How to Secure Financing from Private Business Lenders
Private business lenders are organizations or individuals that originate and/or service loans for small businesses. Essentially, a private business lender is any entity that makes loans to businesses and isn't a bank or credit union.
As you conduct loan research, you'll quickly learn that the lender is as (or more) important than the loan itself. Even the same loan may look very different depending on the business financing lender.
Private business lenders are a case in point. You can get, for example, a construction loan from both a private lender or a bank. Yet the qualification criteria, loan amount, and repayment terms will be completely different for each lender.
Even just among private lenders, there's going to be variation in loan terms. Therefore, if you're considering a private business loan, it's important to know what you're getting into.
To that end, this post will review different types of private business lenders, how their loans work, who they're used for, and their advantages and disadvantages.
Types of Private Business Lenders
1. Online Lenders and Private Lending Companies
Most private business loans are originated by private lending companies. These lenders typically lend their own funds or connect borrowers and investors.
You may also hear these companies referred to as simply "online lenders." This is because many private lending companies tend to originate, process, and service their loans digitally.
Private business lenders may numerous types of loan products or they may specialize. In either case, they tend to provide loans that are easier to qualify for compared to a bank.
According to a Federal Reserve report, medium- and high-credit-risk applicants tend to have an easier time qualifying with online lenders than banks. Online lenders have approval rates of 76 percent versus 34 and 47 for large and small banks, respectively.
2. Individual Lenders
While they're not as common as private lending companies, individuals can also be private lenders. Generally, there are two types of individual lenders: private investors and family, friends, and acquaintances.
Obtaining a loan from individual lenders is less about your financials and more about your ability to get them to believe in you and your business. Also, because these lenders are individuals and not companies, they may be limited in terms of the loan amount and variety they can offer.
How Private Business Loans Work
Private business loans don't work any differently than a loan from a bank or credit union. The main difference isn't the structure but the terms and conditions attached to the loan.
As with any loan, with a private business loan, you'll apply, get approved (or not), receive funds, and pay back the loan based on an agreed-upon schedule. Repayment schedules will vary depending on the lender, and could come with daily, weekly, or monthly payments.
When you close on the loan, during the term, and at maturity, you may incur certain fees. Terms and conditions, including fees and interest rates, will vary from lender to lender.
What Kinds of Entrepreneurs Use Private Business Loans?
Any small business owner can apply for a private business loan. As mentioned earlier, private business lenders tend to have less stringent credit requirements. So a wider range of entrepreneurs can qualify for these loans.
At the same time, private business loans tend to have smaller loan amounts than a bank would offer. That means businesses who need a large loan amount may be less likely to consider a private business loan.
The Key Benefits of Working with a Private Business Lender
1. Less stringent qualification criteria
Since banks and credit unions use their customers' deposits, they're subject to stricter regulations than private lenders. These regulations make it so banks must require excellent credit scores, plenty of cash flow, and low debt-to-income ratios. So, as alluded to above, private business loans are far easier to qualify for than loans from banks or credit unions.
Of course, credit scores, cash flow, and debt-to-income ratios certainly still matter to private business lenders. It's just that these thresholds for these metrics are lower relative to bank or credit union lenders.
2. Flexible loan options
As mentioned earlier, some private business lenders offer a wide range of financing options. Others offer narrow, specialized offerings. In either case, this provides entrepreneurs with a wide range of flexible loan options. For entrepreneurs who want a long-term financing partner, flexible loan options are a major benefit.
Also, because private lending companies offer many options, it enables you to establish a long-term financing relationship. All that said, private business lending companies, not individuals, tend to be the ones to offer many options.
3. Quicker approval and processing
Application, processing, and funding times for bank and credit union loans tend to take a relatively long time. From application to funding, it's not uncommon for an entrepreneur to have to wait 90 days or more to receive funds.
However, online lenders can approve and fund a loan in as little as a few days to a month. For entrepreneurs seeking funding for an imminent project, quick processing makes private business loans very attractive.
Should You Apply for a Private Business Loan?
This type of small business loan is particularly well-suited for entrepreneurs that:
Can't qualify for a bank or credit union loan
Needs funding fast
Prefers a variety of funding options
Also, specialized private business lenders offer more purpose-built financing options such as startup financing, medical business loans, and bridge loans. If you meet the criteria above and/or prefer purpose-built financing, private business loans are worth considering.