I Have Been Offered Expensive Private Money
An expensive offer from a private lender is information. The only question that matters is what it is information about: the transaction, or the file that was used to present it.
Private money is neither a lesser product nor a scandal. Family offices and specialist credit institutions fund transactions that banks cannot fund, and they do it on timescales banks cannot match. They charge for both, and sometimes that charge is the cheapest thing on the table, because the alternative is losing the asset. Sometimes it is a verdict. The borrower who signs without reading the verdict pays twice: once in the cost of the money, and again in never finding out why he was quoted it.
What the price is actually buying
Speed is the first item on the invoice, and it is genuine. A lender able to commit within days is carrying the cost of deciding with less information than a bank would require, using experienced people instead of a scoring model, and holding capital available so that it can move when a transaction demands it. That capacity is expensive to maintain and it is used only occasionally, so it is priced into every transaction that uses it.
The second thing being bought is willingness. An asset producing no income yet. A borrower with no local credit history. A corporate structure a standard process cannot classify. A jurisdiction the institution’s model does not cover. A position in the capital stack behind somebody else. None of these is necessarily a bad risk and some are very good ones, but each requires an underwriter who will read it rather than score it, and underwriting by hand is a small industry with a high cost base.
Certainty of execution is the third, and it is undervalued until it fails. A lender funding from its own balance sheet, whose credit decision has already been taken, is selling something a cheaper conditional offer simply does not contain. In a transaction with a deadline attached to real money, the distance between probably and certainly is the whole value of the financing, and it is not unreasonable that it costs something.
What the price is not, in a functioning market, is arbitrary. A private lender prices the risk it can see and the work it will have to do. That is precisely why an unexpectedly high price deserves a second look rather than an immediate negotiation, because the number is telling the borrower what the lender can see. If the transaction is not urgent, the asset is not unusual and the structure is not exotic, the price is being charged for something else.
When the speed is worth paying for
The cost of expensive money is never usefully compared with the cost of a mortgage. It is compared with the alternative available on the same calendar, which is often not financing at all. A deposit and an exclusivity period at risk. A seller who will take the next buyer on Monday. A judicial or insolvency timetable that moves for nobody. Measured against losing the transaction, a high price for a short period can be the least expensive decision available, and the arithmetic that says so should be written down rather than merely felt.
The condition that makes it work is an exit that exists. Expensive money is capital for a phase: a signed sale that settles later, a refinancing once the asset produces income, a disposal already in process. The exit needs a date, a source and a fallback if it slips. Expensive money repaid by an event that is contracted is a timing instrument. Expensive money repaid by an event that is expected is the slowest and most costly way there is to lose an asset.
Duration is the other discipline, and it is where most of the damage is done. A high price over a short period is a manageable cost that buys a defined outcome. The same price left running because the exit was optimistic compounds into something that changes the result of the whole transaction. Before signing, the borrower should know exactly what the money costs over the intended period, over that period extended by a delay he considers realistic, and over the worst delay he can imagine, and he should be willing to live with the third figure.
There is also a category in which the price is simply the market for what is being asked. Land without permits. A half-built asset with inherited technical risk. A borrower whose income and assets sit in three jurisdictions and whose file is impeccable and still does not fit any domestic bank’s process. In those cases the specialist price is not a penalty. It is the cost of finding an underwriter capable of the analysis, and a well prepared file earns the specialist’s price rather than the distressed one.
When the price is a verdict on the file
Now the uncomfortable reading. If the transaction has no deadline that costs anything, the asset is conventional, the structure is ordinary, and the only offer on the table is expensive private money, then the price is describing the file rather than the risk. Lenders price uncertainty, and a file that fails to answer the obvious questions manufactures uncertainty out of nothing. The borrower experiences this as the market’s opinion of his transaction. It is the market’s opinion of his presentation of it.
The symptoms are consistent. An ownership chain that has never been drawn down to the beneficial owners. Numbers that exist in three formats and reconcile in none. No sources and uses, so the lender cannot see where the money goes or where the borrower’s own capital sits. Internal balances with no documentation behind them. An exit described in one sentence and evidenced by nothing. Any competent lender meeting that file either declines or prices for what it cannot verify, and the second of those is not generosity.
There is a worse version, and it is common. The transaction has already been sent to a long list of institutions, by the borrower or by an intermediary paid on completion, in whatever condition it happened to be in. Credit officers talk to each other less than borrowers fear and remember more than borrowers hope, and a transaction that has been declined around the market arrives at the next desk with a history attached. At that point the expensive offer is not pricing the asset at all. It is pricing a deal everyone else has already refused, and repairing that takes longer than preparing it properly would have taken.
The test is direct and it costs nothing. Ask the lender what it is pricing. A lender pricing genuine risk will say so specifically, and will usually name the feature: the absence of income, the jurisdiction, the position behind a senior loan, the deadline, the construction risk. A lender pricing a file will be vaguer, because the honest answer is that it cannot tell what it is looking at. The first answer is a market price. The second is an invoice for disorganisation, and unlike a market price it is refundable, in the sense that the file can be fixed.
Reading the offer before reading the number
In expensive money the terms decide the outcome more than the price does, and the first of them is duration. What the term is, whether it can be extended, at whose option, and at what cost. An instrument that ends before the exit can realistically occur, with an extension in the lender’s gift, hands that lender the whole negotiation on the one day the borrower has no alternatives left.
The cost of the money is rarely only the cost of the money. Arrangement fees payable at signature, exit fees payable on repayment, legal and valuation costs, and the treatment of interest that accrues rather than being paid along the way. Rolled up interest is a real accommodation and a real risk at the same time, because it grows quietly and arrives in full at the precise moment the transaction is already late. The figure worth comparing is the total sum repayable on the intended date, and the total sum repayable on the delayed one.
Then the security, which in private lending is frequently broader than the transaction requires. What is charged, what is pledged, which guarantees are asked for and whether they are capped and released on repayment. A short, expensive facility that encumbers assets the borrower will need for his next transaction carries a cost that appears nowhere in the pricing, and a guarantee given for a bridge outlives the bridge if the release was never written down.
Finally, the machinery of a bad day. What constitutes default, whether there is a cure period, what the lender may do and how quickly it may do it, and what the documents say about enforcement. It is worth knowing who the counterparty actually is, whether it lends from its own capital or intends to assemble the money after signature, and how it has behaved when other transactions ran late. A lender whose business model is the asset is a very different counterparty from one whose business model is being repaid, and the documents do not always distinguish between them.
The three honest options
There are three answers to an expensive offer and only three. Take it, because the speed is genuinely worth the price and the exit is documented. Fix the file and return to the market, because the price was a verdict rather than a quotation. Or do the smaller transaction, or none at all, because the deal only works at a cost of capital it cannot really carry. The answer that is not on the list is to sign and hope the exit arrives punctually.
The second option is less slow than it sounds. Consolidating the numbers to one date, drawing the ownership chain, documenting the internal balances, writing sources and uses and evidencing the exit is work measured in weeks rather than quarters, and much of it can run alongside the deadline that made the expensive offer attractive in the first place. The question worth asking early is whether the urgency is real or whether it has been supplied by the only lender who agreed to look.
In one file a foreign investor had been refused by a bank for reasons that had nothing to do with the quality of the asset or his capacity to repay: he had no local credit history and his corporate structure did not fit the bank’s standard process. The real reason was identified, the financial presentation was rebuilt, and the transaction was taken to a lender specialised in real estate assets and international borrowers, where it was financed without disproportionate personal guarantees and without dismantling the structure. Changing lender solved a credit criteria problem, not a solvency problem.
That distinction is the one to hold on to. A specialist lender charging what its risk costs is not the same counterparty as a lender charging what a disorganised file costs, and on the day the term sheet arrives the two look identical from the outside. What separates them is not the number on the page. It is whether anybody can state, in one sentence, what the price is for. A borrower who can answer that question is buying speed, and buying it deliberately. A borrower who cannot is paying for silence.
Montclare does not act as a lender. It structures transactions, prepares the file and coordinates financing with authorised institutions.