value in a business model before committing any funds. They aren’t being presented with a specific opportunity until after they’ve agreed to provide some funding for your business. This means they haven’t been formally solicited for funding, which is more closely governed by the laws that concern investments. Just stay away from randomly soliciting funds for a specific deal and you should be OK. I of course may be missing a detail or two so be sure to run all this by your attorney to make sure you are doing everything correctly.

Now that I that have covered the bases, I will now discuss what you need to agree on with your lenders. Example terms for an agreement with a private lender include the following:

The length of the loan

The amount that is being borrowed

The return that is expected

The means by which the loan will be repaid (usually a fixed return rate or sometimes profit sharing)

Recourse if the loan is not paid back on time

Something to keep in mind when you outline the terms of the agreement is the ability to go back and renegotiate the terms at a later date. As I have pointed out before, Murphy’s Law is everywhere and it certainly doesn’t hurt to put in a safety net for all parties should something go awry. The private lender may also view this too as smart business on your part and respect your attention to details and keeping their best interest as well.

There may be some other agreed upon terms, too, but these are the main things you need to work out with a private lender. Ways to put all this to paper can vary and I highly suggest you work with your attorney to get it all put together because your lender will probably be having their attorney review it.

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