What is Direct Lending? Your Investment Capital

Financing for SMEs (small and mid-size enterprises) and other entities has shifted dramatically in the last few decades. Banks and other financial institutions once sat at the head of the table for business financing. Now, other options like direct lending and hard money loans have replaced many public, syndicated loans. 

In fact, despite the economic downturn in 2020, the direct lending (or private debt) markets in North America increased 15.8% from the previous year. So, exactly what is direct lending?

Direct lending is a private financing option with no intermediary (such as a financial institution or broker). The lender raises funds from investors, then the funds go directly to borrowers.

Key Takeaways:

  • Direct lending is the transition of loaned money from one party to another without an intermediary, such as a broker. 
  • There are multiple types of private equity lenders, including private equity firms and peer-to-peer lenders. 
  • Direct private loans are typically high yield investment options.

Direct Lender Definition

Direct lenders are individuals or entities that determine whether or not a middle-market company qualifies for a loan, and then releases the funds directly if they do. 

A number of factors determine final approval for a direct loan. Credit score, clean background check (criminal, financial, etc.), down payment, experience, liquid reserves and the projected ROI of the project are a few.

Requirements for securing a private money loan vary by lender. Many lenders may require you to demonstrate previous success with real estate investments (typically within the last 36 months). Past projects should be similar in size and scope to the new project being financed. 

Revolution Realty Capital’s tech-enabled lending platform makes direct lending simple and hassle-free. We offer state-of-the-art technology for broker partners to service their loans to make the direct lending process easy to oversee and manage. Review the chart below for an overview of our requirements to secure a direct private loan.

Direct Private Loan Requirements
  • 85% LTV: A minimum 15% down payment is required, but a higher percentage down will likely help you secure a loan quicker.
  • Exit Strategy: Your exit strategy outlines how you intend to repay the initial loan – will you sell the property in a certain number of years? Refinance the property with a long term loan?
  • Collateral: Collateral minimizes the risk of your loan. The most common type is equity in the subject property, another property, or cash in a bank account.
  • Income: Income verification shows a more complete picture of your financial situation, and the amount of risk that may be involved by lending you money.
  • Credit Score: The higher your credit score, the more likely you are to secure a loan. Higher ratings increase lender confidence and can decrease your interest rate.

 

Meeting these requirements will give you a greater chance at financing your next real estate project. And with the right private equity lender, you can kickstart your project in no time.

Private Equity Lenders

A variety of private equity lenders exist in the current market. These lenders most commonly include private equity firms, peer-to-peer platforms, investment banks, and family offices. 

Private equity firms: These firms, like Revolution Realty Capital, typically provide greater flexibility than banks and can approve funding faster than traditional loans. 

Private equity firm interest rates and loan approval depend on your experience as a real estate investor, the size of the requested loan, personal credit score, and income. Specific requirements vary among firms.  

Peer-to-peer platforms: Peer-to-peer lending can supply needed funds with flexible qualification requirements and quick funding. 

However, this lending option may place restrictions on how you can use the funds. These loans are typically unsecured, which may not be suitable if you’re looking to purchase a property and secure capital for renovations. Additionally, if there aren’t enough willing investors you may only receive partial funding – or no funding at all.  

Investment banks: Investment banks such as Goldman Sachs and Morgan Stanley offer real estate investors access to financial capital to fund projects. However, many investment banks don’t offer loans less than $1 million and have more rigid requirements than private equity firms.

Family offices: These institutions are private wealth management advisory firms designed to provide services to ultra-high-net-worth individuals (HNWI). Similar to investment banks, they usually offer loans to a select group of investors. 

Types of Direct Lending Investments

Not all direct lending investments are made equal. Middle market lending, lower middle market lending, and hedge fund lending all serve different entities within real estate investing. Knowing which would be best for your portfolio or your business will help you further understand the answer to your question, “What is direct lending?”

Middle Market Direct Lending

In middle market direct lending, a lender provides funds to middle-market companies (those with revenues of $25 million to $250 million, are profitable, and have a healthy balance sheet). The loans are evaluated and secured based on the borrower's current and forecasted cash flow. 

These loans are usually senior secured with floating rates. Typically the loan is provided by a single lender or a small group of lenders.

Lower Middle Market Direct Lending

The lower-middle-market direct lending is similar to middle-market direct lending but involves lower leverage and companies earning between $5 million and $50 million. However, companies that receive these funds must prove that they can generate consistent cash flow.

Direct Lending Hedge Funds

Hedge funds comprise numerous investors who combine their capital to provide direct lending services to borrowers. Direct lending investments generate current income, making direct lending hedge funds attractive to insurance companies and pension funds. 

Direct lending provides real estate investors with a faster means of obtaining a variety of loans, including ground up, fix and flip, bridge, rental property, small balance commercial, and net lease lending

Now you know the answer to your question, “What is direct lending?” the next step to funding your real estate investment or broadening your portfolio is to get in contact with a private equity lender.

Aside from providing direct loans with the most competitive rates, Revolution Realty Capital’s internal platform makes it easy to manage your loans. You’ll also receive exclusive advice to help you determine the best course of action for your business.

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Key Takeaways

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  • Taesent tincidunt vehicula ante, sed tempus libero vulputate.
  • Lorem ipsum dolor sit amet, consectetur adipiscing elit.
  • Lorem ipsum dolor sit amet, consectetur adipiscing elit.
  • Taesent tincidunt vehicula ante, sed tempus libero vulputate.
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Proin interdum dolor a ullamcorper molestie. Vivamus in justo velit. Aliquam vehicula massa et venenatis placerat. In hac habitasse platea dictumst. Maecenas scelerisque ipsum et mauris aliquam, eget rhoncus enim facilisis. Praesent tincidunt vehicula ante, sed tempus libero vulputate at. Proin sed erat neque.”

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