How to Raise More Capital for your Hard or Private Lending Business

In our discussion about raising capital for a hard money lending business, we’ll address the significant challenges many people, myself included, encounter in this capital-intensive field. I’ll share some of the successful strategies I’ve employed, including a few unconventional methods, to help navigate this crucial aspect of the business.

Friends & Family

First and foremost, let’s discuss how most people typically go about raising capital. I don’t think this is a bad approach; in fact, it’s one of the better ways to start. However, you might eventually hit a ceiling with it. The first method is raising capital from friends and family. This is often where everyone begins.

When you’re starting out, you’ve typically had some success in real estate, so reaching out to your network is low-hanging fruit. If you’re active on Facebook or social media, your friends and family are likely aware of your activities, whether you’re flipping houses or something else. Hopefully, you’ve built some goodwill with them, and they can see that you know what you’re doing. When you announce your new lending company, transitioning away from flipping or buy-and-hold strategies, people will be interested and eager to learn more.

However, it can be a bit scary because these are people close to you. You want to make sure you don’t let them down. It’s different when you’re dealing with investors you don’t see at family gatherings; you’re more concerned about preserving that goodwill with friends and family.

I firmly believe that most of the capital you need for your lending business is within your first or second-degree network. There’s plenty of capital out there, but people tend to invest only in individuals they like, know, and trust. Networking is key. Take people out to lunch and demonstrate that you’re trustworthy and knowledgeable. If you show confidence and competence, the money will flow.

I’ve also found that social media plays a significant role in this. Anytime I post on my personal page about seeking capital, I usually get one or two leads from it. This is, by far, one of the easiest ways to build capital.

Registered Investment Advisors (RIAs)

Next, let’s talk about reaching out to RIAs, or Registered Investment Advisors. These fiduciaries manage funds for others and often seek private equity or investment opportunities to diversify. Many investors feel stuck in the market, and while bond yields are good now, that won’t last. RIAs are always looking for different investment options.

Similar to reaching out to friends and family, you need to establish a relationship with RIAs. You can’t just send a cold message asking if they’re interested. No one will invest in someone they don’t know. I’ve had success with this approach, and a bonus is that it can help you navigate accredited investor regulations, as they might be exempt.

You can’t just send a cold message asking if they’re interested. No one will invest in someone they don’t know.

So, where do you find RIAs? Google is one option, but I’ve had the best results on LinkedIn. We automate our outreach to anyone with “RIA” in their bio or title and ask if they’re interested in private lending. This strategy has yielded decent results.

Family Offices

Moving on, many people reach out to family offices for capital, but I haven’t had success with that route. Everyone seems to be trying to tap into family offices, so they’re often overwhelmed by inquiries. I think they get a lot of emails from random individuals seeking funds. While you may have had better luck, I have not.

Institutional Funds

The next source of raising capital is institutional funds, such as big banks. This can be a double-edged sword. Some people love institutional capital, while others dislike it because these entities often have significant control. When you work with institutional capital, they tend to negotiate higher rates than you might be comfortable with, along with imposing various regulations. This can limit your autonomy, and you risk becoming just another typical mortgage lender, which is not the goal.

I’m not opposed to using institutional capital, but I wouldn’t want it to constitute 100% of my funding. Diversifying your capital sources is crucial, but be cautious, especially with predictions of an upcoming recession. During the 2008-2009 financial crisis, many large institutional funds dried up, and they may do the same in the future. If your lending company relies entirely on these funds, your business could be at risk when they pull out.

Another option is small banks or credit unions. However, I’ve not had much success here. Many local banks are reluctant to engage because they don’t fully understand the asset class or collateral involved. They often have reservations about fix-and-flip loans. While I understand their concerns—lending out to another operator means you don’t have full control—typically, we’re lending on strong deals with significant equity spreads.

I’ve spoken with other lenders who have established lines of credit with small banks, but it often hinges on having an existing relationship and showing that you’re a professional, not just a small-time operator. I’ve found that these small banks may offer a line of credit, but you often need to assign the collateral to them through a formal contract once the loan closes.

I’d be okay with having a small line of credit from a local bank or credit union. It’s a good solution, but again, it shouldn’t be your sole source of funds. If you’re seeking capital, I encourage you to give this a try. Remember, volume negates luck. Many people call two or three banks, receive a rejection, and assume there are no banks willing to lend. I believe you should reach out to 50, 100, or even 200 banks. All you need is one positive response.

If you’ve only made two or three phone calls, you really haven’t done enough work. Start with the banks you have a personal relationship with, but there are more opportunities out there. You just have to put in the effort.

If you’ve only made two or three phone calls, you really haven’t done enough work.

You need to make the volume of calls, reach out on LinkedIn, and find the right people to talk to. When you call a local bank and ask to speak with someone in lending, you might be connected to a regular loan officer who doesn’t have any decision-making power.

This can be a decent option, but it does require more work.

Social Media

Now, let’s talk about social media, which has been a significant shift for us lately in raising more capital. While we’ve touched on friends and family, it’s essential to approach social media professionally. Over the past six weeks, we’ve been posting two to three reels on Instagram almost daily, focusing heavily on Instagram, TikTok, and a little on YouTube Shorts. We started with about 1,300 followers and have grown to 1,800, thanks to a few videos that gained decent traction. We’re now gaining 40 to 50 followers per day, which is huge for us.

In that same timeframe, we’ve managed to raise half a million dollars from investors. Here’s our strategy: post consistently every day, provide value to your audience, and sprinkle in some humor. Avoid getting too niche; if you focus solely on private lending, many people won’t understand it. Instead, talk about money or investing more broadly to cast a wider net.

Here’s the key: message every single person who follows you. Our strategy is straightforward. We reach out and say, “Hey [Name], thanks for the follow! Are you here for the content, or are you looking to level up your finances?” We do this for every new follower and all existing followers. Every follower receives a direct message, starting a genuine conversation. This individual may have funds available or may not realize they can roll over money into a self-directed IRA to invest with you.

Creating genuine connections and providing education is crucial since many people are unfamiliar with what we do. This is a unique space, so education plays a significant role. Be a professional in the sense that you dive in completely—social media offers incredible reach and power.

We plan to continue this strategy for the foreseeable future because it has proven effective in generating leads. As I mentioned, we’ve explored other avenues like reaching out to banks, RIAs, and friends and family, all of which are valuable. However, social media has been a goldmine for us.

If you’re interested in raising more capital, I highly recommend combining all these different strategies.

Ads

One more pro tip: we’re considering running Facebook ads for a free wealth audit. This could be tricky because our previous ads aimed at finding investors didn’t yield any results. We spent around $5,000 on various ad campaigns but didn’t attract a single investor. I’m not a huge fan of Facebook ads for this purpose, but we’re exploring the wealth audit idea.

The idea is to create a form where people submit information about their investments, debts, risk tolerance, and goals. We’ll provide a guide or a basic financial plan to help them improve their finances. It’s essential to be cautious, though, because you don’t want to misrepresent yourself as a financial advisor. Make it clear that you’re passionate about finances and here to help, and if there’s an alignment, you can discuss private lending.

The main takeaway from this episode is to try everything. Don’t limit yourself to one strategy. I hope you find this information helpful. These are the ways we’ve successfully raised capital from various investors.

If you enjoyed this episode, please leave a review on your favorite platform. I’d love to hear about your unique strategies for raising capital. Let me know!