I’ve been an entrepreneur my entire life. Ever since I was a kid selling candy on the playground, I’ve always had that hustler attitude. I’ve started all kinds of businesses over the years – some succeeded and some failed miserably. With each and every project, I feel I get wiser and make fewer mistakes. After my latest venture into the lending space, I’ve now come to realize that lending is hands-down one of the best business models.
Building all these different businesses helped me develop some strict criteria that I now adhere to for any new venture I’m looking to pursue. These rules are designed to safeguard me from wasting time and money on ideas that don’t have any real potential.
The Criteria
Below is the step-by-step checklist I go through every time I’m contemplating a new venture:
High Ticket
1) The first (and probably most important) box on the checklist is that the venture must be high-ticket, meaning each “widget” sold is $500 or more. In our lending business, our minimum origination fee is $2,500. Whether it’s a $20,000 loan or $200,000, that $2,500 minimum has to be met. Obviously, if we’re doing a higher loan amount, we’ll charge more than the $2,500. But I’m not interested in selling tiny $10 or $50 products or services. At this point in my career journey, it just doesn’t make sense effort-wise.
High Gross Margins (80%+)
2) The gross margins have to be 80% or higher. Lending is great for this because there’s essentially no inventory – you’re just selling math. Our margins are way above 80%. A lot of businesses get crushed by labor, materials, and other costs that destroy their margins. Not the case with lending!
You’ll see larger operations (significantly larger than ours) doing $30M-$50M in AUM, all with one lender and an assistant.
No 1-to-1 Time Correlation
3) There can’t be a 1-to-1 correlation between the time I put in and what I earn. In other words, I make money whether I’m working or not that particular day. Once the loan is given, the interest just keeps accruing without more work from me until payoff.
This is very different from something like a painting business where you only make money while actively working.
Low or No Overhead
4) The overhead has to be low or virtually non-existent. No expensive equipment, materials that expire, tons of employees, expensive warehouse rent, etc. We run our lending business out of my own office, which means our primary expense (rent) is already covered with the mortgage I was already paying for anyway.
This gives us a big advantage over something like a meal-prep company that has high labor costs and constant food waste/expiration.
Hard or Private Lender? Manage all your loans with ease.
Lendr allows you to manage your entire lending business from one place.
5) There should be little to no additional cost for each new customer or product sold. This one doesn’t fully apply to lending, but it’s a nice bonus for things like digital products, software, info products where you can endlessly scale without much incremental cost.
Huge Total Addressable Market (TAM)
6) There has to be a huge total addressable market (TAM) with tons of potential customers to sell to. With all the home flipping/renovating hype and reality shows lately, we have no shortage of borrowers looking for hard money loans. Our constraint is capital to lend out, not customers to lend to. This is a fantastic position to be in.
Sticky Product/Service
7) It has to be a “sticky” product that customers keep coming back for. Lending definitely fits this, as the vast majority of our borrowers do multiple loans with us once they see how easy we are to work with. Building that repeat business is huge for long-term growth.
I often think of my wife with some of the products that she uses on a regular basis. She never goes without makeup — as soon as her mascara or eyeliner gets low, she’s got another one on order. It helps to be in a business where people never cancel (insurance, cosmetics, etc).
Highly Scalable Model
8) Scalability – the business has to be something that can grow and expand over time as you get systems and processes dialed in. Lending is very scalable as you attract more capital from investors and more borrowers come through the door.
I often ask myself, “Is this industry growing or shrinking?” I’d rather be involved with some software on the leading edge of a new Artificial Intelligence movement than I would be in running a weekly newspaper.
Ability to Semi-Passively Operate
9) There needs to be a path to having it operate at least semi-passively at some point, where I don’t have to be deeply involved in the day-to-day. You can hire staff for different roles in the lending process like origination, underwriting, servicing, etc. As the business grows, you can step back from the particulars.
5+ Year Commitment
10) I have to be willing to commit to this for 5+ years with no distractions. You can’t build something big if you’re constantly chasing shiny new objects and opportunities. With my background of starting and killing dozens of companies, I know the importance of steadily chipping away at one thing for many years.
Alex Hormozi taught me the importance of focus and really diving in on just one opportunity. I’m starting to believe that there’s now no such thing as multi-tasking. Instead, you’re just starving one opportunity to feed another.
I’m starting to believe that there’s now no such thing as multi-tasking. Instead, you’re just starving one opportunity to feed another.
B2B Instead of B2C
11) And finally, it has to be a B2B (business-to-business) model rather than B2C (business-to-consumer). Businesses tend to stick around longer, have more money to spend, lower churn rates, and more stickiness compared to fickle consumers always hopping to the next thing.
I’ve had multiple B2C services/products in the past. This is a hard-stop rule that I’m not willing to compromise on moving forward. Never again will I pursue another B2C “opportunity”.
Examples of Good (and Bad) Models
Some examples of good business models that hit these criteria: digital courses, affiliate marketing, software, e-commerce, real estate investing. These all tick the high ticket, high margin, low overhead, huge TAM boxes.
Some bad ones that don’t make the cut: food service (high costs & expiring inventory), painting (low margins), or cleaning services (trading time for money 1-to-1 with very little scalability).
The Power of Hard Money Lending
Ultimately, hard money lending ticks every single one of those eleven boxes for me. I really enjoy the nerdy numbers/analysis side of it, without all the headaches and hassles of actually doing the construction work. Projects pretty much always run into delays, surprises, and adjustments to the original scope. Obviously I don’t wish a bad project or delays on a borrower, because that hurts them and puts us at risk as well. Although, when it does happen (and it happens quite frequently), I as the lender actually profit more from the extension fees and interest.
There’s a massive market of flippers, rehabbers, and developers out there constantly hungry for more capital to fund their next project. If you can position yourself as a reliable private lender, you’ll have an endless stream of deals to filter through.
It’s one of the most lucrative and scalable models around when you look at the high margins, low overhead, and market demand.
In summary, those are my reasons for choosing hard money lending. You may disagree with some of the criteria or weighting, and that’s perfectly fine! I’d love to hear your thoughts and any counterpoints you have. I’m always eager to learn from my fellow lenders.
At the end of the day, this rubric of “must-haves” has served me well in avoiding businesses that were doomed to struggle or remain unprofitable. Hard money lending checks all the boxes for scalability, low overhead, high margins, steady demand, and the ability to build serious wealth over years, not days or weeks. That’s why I’m all-in on this as one of the top business models around.
