What is Private Business Loans?
A private business loan is any type of business financing provided by a non-bank business lender. Unlike with an equity investor like angel investors and venture capital, a private business loan doesn’t require giving away a portion of your company’s equity in order to obtain financing.
Private business loans are almost always structured as a type of debt financing, that are structured as loans, lines of credit, factoring and sales of future business receivables.
Private Business Loans In South Africa?
What is the Purpose of Private Business Lending?
Private small business lending is meant to fill the gap left by traditional and conventional bank lending institutions. Oftentimes, conventional lenders have very strict lending criteria with little to no flexibility in their underwriting and structure of the business loan facility. Private lenders on the other hand aren’t constrained by many of the regulations and restrictions that FDIC-insured lending institutions have. With these looser regulations and fewer restrictions, private lenders are able to offer small businesses with creative types of business financing that can work for nearly any business that can prove their ability to repay the loan, and doesn’t pose too much risk to the lender or funding company.
Whether you have good credit or bad, private business loans can sometimes offer an advantage over their big-bank counterparts. Compared to traditional financial institutions, private lenders will consider much more than just your credit score and your credit history when it comes to qualifying you for their products. In fact, private lenders offer many of the same products that their corporate counterparts do. They also provide a variety of loan terms for small businesses.
When to Choose a Private Business Loan
If you run a small business, private lending options may be the right option for you. Private lenders offer up plenty of solutions to your everyday business needs. A private loan can help you cover a wide range of business needs, including:
- Purchasing inventory
- Upgrading equipment
- Managing your business cash flow
- Managing debt consolidation
- Obtaining funds for accounts payable
- Remodeling your retail location
- Opening another retail location
- Paying rent or other real estate payments
Whether you need a short term loan, a small merchant advance, or a large loan, there are private loans out there available for you. Here are a few examples of private loans that may be a good fit for your business.
Working Capital
Working capital differs slightly from merchant advances in that it considers all of your revenue and not just that which comes from credit cards. To qualify, you need to prove a relatively long history of consistent income from a variety of sources. Just like a merchant advance, you will repay the amount you borrow with a percentage of your daily sales. Good credit is not necessarily a requirement for these private loans, but a solid history of generating revenue is. The amount you can borrow varies based upon your business and the money it brings in.
Term Loans
Private lenders also offer up term loans, which are private loans that compete with loans from traditional banks. While a bank will pull your credit and use the information in the credit report to make its decision, a private lender will combine this information with data about your company, its revenue, and its time in business. All in all, private lenders are more concerned with your ability to repay the loan than your past credit history. Because of this, you can expect higher interest rates and fees than loans provided by banks.
Investor Loans
Sometimes, private lenders will agree to provide you with a lump sum of cash in exchange for stake in your company. For example, if you want to develop and manufacture a new product to add to your retail stores and you need money to do so, an investor may provide you with those funds in exchange for a percentage of the revenue that product generates – or a solid percentage of all of the revenue your company generates well into the future. This type of private loan can be quite risky, but it is especially helpful for startups who need funds to get their business ideas off the ground.
Everything You Need to Know about Private Business Loans:
Types of Private Business Loans:
A private business loan is a loan issued by a non-banking lender. The issuer can be anyone, including:
- A family member
- Friend
- Angel investor
- Venture capitalist
- Alternative lender
Private loans are often easier to qualify for than traditional loans but can also have less favorable terms, and in some cases higher interest rates.
There are several types of private financing available to small business owners, the most common of which include:
- Merchant cash advances
- Term loans
- Lines of credit
- Working capital loans
- Invoice financing
Typically, but not always, merchant cash advances and short-term loans are the most expensive options.
For example, a business that takes out a merchant cash advance can get access to funding almost immediately but typically pays back 20 to 40 percent more of the amount borrowed. They’re also the most accessible to small business owners.
On the other hand, private lines of credit and working capital loans often require you to submit collateral to secure the loan with your company’s assets, such as accounts receivable.
In many cases, it’s possible to borrow up to 90 percent of the value of your outstanding invoices. Of course, this type of loan requires you to have sales in the pipeline.
How to Qualify for a Private Business Loan:
Qualifying for a private business loan depends on the lender’s specific requirements, but it’s usually easier than applying for a traditional business loan.
Private lenders like angel investors and venture capitalists, for example, tend to understand specific segments of the market better than traditional lenders. They make decisions based on your business’s potential, not its financial history. Therefore, you’ll likely need to provide a solid business plan and viable market before they’ll approve your financing application.
In comparison, alternative lenders typically have more relaxed qualification standards and therefore their loans are easier to obtain.
Most alternative lenders require a minimum credit score of 500 to 650, and a few have no minimum credit score requirement.
Private lenders will look at these aspects of your business, including:
- Your credit score
- Your annual revenues
- Time in business
- Previous bankruptcies
- Industry
- Preferred use of funds
- Outstanding debt
Finally, if you’re borrowing from a family member or friend, a good-faith agreement may be enough to obtain funding. The IRS requires a formal contract, but the loan terms can be more favorable than working with other private lenders.
How to Obtain and Repay a Private Business Loan:
The private loan application process is typically much quicker to complete than applying for a traditional bank loan. This is because most alternative lenders require less documentation and minimal credit history. In many cases, you’ll be approved in a matter of days as opposed to weeks or months with a traditional loan.
Repayment plans for private business loans are outlined in the loan agreement. With a merchant cash advance, you’ll likely be required to remit a portion of your daily revenue until the loan is paid back. Private lines of credit or working capital loans may require accounts receivable financing, which means the lender is entitled to a portion of your outstanding sales. Term loans typically have more traditional repayment terms, requiring you to make payments on a weekly or monthly basis until the loan is paid in full.
Conclusion: Consider a Private Loan for Your Business
Although private loans are usually easier to obtain than traditional financing, their loan terms may not be the best fit for your business. That’s why it’s crucial to find a private business loan that has the right terms that fit your company’s unique financial needs.
If you’re confident that you can repay the loan amount quickly, private loans can be a great way to finance your business. You’ll have access to fast financing without the lengthy application process and stringent requirements of traditional lenders.
Before applying for any type of business financing, we suggest conducting thorough research so that you’re aware of your options. Although you may require immediate funding, you shouldn’t sign a contract until you’re comfortable with the loan offer.
Have you received a private loan for your small business? Tell us about your experience securing this type of financing in the comment section on this page.
What is a private loan for business?
A private business loan is an alternative loan that is issued by a non-banking lender, as opposed to a loan from a bank.
These loans can be from family members, friends, angel investors, venture capitalists, brick-and-mortar financial institutions or online lenders.