Key takeaway: A commercial real estate loan broker connects you with CRE hard money lenders to help you find the best financing option. In contrast, direct balance sheet hard money lenders are the institutions that approve and provide loans directly.
If you’re looking for hard money financing to buy or rehabilitate a commercial property, you may be wondering if you should use the services of a CRE loan broker or apply for a loan directly from direct balance sheet hard money lenders.
Loan brokers act as intermediaries and help you find the best lender for your needs. They do the legwork to connect you with a lender that fits your CRE project’s financial situation or requirements.
Direct hard money lenders, on the other hand, are financial institutions or private entities that evaluate and fund loans themselves without involving a middleman.
Both options may work depending on your project and timeline. To decide which route is best for securing your loan, you need to understand the differences between them.
What are Direct Balance Sheet Hard Money Lenders?
Direct balance sheet hard money lenders are the institutions — usually private lenders and sometimes credit unions — that provide the loan money directly to you. They provide loans using their own funds, making them the direct source of financing.
These lenders maintain full control over the lending process because they use their balance sheet to fund investments. They don’t need to rely on external funding sources, so they can make loan decisions faster and disburse funds quickly. And since they control the capital, they can often offer you tailored loan terms to fit your investment horizon.
The application process is straightforward: you’ll submit your documents and fill out the forms, and then wait for approval (which can be as fast as 24 hours). Working with a direct lender means you interact with the decision-makers themselves — no unnecessary intermediaries. This streamlines communication and allows any questions or concerns you (or they) might have to be resolved right away, rather than relying on a third party to relay information. Negotiations are also done directly.
You might prefer working with a direct lender if you already have an established relationship with them. That connection can sometimes lead to better terms such as a higher loan amount or a lower interest rate.
However, if you don’t have a relationship with a direct balance sheet hard money lender, you may find yourself applying to several different lenders to find the best deal, which can be both time-consuming and tiring. If the lenders all conduct a credit check on your personal finances, this may also hurt your credit score.
What are CRE Loan Brokers?
CRE loan brokers work with a variety of lenders to arrange funding that you (their client) can use for purchasing, developing, or refinancing commercial properties. Their role is to secure financing options that fit your needs and negotiate terms that match your CRE project’s goals. You can also turn to them for advice on the best financing solutions available for borrowers like you and on how to manage CRE loan transactions from start to finish.
CRE loan brokers serve all kinds of investors, from individuals to corporations and developers as well as real estate investment trusts. Are you a small business owner looking to purchase or renovate your CRE premises? They can work with you, too.
How are they Compensated?
The way CRE loan brokers and direct lenders earn from the transaction is another major difference between these two. CRE loan brokers get paid through fees based on the loan amount. The lender may cover this cost through the loan’s origination fee — and this is also why working with brokers can be problematic.
As you can see, this compensation setup can affect the broker’s advice if they have preferred lenders they work with regularly. So if you’re working with a broker, it’s a good idea to ask why they recommend a particular lender.
Meanwhile, direct balance sheet hard money lenders earn revenue through various fees associated with the loan, including loan origination fees, interest on the loan balance, late fees, and other charges related to closing. Don’t worry — you’ll receive a good faith estimate from the lender that clearly outlines these costs so you know exactly what you’re paying them.
Can you Only Choose One?
No. You aren’t locked into choosing between a loan broker or a direct lender. You can certainly explore both options and compare their rates and processes to decide which approach works best for your CRE project.
Do you already have a strong relationship with a direct balance sheet hard money lender? Starting with them might make sense especially if they are open to offering favorable terms for long-time clients like yourself. But if reaching out to multiple lenders feels overwhelming, you can turn to a CRE loan broker to simplify the process.
CRE loan brokers faced criticism in the past due to loose regulations and commission-based incentives that sometimes led to risky loan recommendations. But things have changed. Stricter regulations and borrower protection laws have improved their credibility, so if you want someone to handle the legwork for you, you can certainly explore working with a broker.
Pros and Cons of Working with A Loan Broker
A loan broker lets you access a network of lenders and helps you see how different institutions evaluate your financial situation, which can be useful if your CRE project or your circumstances don’t exactly fit the traditional lending mold. Whether the issue is your credit score or the type of CRE property you’re trying to finance, a broker can connect you with options that might otherwise be out of reach if you are on your own.Fees are the biggest drawbacks of working with a CRE loan broker. Some of them charge you directly while others receive their payment from the lender. If the lender covers the broker’s fee, make sure you’re not being pushed toward a more expensive loan simply because it offers the broker a higher commission. You should assert your rights and always ask questions about the rationale behind their recommendations.
Pros and Cons of Working with A Direct Balance Sheet Hard Money Lender
It’s faster to work directly with a direct balance sheet hard money lender since they make their own funding decisions. They can approve loans faster and release the funds immediately, which is especially useful if you’re on a tight timeline.
Many direct CRE lenders also operate across state lines so they’re a great resource if you’re buying a property in another state. Communication tends to be clearer and more efficient with fewer intermediaries involved.
But if you are exploring several lenders, the process starts to become time-consuming. You need to apply separately to each one, and you also need to gather financial documents and submit your CRE loan applications by yourself, without a broker’s support.
There’s always a risk that your application may be denied. Do note that each direct lender has unique criteria, so if one denies your loan, you’ll need to start the application process from scratch with a new lender, further delaying your plans and adding to the overall effort required. So if you want to explore several options at once to make sure that you get funding, you may be better off working with a broker. Their network may be able to help you find approval.
How to Find A Loan Broker
Loan brokers often operate locally, so ask your CRE network for referrals. You can also use brokerage platforms to submit an inquiry and have brokers reach out to you directly.
How to Find A Direct Hard Money Lender
Private Capital Investors is a direct CRE lender that brings over 25 years of experience and a proven track record of helping CRE investors secure more than $8.5 billion in funding.
We work directly with clients across the US and internationally. Our extensive network of partnerships with life insurance companies, banks, CMBS, hedge funds, and private investors lets us provide CRE financing — including hard money — for a wide range of commercial real estate projects and segments.
Speed is one of the biggest advantages of working with us. We can close deals in as little as two weeks so that you don’t miss out on time-sensitive CRE opportunities. We also reduce the paperwork to simplify the process — in fact, many of our loan programs don’t require tax returns.
Whether you need straightforward capital or guidance through a complex financial situation, you can count on our team of highly experienced CRE loan professionals to look at your project closely, in a way that many traditional lenders don’t. We understand the unique requirements of CRE borrowers — including complex situations that conservative banks don’t bother to look into — because this is our specialty.
Our goal here at Private Capital Investors is to build lasting partnerships with our clients. Talk to us today to find CRE financing solutions for your project.
