Private Business Loans
If you’re a small business owner, you’re probably aware of the various options you have for financing for your company. Traditionally, business owners will approach a commercial lender to get a better understanding of the loans and credit facilities available to them. In recent years, there has arisen a substantial alternative to traditional lenders and commercial banks. Instead of approaching a large institution, you can now get private business loans from individuals or investors. Like any other loan, these loans are granted by people who are seeking return on their capital, and therefore have interest rates that are set by the lender.
Despite being a private exchange of capital, private business loans are regulated and must follow proper lending procedures within the United States. The only regulation that many private lenders don’t have to abide by is having a banking license – this being said, if they make too many loans in a specific region, they may have to apply for a banking license to continue operating.
One of the primary advantages of private money business loans is that they afford borrowers the opportunity to borrow even if they have a checkered credit history. Each individual private lender sets their own credibility standards and can lend to anyone they feel necessary.
This guide has been made to help small business owners get a better understanding of what private business lending is, and how it may be of use to their companies. It will provide comprehensive summaries of the internal concepts of private loans, as well as instructions on how to best approach the topic should you decide this is an appropriate option for your business.
Private Loan Sources
Pretty much anyone can provide another person with a private loan as long as they follow the set restrictions put in place by the government. A legal contract should be drafted to stipulate the exact conditions of the loan – this is important to ensure that both parties are legally bound by the conditions of the loan.
Most people access private loans through a website or company that acts as an intermediary. There are plenty of websites that offer users the ability to give one another peer-to-peer loans. There are even private lenders that require no credit checks or additional information to loan money, but these options obviously come with a substantial interest rate attached. These loan intermediaries effectively provide a place for private investors for small business loans to contact potential clients. These investors take on considerable risk by giving unsecured loans to businesses with poor or no credit histories – it is a very big gamble for those lending the money.
If you don’t want to use one of these companies, you could even approach someone you know or someone in your community to provide you with a loan. As long as the loan follows proper regulations, another individual can legally lend you money at their own terms should you manage to convince them you are a good borrower. Friends and family can provide you with private loans as well.
Private Business Loans with Bad Credit
Attaining a private business loan with bad credit is entirely possible. Many private business lenders have entered the market with the intention of receiving as high of a return on capital as possible. For this to be possible, they must lend to borrowers with lower credit scores and less than perfect credit histories. This is largely due to the fact that individuals with great credit ratings will be seeking lower interest rates that are traditionally supplied by commercial lenders.
This has allowed the private loan market to become one of the de facto hotspots for businesses with unfavorable credit histories. Plenty of business owners that want to avoid selling equity in their company, but know that they will be able to service higher levels of interest, head to private lenders and try and negotiate a price for finance.
Private business loans aren’t your only option as a borrower with bad credit, but they are certainly one of the most practical and regulated forms of finance available to those who cannot use commercial lenders.
Is a Private Loan Right for My Business?
After taking in a lot of the information provided in this guide, you’re probably trying to assess if a private loan is a good fit for your business. There is no set answer to this question – you should assess the various advantages and disadvantages associated with this form of finance to see if the benefits outweigh the costs.
As a rule of thumb, a private business loan is typically right for your business if you are clearly ineligible for traditional commercial loans. If you are eligible for a commercial loan, there tend not to be many advantages of getting a private loan for business as the interest rates are substantially higher. Aside from assessing if it is your only option, you should also assess if it is affordable to begin with. Many small business owners make the unfortunate mistake of signing any loan agreement they are offered due to desperation – this will most likely have dire consequences in the future when you’re unable to meet your obligations as a borrower.
Advantages of Private Loans for Small Businesses
There are a few distinct advantages of obtaining a private loan for small business. The top reasons that you should consider this form of funding are provided below:
- Easy Access – You don’t need to have an awesome credit score or established borrowing history. Using private loans is one of the best ways to ensure that you’ll be able to get the money you need to operate your business. There are even private lenders that don’t require credit checks or extensive documentation.
- Customizable – Private loans are offered by private investors so there isn’t a traditional mold that all of them follow extensively. Unlike commercial loans, private loans don’t have a set framework that they exist within. You can shop around thousands of private investors to find a situation that suits you best. In addition, you can offer up your own terms and see if a private investor is willing to take on your loan. You will never be able to do something similar to this in a commercial bank – bureaucracy is too high.
- Regulated – The private loan industry is well regulated despite its unique placement in the finance world. As long as you follow proper procedures, your lending contracts are enforceable and recognized by United States officials. You aren’t putting yourself at risk by taking on a personal loan.
Disadvantages of Private Loans for Small Business
Despite their many advantages, private loans also have a host of disadvantages that may make you want to consider a different type of finance for your business. A list of the top disadvantages of private loans is provided below:
- High Interest Rates – One of the biggest complaints about private business loans is the associated high interest rates. Because private investors for small business loans take on considerable risk, they input high interest rates to offset the chance that clients do not pay back their loans.
- Not as Good for Credit History – If you have a bad credit history and you’re currently trying to improve it, a private business loan will not do as much good for your score as a commercial loan would. That’s why it’s a good idea to look for commercial lending options if your primary focus is rebuilding your credit score.
Alternatives to Private Loans for Small Business
If you research various private loans and find that the interest rates are too high for you to afford, or the payment terms don’t match your business’s needs, there are still a few options that you can explore. As mentioned previously, most people who attain private loans have reasons that they cannot attain commercial loans – typically due to a poor credit history. If you want an alternative to private loans, you will most likely need to assess other bad credit finance options. Factoring and secured loans are the most common forms of bad credit financing that will be available to you as a business owner. We will explain a bit more about each of these types of funding below.
Factoring is a unique form of funding that is available to you no matter what your credit history is. Instead of attaining a loan, you can actually sell your company’s unfulfilled invoices in exchange for upfront capital. Factoring companies will often give you up to 90% of your invoices total in advance – in addition, they’ll only take around a 2-3% fee once they collect the invoice. Because factoring companies are more interested in your client’s credit rating than yours, it’s a perfect way to get some cash if you’re unable to due to past credit circumstances. In addition, because you’re not actually taking out a loan, factoring doesn’t end up as a liability on your balance sheet – you’re not taking on any additional debt which could harm your business’s credit score.
This may sound like an option that is only available to people who already have a company with an existing client base. And while many factoring users do have existing businesses, you can use this if you’re only just starting operations. For example, if you get a big order for a product but don’t have the capital to produce it – you can factor the invoice, that way you can fund the order with upfront capital. Factoring doesn’t work for every industry, you need to own a business that fulfills large invoices, not a sales or hospitality based business.
Secured loans are another option when it comes to borrowing money with bad credit. Secured loans are offered by many commercial lenders, but they come with their own disadvantages and risks. To obtain a secured loan you will have to have assets to sign over as collateral. This means you will need to have items with considerable value owned by your company. If you operate a business that doesn’t have any of such items, you won’t be able to get a secured loan. At times, you can sign over personal assets in order to secure a loan, but this also has considerable risk as you don’t want to put your family’s livelihood at risk if you don’t have to.
It is important to note that many traditional business loans are already secured. The difference between a traditional loan and the one we are discussing in this section is that you may have to secure this form of loan to the entire value of the loan. If you have a bad credit history, there is little chance that a lender will be willing to take a risk with you, meaning that you may have to offer collateral that is equal to the entire value of the loan. Speak to a lender about the various secured loan offers that they may be able to provide you with, they’ll have a good understanding of how secure the loan will have to be given your situation.
If you’re thinking of obtaining private investor loans for small business, you should make sure to do as much due diligence as possible. Private loans for business are regulated by U.S. officials, but it’s still important to make sure the loan you are obtaining is legitimate. Head online and read reviews of private lenders that are currently operating in the market – if you don’t know the lender that is providing you with capital, it’s best to use someone with an established presence. If not, go through an intermediary website that will be able to ensure that everything is what it should be.
Don’t get roped into your first loan offer, there are thousands of private investors for business loans. Private business loan lenders compete with one another – make sure to compare and contrast various offers. If you feel that you can’t get something at a low enough interest rate, consider looking for another form of finance.
In addition, it must be noted that you should always ask lenders for a full breakdown of costs. Make sure they include a total cost that includes charges and fees so you have a true understanding of what the loan will cost your business.
Anne is a Senior Author for SBL. She began her career as an independent consultant for local businesses after graduating with a BA in Management. Since that time, she’s expanded to writing as well as consulting to spread helpful knowledge to small business owners across the country.