According to a recent report by Forbes, over half of all real estate investors are now turning to private lenders. With this comes a more crowded marketplace, which means that existing lenders need to consider ways to stand out from the crowd, to survive.
The rise of private lending
Private lenders disrupted the monopoly of traditional banks and the private lending market has since seen a remarkable rise, reaching $1.5 trillion in assets under management globally at the start of 2024. In the past five years, the number of private lenders in the U.S. has surged by 20-30%, with more than 5,000 lenders originating mortgages in 2023. This increase can largely be attributed to the technological advances that have taken place in recent years.
With the rise of private lending comes an increase in competition, from new and traditional lenders. Banks are grappling with the huge increase in private lending, and many of them are entering the direct lending space so that they can establish themselves in the private market too. To compete in this space, they’re embracing technology, forming partnerships with fintech firms and improving their customer experience.
Technology is playing a pivotal role in lowering the barriers to entry for new private lenders, and revolutionizing how private lenders operate, enabling them to reach borrowers more efficiently and with greater precision.
How to stand out from the crowd
Lean into technology
Embracing technology is one of the first steps to creating a lending business that will be agile enough to keep up with the pace of evolution in today’s lending climate. For instance, artificial intelligence (AI) and machine learning are being used for credit scoring, which allows for faster and more accurate assessments of borrower risk, and enables lenders to make more informed decisions.
Diversify your product range
Consider diversifying your range of financial products. You may need to add more products to your offerings, to keep up with changing and complex borrower needs. For example, providing junior credit and hybrid capital solutions is a powerful tool for private lenders to set themselves apart by offering more flexible financial solutions.
Enhance customer experience
In the age of personalization, understanding each borrower’s unique needs has become more important than ever. Personalized loan products with customized loan repayment options and advisory services are key features to staying relevant in a competitive market. This also means that user-friendly platforms and long-lasting client relationships are vital to a private lender’s longevity.
Proactive approach to regulatory changes
With regulations around private lending changing frequently, a major opportunity for lenders to stay ahead of the competition is by staying on top of these regulatory changes and pivoting accordingly. Making sure that a team member or compliance officer keeps up with the changes is important, along with creating a comprehensive compliance framework, using compliance management software and developing contingency plans for various regulatory outcomes.
Enhance operational efficiency
Collaborative workflows, automating processes and improving data security are all important enhancements that you could include in your private lending business. Data security improvements are imperative as 2023 saw a major rise in cyber-attacks. For example, large language models (LLMs) can automate credit underwriting and help to reduce defaults.
Final thoughts
In the rapidly evolving private lending space, competition is intensifying and the key to thriving in this bustling marketplace lies in adopting a holistic approach that leverages technology, diversifies product offerings, enhances the customer experience, and remains agile in the face of regulatory changes.
James Keegan is a Senior Loan Originator at New Silver Lending.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.
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