Why 12% Private Capital May Be Cheaper Than It Looks
Private capital at 12% interest is often misunderstood as expensive, but Gelt Financial argues that the real cost of capital includes factors like speed, lost opportunities, and equity surrendered, making it cheaper than many alternatives.
When a borrower sees a 12% interest rate on private capital and compares it to a bank's 6%, the choice seems obvious. But according to Gelt Financial, a national private lender with nearly four decades in the market, that comparison misses the true cost of capital. Most borrowers who walk away from private funding because of the rate end up paying more in ways they didn't account for, says H. Jack Miller, founder of Gelt Financial.
Miller calls it the "Tony Soprano perception" — the idea that private capital is a last resort for desperate borrowers. "The reality is the exact opposite," he says. "Our borrowers are so grateful to us. We're coming through in four or five days when everyone else said no or told them to wait two months." Miller points to Elon Musk as an example: the world's wealthiest person doesn't borrow at 6%; he raises capital through private equity and venture funding, which often costs more than 12% when factoring in the equity stake surrendered.
The real alternative to private capital is often more expensive. Miller describes a common scenario where a borrower brings in a family member for funding in exchange for half the profit. "That's what people think of as the acceptable option," he says. "But when you do the economics, giving up 50% of your profits is far more expensive than borrowing the money at 12%. And you have to deal with that person at every dinner table for the rest of your life." The mistake, he argues, is treating the interest rate as the total cost of capital without factoring in what the deal actually returns or what is given up to access cheaper money.
Gelt Financial's experience through the 2008 financial crisis underscores the importance of discipline. After hundreds of defaults, Miller says they analyzed every loss and found that all losses came from exceptions to their underwriting standards. "When we stayed disciplined, we didn't lose a penny. Every single loss came from exceptions," he notes. This sets Gelt apart from newer private lenders that have never operated through a significant downturn.
The shift toward private capital is structural. Banks have become more restrictive, with stricter regulations and longer approval timelines. Private capital has grown more sophisticated and accessible. "Sophisticated operators understand that if the deal works at the cost of capital, the cost of capital is not the problem," Miller says. For time-sensitive deals, bridge transactions, and borrowers who don't fit the bank template, private capital is increasingly the first call. Gelt's track record across hundreds of closed deals reflects that logic in practice.