Navigating Private Lending: Best Practices for Success

By Brian J. Bocketti, MacKenzie E. Hamill

May 29, 2024 | Articles

In times of economic uncertainty, lending is not exclusively within the realm of banks. Non-financial institutions, such as corporate entities, pension funds, insurance companies, and even high-net-worth individuals, play a significant role in the lending ecosystem. Their involvement brings unique considerations and best practices to the lending space. Understanding these practices is critical for future success, whether you are a borrower or a lender. 

1. Extensive Due Diligence Review 

Performing extensive due diligence before entering into any financing transaction is essential for the success of the lending relationship. Throughout this diligence process, lenders must assess the borrower’s financial health, creditworthiness, and ability to repay a potential loan. This diligence process allows lenders to comprehensively analyze the borrower’s financial statements, cash flow projections, and the quality of any collateral offered. In addition, understanding the borrower’s industry, market dynamics, and regulatory environment is crucial for making successful lending decisions. Oftentimes, it is the transactions that lenders reject following diligence that allow them to have an overall successful loan portfolio. 

2. Clear Loan Terms and Documentation through Transparency and Communication

Open communication between lenders and borrowers is critical throughout the lending process. Lenders should provide transparent information about their lending criteria, methods, and expectations. Similarly, borrowers should disclose relevant information about their financial condition, business operations, and any material changes that may impact their ability to repay the loan. Clear communication fosters trust and helps mitigate future misunderstandings or disputes. Through open communication and transparency, all parties to the loan facility will clearly understand the loan terms, including interest rates, repayment schedules, collateral requirements, and any covenants or conditions attached to the potential loan. In addition, each party should engage their respective attorneys to ensure the documents reflect the agreed-upon terms of the lending transaction.  The comprehensive loan documents that will be prepared and reviewed by their respective attorneys ensure that the rights and obligations of both parties are clearly outlined, which will reduce the risk of disputes in the future. 

3. Risk Management

Non-financial institutional lenders must have robust risk management frameworks in place. Effective methods for risk management include assessing and mitigating credit, market, operational, and legal risks associated with lending activities. Regular monitoring of loan portfolios, stress testing, and contingency planning are essential components of effective risk management. In addition, diversifying the loan portfolio is a fundamental risk management strategy. By spreading lending across different sectors, geographies, and types of borrowers, non-financial institutions can reduce their exposure to specific risks. However, diversification should be balanced by carefully assessing each opportunity to ensure alignment with the institution’s risk appetite and strategic objectives. 

4. Flexibility and Adaptability

Given today’s dynamic business environment, flexibility and adaptability are essential for non-financial institutional lenders’ success. Economic conditions, regulatory requirements, and market trends can change rapidly, which will impact a borrower’s ability to meet their obligations. In this current climate, lenders should be prepared to alter loan terms, renegotiate agreements, or provide further support to help borrowers navigate these testing times and preserve the value of their loan portfolio.   It is this type of flexibility that has made private lending an attractive alternative to the traditional processes employed by commercial banks. 

5. Compliance and Regulatory Oversight

Like traditional lenders, non-financial institutional lenders must adhere to applicable regulatory requirements and industry standards. Compliance with laws governing lending practices, license requirements, interest rates, consumer protection, anti-money laundering, and privacy is a non-negotiable obligation of non-financial institutional lenders. Establishing vigorous compliance policies, conducting regular audits, and staying informed of regulatory developments and updates are essential for avoiding legal pitfalls and maintaining the institution’s reputation and success. 

In conclusion, private lending offers both lenders and borrowers significant opportunities. Thorough due diligence, clear documentation, robust risk management, flexibility, and compliance are critical pillars of effective lending operations in today’s economic environment. Following these best practices, non-financial institutions can build resilient lending portfolios, foster trust with borrowers, and contribute to sustainable economic growth. 

For questions pertaining to private lending, please contact one of our qualified attorneys on the Banking & Financial Transactions Team, Brian J. Bocketti ( or MacKenzie E. Hamill ( 
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