To start a private lending business, you form a liability-shielded entity, register it with the state and get an EIN, obtain any licenses your loan types require, build compliance around federal lending and fair-lending rules, set rates below your state’s usury cap, and prepare proper loan documents for every deal. Private lenders typically fund short-term bridge loans or real estate investment projects outside the traditional banking system, offering faster closings and more flexible terms in exchange for higher interest rates. Skipping any of these steps can leave your loans unenforceable or expose you to fines and lawsuits.
Pick a Business Entity First
Do not make a single loan under your own name. Without a formal entity, your home, savings, and personal accounts are exposed if a borrower sues or the business takes on debt it cannot pay.
A limited liability company is the most common choice. It creates a legal wall between you and the business, so a judgment against the company generally cannot reach your personal assets. An operating agreement sets out who manages the company, how profits are split, and what happens if a member leaves. Most states allow a single-member LLC, which works well for solo lenders.
A C-corporation is a separate legal entity owned by shareholders and run by a board, with more formal governance than an LLC. An S-corporation follows the same governance rules but caps ownership at 100 shareholders, requires U.S.-resident individual shareholders (not partnerships or other corporations), and allows only one class of stock.1Cornell Law Institute. S Corporation Either corporate form works for lending, but the added formalities push most small operations toward the LLC.
Register the Entity and Get an EIN
File formation documents with the Secretary of State where you plan to operate. For an LLC, this is usually called the Articles of Organization. You will list the company name, business address, and a registered agent authorized to accept legal notices and lawsuits on the company’s behalf.2Cornell Law School / Legal Information Institute. Agent for Service of Process
Check the state’s business name database before filing so your name is not already taken. Filing fees generally run from $35 to $500, and processing can take a single business day or several weeks depending on the state and whether you pay for expedited service. Save certified copies of the approval certificate; you will need them to open a business bank account.
Then apply for an Employer Identification Number from the IRS. The EIN functions as the tax ID for your business and is required for tax filings, hiring, and opening bank accounts. Apply online at irs.gov for immediate issuance, or submit Form SS-4 by fax or mail.3IRS. Employer Identification Number The application asks for the name and Social Security number or ITIN of the “responsible party,” meaning the individual who ultimately owns or controls the entity.4Internal Revenue Service. Instructions for Form SS-4 (Rev. December 2025)
Figure Out Which Licenses You Actually Need
Licensing depends almost entirely on what you plan to lend on. The line that matters is whether you are making consumer loans secured by owner-occupied homes, or business-purpose loans to investors on rental, flip, or commercial properties. Consumer residential loans carry far more regulatory weight.
Residential Consumer Loans
The federal Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act) requires mortgage loan originators, meaning the individuals who take applications and negotiate terms, to be licensed or registered through the Nationwide Multistate Licensing System.5Conference of State Bank Supervisors. NMLS At-a-Glance Qualifying for a license means completing at least 20 hours of approved pre-licensing education, passing a background check with FBI fingerprinting, and submitting personal history to the NMLS.6Consumer Financial Protection Bureau. 12 CFR Part 1008 (Regulation H) – 1008.105 Minimum Loan Originator License Requirements
States layer their own rules on top. Many separate lenders who use their own capital from brokers arranging loans funded by others, with different licenses for each. Check your state’s financial regulator before originating anything.
Business-Purpose and Commercial Loans
Loans to investors for rental properties, fix-and-flip projects, or commercial real estate face fewer federal disclosure obligations because the borrower is not a consumer buying a home to live in. Some states still require a finance lender license or similar credential even for business-purpose lending, so do not assume commercial loans are license-free without confirming your state’s rules.
When Federal Disclosure and Ability-to-Repay Rules Kick In
The Truth in Lending Act and its implementing Regulation Z require lenders to give borrowers standardized disclosures about interest rates, fees, and repayment terms.7eCFR. 12 CFR Part 1026 — Truth in Lending (Regulation Z) The rules only apply once you meet the definition of a “creditor.” Under Regulation Z, that means originating more than five mortgage loans secured by a dwelling, or more than 25 other consumer credit transactions, in the preceding calendar year.8eCFR. 12 CFR 1026.2 — Definitions and Rules of Construction Once you cross those thresholds, every consumer borrower gets the full disclosure package. Below the threshold, giving clear written disclosures is still smart practice.
For consumer loans secured by a home, the Dodd-Frank ability-to-repay rule adds another layer. Before closing, you must make a good-faith determination that the borrower can afford the payments, considering at minimum the borrower’s income or assets, monthly obligations, existing debts, employment status, credit history, and any simultaneous loans you know about.9eCFR. 12 CFR 1026.43 — Minimum Standards for Transactions Secured by a Dwelling The rule covers nearly all closed-end consumer loans secured by any dwelling, including second liens and vacation homes, not just primary residences. Home equity lines of credit and certain timeshare loans are exempt. A violation exposes you to borrower lawsuits and potential loan rescission.
Fair Lending Rules Apply to You
Two federal statutes prohibit discrimination and apply to private lenders the same way they apply to banks. The Fair Housing Act makes it unlawful to discriminate in any residential real estate loan (including the decision to lend, the interest rate, or other terms) based on race, color, religion, sex, disability, familial status, or national origin.10Office of the Law Revision Counsel. 42 US Code 3605 – Discrimination in Residential Real Estate-Related Transactions
The Equal Credit Opportunity Act reaches further, covering all types of credit. It prohibits discrimination based on race, color, religion, national origin, sex, marital status, age, or because income comes from a public assistance program.11Office of the Law Revision Counsel. 15 USC 1691 – Scope of Prohibition When you deny a loan or offer less favorable terms, you must send the applicant a written adverse action notice within 30 days stating the specific reasons and identifying the federal agency that oversees your compliance.12Consumer Financial Protection Bureau. Regulation B – 1002.9 Notifications The most reliable defense is written underwriting criteria applied the same way to every applicant.
Know Your State’s Usury Cap Before Setting Rates
Every state caps the interest a private lender can charge. General limits range from roughly 5% to 45%, with many states setting defaults near 10% to 12% for private contracts. Some states tie their cap to a floating index like the Federal Reserve discount rate, so the ceiling shifts over time.
The penalties are serious. Under federal law applicable to national banks, knowingly collecting usurious interest can result in forfeiture of all interest on the loan, and a borrower who paid the excess can sue to recover double the amount paid within two years.13Office of the Law Revision Counsel. 12 US Code 86 – Usurious Interest; Penalty for Taking; Limitations Some states go further and void the entire loan, not just the interest, if the rate exceeds the cap. Research the specific usury statute in every state where you plan to lend before you price a deal.
If You Raise Money From Investors, Securities Law Applies
Many private lending businesses fund loans with capital pooled from outside investors. Accepting that capital in exchange for a share of profits or a promised return generally means you are selling a security, and federal securities laws apply. The most common route for private lending funds is a Regulation D exemption, which lets you raise money without full SEC registration.
Two versions of that exemption cover most offerings:
- Rule 506(b) allows unlimited capital but no public advertising. You may accept up to 35 non-accredited investors if each has enough financial sophistication to evaluate the risks; the rest must be accredited.14eCFR. 17 CFR 230.506 — Exemption for Limited Offers and Sales Without Regard to Dollar Amount of Offering
- Rule 506(c) allows advertising and broad solicitation, but every purchaser must be accredited and you must take reasonable steps to verify their status.14eCFR. 17 CFR 230.506 — Exemption for Limited Offers and Sales Without Regard to Dollar Amount of Offering
An accredited investor is an individual with a net worth above $1 million (excluding their primary residence) or annual income above $200,000 ($300,000 with a spouse or partner) in each of the two most recent years, with a reasonable expectation of the same in the current year.15U.S. Securities and Exchange Commission. Accredited Investors Work with a securities attorney to prepare a private placement memorandum and subscription documents before accepting any funds.
Documents You Prepare for Every Loan
Each loan needs a clear paper trail that defines the debt, secures the collateral, and protects your right to collect. Three documents form the core of every transaction.
- The promissory note is the borrower’s written promise to repay, laying out principal, interest rate, payment schedule, late fees, and default terms.
- The security instrument (a mortgage or deed of trust, depending on the state) ties the debt to a specific property and gives you the right to foreclose if the borrower stops paying.
- The loan agreement is the broader contract that sets ongoing conditions, such as the borrower’s obligation to keep insurance in force, pay property taxes, and not take on additional liens without your consent.
Where federal disclosure rules apply, you also provide the standardized disclosure documents detailing APR, total cost of credit, and payment obligations. For business-purpose loans not covered by those rules, a clear written breakdown of all costs still reduces disputes and signals professionalism to repeat borrowers.
Title Insurance
Require the borrower to purchase a lender’s title insurance policy before you fund. The policy protects you if someone later challenges the property’s title through an undisclosed lien or ownership dispute. Coverage matches the loan amount and stays in effect until the mortgage is paid off.16Consumer Financial Protection Bureau. What Is Lenders Title Insurance? A clean title search comes first, but the policy is your backstop if the search misses something.
Recording the Security Instrument
After closing, record the mortgage or deed of trust with the county recorder where the property sits. Recording puts the public on notice that you hold a lien, protecting your priority if the borrower takes out additional loans or faces a judgment. An unrecorded lien can be wiped out by a later lender who records first, so file promptly.
Tax Reporting for Lending Income
Interest you earn is ordinary business income. If your lending qualifies as a trade or business, which it generally does when you are making loans regularly for profit, you report income on Schedule C of your personal return, or on the appropriate business return if you operate through a corporation. Lending falls under IRS business code 522200 for nondepository credit intermediation.17Internal Revenue Service. Instructions for Schedule C (Form 1040) Schedule C income is also subject to self-employment tax unless you elect corporate taxation for your entity.
You have a separate reporting duty on the interest your borrowers pay you. Receiving $600 or more in interest from a single borrower during the year in the course of your trade or business triggers a Form 1099-INT filing with the IRS. Below that threshold, a 1099-INT is still required if you receive at least $10 in interest or if you withheld any federal income tax under backup withholding rules.18Internal Revenue Service. Instructions for Forms 1099-INT and 1099-OID Furnish a copy to the borrower as well. Tracking every payment, its split between principal and interest, and the date received from the first loan onward keeps year-end reporting straightforward and gives you the records you need if the IRS asks.