Scarcity of Bank Lending Drives the Private Lending Market

Although the economy has shown some signs of improvement, there continues to be a scarcity of bank lending. Many entrepreneurs and businesses seeking capital are turning to private lenders, who may be able to offer more flexible terms and conditions to qualify for a loan. Investors can use their self-directed IRA accounts to finance private lending, creating arrangements that are mutually beneficial to both borrower and lender.

Demand has been slowly starting to strengthen for business loans, residential mortgages, and commercial real estate lending in early 2013. However, most U.S. banks are still reluctant to issue loans in the wake of the 2008 global credit crisis, according to Bloomberg. In fact, the average loan-to-deposit ratio at the top 8 commercial banks has plummeted from 101% in 2007 to just 84% today. Even with cash deposits rising, and banks having sufficient capital available to make loans, stricter regulations and credit-worthiness standards have made it more challenging for loan applicants to be approved. There is significant pressure on financial institutions from investors and regulators to avoid risk; with the struggles that many companies and individuals have weathered over the last several years, there are few that have the unblemished credit track record that the banks now want to see.

The bright spot in the scarcity of traditional bank loans is that it has created opportunities in the private lending market. Owners of self-directed IRAs are able to use their retirement accounts to make loans and investments in a wide variety of endeavors. Private loans can be made directly to an individual or business, with the IRA account holder reaping a substantial return on their investment, just as a traditional bank does when they make a loan. CamaPlan’s clients are continuing to┬ámake private loans for everything from mortgages to notes to buying existing debts. As the loan issuer, the IRA owner can decide which potential borrowers are reliable, whether to issue a secured or unsecured loan, and set the terms for interest and repayment. Another form of private lending from a self-directed IRA is a private placement, which is not a traditional loan repaid on a schedule, but rather provides working capital to a growing business. Smart private placements can be extremely profitable, because the issuer owns equity in the company, and if the company thrives, the return on their investment will grow exponentially.

Do you have the tools and knowledge to be a private lender? Take a look at our checklist and find out!