Private Lending is an alternative to traditional assets like stocks and bonds, and also offers higher interest rates than FDIC insured savings accounts.

Private lending is a way to get funding from an individual or organization that is not a traditional financial institution, like a bank or credit union. Private lenders can be individuals, private lending companies, or crowdfunding platforms.

Private lenders can be more flexible than traditional lenders in the types of loans they offer and the qualifications they require. However, they usually charge higher interest rates because they take on more risk.

Private lending can be used for a variety of purposes, including:

Investors can use private lending to buy commercial property, undeveloped land, or close a project quickly. Some investors prefer private lending (through their Solo 401k) rather than real estate ownership, which can require a high amount of asset management.

Cash-poor businesses can use private lending to cover cash shortfalls or take advantage of time-sensitive opportunities. Business owners can also use private lending to start a new company without meeting the strict pre-sale requirements of traditional lenders.

Businesses might also want to borrow money privately to:

Private lenders typically require an asset as security for the loan. For example, if the borrower defaults on a real estate loan, the lender can foreclose on the property to satisfy the loan.

Borrowers may need to provide a lot of documentation, including tax information and proof of income.

Interest rates on private money loans tend to be higher than loans from licensed lenders. From 15% to 20% is typical. Terms on private money loans are often short, just six to 12 months, but may also be payable over up to five years. They generally require a down payment and often are secured by the property. The lender typically requires a written plan describing how the money will be spent.

Work with your attorney to the loan (note) to the borrower and set forth the loan term, repayment options, and interest on the loan. Your 401k trust is listed as the lender (not you personally, and not your business).

The risk of default is a significant factor when determining the rate of interest.

A secure note will have a lower rate of interest. That’s because if the borrower defaults, the Solo 401k can take legal possession of the collateral. Then, you can sell it to recover the outstanding debt. The only remedy for an unsecured note that defaults is for the Solo 401k to pursue legal action against the borrower (sue).

Unsecured loans command a higher rate of interest than secured loans.

Depending on the loan terms, the borrower may make monthly or quarterly payments or repay the loan in a lump sum. Have all loan repayments sent to your 401k bank or brokerage account.

Do not receive any dividends or payouts to your personal or business bank account. All investment income must go right to the Solo 401k.

Solo 401k profits are tax-deferred (or tax-free with a Roth Solo 401k).

Don’t lend funds to a disqualified person in Solo 401k private lending deal

Disqualified people cannot benefit from the activities resulting from the loan. The Solo 401k should never write a private note to:

The people mentioned above are all disqualified from the Solo 401k. Your Solo 401k cannot transact with them.

Disclaimer: Investing inherently involves risk. Nabers Group and its affiliates, subsidiaries, or partners are not investment advisors, and we do not offer investment advice. Always complete your due diligence before executing any investment and check with your CPA, legal counsel, or tax advisor before executing investments using retirement funds.