Private lenders have overtaken traditional lenders in commercial real estate, accounting for 37% of non-agency CRE loan closings last year, outpacing banks, which trailed at just over 31%.
These loans fund fast and don’t require the usual piles of paperwork.
Instead of digging into your personal finances, private lenders look at the asset you want to buy and what you plan to do with it.
If the numbers hold up and the timeline makes sense, you can get to the closing table without weeks of back-and-forth.
But is it safe to borrow money from a private lender to fund a commercial property deal?
Or are you committing to terms that could turn against you later?
Also read about What you should know about before borrowing private money
Let’s demystify misconceptions
The short answer is, it’s safe to borrow from a private commercial lender.
But it’s also easy to see why you might hesitate.
Many newer investors avoid private lending altogether because they believe three false assumptions:
Misconception #1:
Private lenders are not regulated
Not true. Private lenders don’t operate under bank charters, but they’re still part of the lending industry and therefore have legal obligations.
Most states impose licensing rules for anyone issuing commercial loans secured by real estate.
In California, for example, private lenders must hold a license under the California Financing Law.
States like New York and Connecticut also require lenders to provide clear, written disclosures that break down terms such as the APR, total repayment cost, payment schedule, and other material conditions — similar to what you’d see in consumer lending.
Interest rates can’t just be “whatever the lender wants” because private lenders are still subject to usury laws.
Depending on the loan structure and state, that means there are legal caps on how high rates can go.
And of course, private lenders have to stay compliant with laws around fraud prevention and fair lending practices.
In some cases, they’re also required to report deal volume or licensing activity to state regulators, depending on how the loan is structured and who’s funding it.
If you’re working with a legitimate lender, they should be able to tell you exactly which rules they follow and why.
Here is a Complete Guide about Private Lender Requirements before Lending
Misconception #2:
Private lending is just for borrowers with bad credit
Plenty of experienced investors borrow from private lenders by choice. They’re not doing it out of desperation, but because the structure offered by the private lender better fits the deal.
Read about How Private Lenders Check Credit Report
Traditional banks often take several weeks (even several months) to approve a loan.
They also rely on rigid underwriting guidelines, so you will have to submit full income documentation and meet strict minimum debt coverage ratios.
Most banks don’t lend on transitional or unstabilized assets; there are restrictions on the types of properties they’re willing to finance.
This can be stifling if you’re buying a vacant building that doesn’t meet a bank’s income requirements, or bidding against cash buyers who can close in days.
It’s especially limiting if you’re starting renovations that will temporarily lower the property’s value.
Private lenders work differently. They look at what the property could become and whether your plan to get there makes financial sense.
They’re more interested in your exit strategy — how and when you’ll repay the loan — than in ticking off traditional underwriting boxes.
That’s why private money is routinely used by highly-experienced CRE investors with solid business plans.
Read about What Borrowers Need to Know about Private Credit in 2026
Misconception 3:
Private lending is just for bad deals that banks won’t fund.
Again, not true. Private money is for deals that don’t fit a bank’s box — not “bad” deals.
A bank might pass on a vacant building because there’s no income yet, but that doesn’t mean the building lacks value or potential.
Private lenders are more open to transitional or underutilized properties because they themselves usually have a lot of experience in commercial property investing.
Therefore, look at risk differently — from the point of view of someone who understands how value is created.
If you are able to explain your business plan and show how the numbers support it, these lenders are often willing to fund projects that a bank wouldn’t even consider.
Are you planning to reposition a retail center that’s half-vacant but in a high-traffic area? Or bring new life to a small industrial property that needs upgrades before it can command higher rents?
Private lenders understand these plays.
The Truth
Risk usually comes from the borrower’s side
Private loans aren’t dangerous by design. But they’re short-term by nature.
Don’t treat a 12- or 18-month private loan like a long-term mortgage.
You need to be strategic and disciplined in managing your capital and executing your exit.
Monthly payments tend to be higher because the loan term is compressed.
There may be interest-only payments, but the balance still comes due in full — often in one lump sum — at the end of the term.
If you don’t have a clear exit strategy, like a scheduled refinance or an upcoming sale, that deadline can turn into a liquidity problem and derail the entire project.
That’s why you need to be honest about your numbers and build in room for delays.
Because the risk is not in the loan itself, but in assuming that you have more time or flexibility than the agreement allows.
How to borrow safely from a private commercial lender
Build in room for setbacks.
A short-term loan can wipe out your profit if you don’t do your budget carefully.
The interest is higher, and the repayment window is tight. Fees can also eat into your initial capital.
If your renovation takes longer than expected or your property sits on the market, you may end up paying for an extension.
Don’t skip due diligence.
There are plenty of legitimate private commercial property loan lenders, but there are also bad actors.
So, before you borrow, check their license status if required in your state. Ask who’s funding the loan.
Make sure everything’s documented — especially if the lender isn’t local or if they’re connecting through a broker.
It’s best to get a lawyer to review the paperwork before you sign.
Clean documentation protects both sides.
Build a relationship with a trusted private commercial lender.
This likely won’t be your last CRE investment, so why treat your loan like a one-off transaction? Be professional.
Show the lender you’re someone worth working with again.
If they see that you meet deadlines and communicate early, you’re more likely to get better terms next time.
Our team here at Private Capital Investors funds commercial real estate projects that need fast, reliable capital.
If you’ve got a deal and a plan, we’ll help you run the numbers and see if it makes sense. Call 972-865-6206.
Sources
- https://news.bloomberglaw.com/us-law-week/state-regulatory-landscape-shifts-for-commercial-loan-lenders
- https://www.offermarket.us/blog/commercial-private-money-loans
