Private lenders and investors are an option to explore if you’re looking for money to start or grow your business, but it’s not right for everyone. Consider the pros and cons, plus the other options you have, before making a decision.
How Does Private Lender Financing Work?
Private lender financing allows you to get a private loan through a variety of lenders. From online business loan firms, “fintech” companies, and more. Some private lenders may specialize in short-term loans, while others may know niche markets well, such as franchises. You’ll have to apply just like any other loan, but the requirements may be different. For example, you may only need a fair credit score, or you may not need collateral. It’s an option worth exploring before going to a bank.
Types of Private Lenders
Peer-to-Peer (P2P) Lenders
Peer-to-peer lenders are usually online firms that connect investors with businesses that are in need of funding. Online P2P services match lenders and borrowers and charge a fee for the service. Interest rates tend to be on the lower side, and approval is usually quick and easy, such as in a few days. There may still be origination fees and other fees, so make sure you read the fine print.
Merchant Advances For More Established Businesses
Merchant advances provide immediate access to capital in return for a percentage of future credit/debit card sales. Approval is rapid, but the fees are typically much higher than interest rates paid on loans.
Investors
Investor loans are somewhat similar to merchant advances in that some private lenders will provide funding in exchange for a percentage of future profits (for example the development of a new product or service that has high potential but needs funding to get to market).
Hard Money Lenders
Usually geared toward real estate businesses for “flipping” houses, hard money loans are usually provided by local businesses in your state. You may be able to find one online that will provide a short-term, high-value loan. They’re risky, though, as interest rates are usually higher, and the terms are short. The property is also used to collateralize the loan.
Pros and Cons of Private Lender Financing
Pros Explained
Typically tailored for businesses in niche industries: Private lenders tend to have more understanding of specific industries and market segments and can tailor their funding offerings accordingly. Application and funding can be quick, with fewer requirements: The application process is usually much quicker with private lenders. Your business may be approved for a private loan and you may be able to receive the funds in just a couple of days, rather than weeks or months. Your credit score may not have to be as high, nor may you need collateral or a large amount of money in your savings in order to apply.
Cons Explained
Usually higher interest rates: Private lenders usually charge higher interest rates of interest. Banks can loan money at lower rates because they have access to funds from federal institutions and depositors. Private lenders may not have the same backing.Terms may be short, making them riskier: Private lenders may be lending to fewer borrowers, or they may set their own terms, which can be short. such as less than one year. This makes them risky as you’ll have to pay the money back fast, and if you don’t there could be penalties.
5 Private Lenders To Help You Get Started
If you’re looking to explore private lenders, these are a few on the internet that you can research and learn more about. One private lender may not fit all, so ask friends, family, and colleagues if they have recommendations for private lenders in your area. A financial advisor may also be able to help.
Upstart is a peer-to-peer (P2P) lender that offers personal and business loans up to $200,000. Upstart is popular with startup businesses that don’t have an extensive credit history. Bluevine is a popular online business loan lender that provides funding primarily in the form of small business lines of credit. Funding Circle is an online P2P lender that can provide funding for more established businesses in as little as three days. CAN Capital offers term loans up to $250,000 for six to 24 months, as well as equipment financing. LendingClub provides business loans of up to $500,000. It also works with the SBA to provide loans, and offers commercial real estate and equipment financing.
