Private lending can be a powerful and profitable strategy—if you do it right. But if your loan documents are weak, vague, or missing key protections, you’re putting your capital at risk.
Whether you’re lending to fund a fix-and-flip or a long-term BRRRR deal, the strength of your paper determines your protection. Here are five critical clauses that every private lender should have in their loan documents to safeguard the deal, their dollars, and their peace of mind.
1. Default Clause with Defined Triggers
Don’t assume everyone knows what “default” means. Spell it out. A strong default clause clearly defines what constitutes a borrower default—missed payments, unauthorized use of funds, failure to maintain insurance, violation of city code, or not completing a project within a given timeframe. The clause should also outline what happens next: Does interest increase? Do you take possession? Can you foreclose or file a judgment immediately? Your rights must be clearly stated and enforceable.
2. Right to Cure and Notice Requirements
In some cases, borrowers may make a mistake that doesn’t justify immediate legal action. A “right to cure” clause allows borrowers a defined period (e.g., 10–15 days) to fix the issue before more serious remedies are enforced. This clause protects your time and reputation by showing good faith—but it must also limit your exposure. Include notice requirements for delivery (email, certified mail, etc.) and clarify that time is of the essence.
3. Personal Guarantee Clause
You’re not just lending to an LLC—you’re lending to a human behind the LLC. That’s why a personal guarantee clause is critical. If the borrower defaults, you want the ability to pursue the individual’s assets, not just the company’s. Make sure the clause is signed and notarized by the guarantor and that they fully understand the implications. If the deal goes sideways, this clause can be the difference between recovery and loss.
4. Use of Funds Clause
If you’re lending for a specific purpose—like acquisition and rehab—your contract should limit how those funds can be used. This clause prevents the borrower from using your capital for unrelated expenses like paying off other debts or taking cash out. If you’re doing construction draws, require receipts or inspections before each disbursement. A clear “use of funds” clause keeps the project on track and your money accountable.
5. Exit Strategy and Prepayment Penalty Clause
Lenders often assume the borrower will exit with a refinance or sale, but when? What happens if they pay off early? You need to know their plan and protect your yield. An exit strategy clause outlines the borrower’s expected timeline and method for repaying the loan. A prepayment penalty clause ensures you’re compensated if they pay off early—especially if your interest is front-loaded. For example, if you were expecting 12 months of interest and they repay in 3, you could miss out on expected earnings without this clause.
Bonus: Attorney Fees and Jurisdiction Clause
Always include a clause stating that the losing party in any legal dispute is responsible for attorney’s fees. Also, define the state and county where legal action must be taken—ideally where you live or do business. This avoids surprise court filings in other states and protects your time and resources.
Conclusion
Private lending can be a high-trust, high-return business—but only if it’s protected by the right paper. Don’t rely on handshake deals or vague templates. Partner with a real estate attorney, review your loan documents regularly, and make sure these clauses are airtight.
Your money deserves more than hope—it deserves legal protection.
If you’re lending regularly or planning to start, join a community that helps you do it wisely. Attend Deal Maker Gary, connect with experienced lenders, and get access to sample docs, templates, and the legal education you need to lend like a pro.
