What About Private Lenders?
Another Source of Small Business Financing
As most small business owners can tell you, even with a great business idea backed by a solid business plan it can be very difficult to obtain bank financing. Financial institutions are notoriously reluctant to provide debt financing to small businesses unless adequate collateral is available - statistically, the small business loan approval rate is less than 25%. Fortunately many of these businesses are ultimately able to obtain small business financing from private lenders.
Private Lenders Can Also Provide Financing
Venture capitalists and angel investors may provide equity financing, however, many business owners do not wish to relinquish equity or deal with investors who want to have a say in how the business is run, making a private loan a viable alternative for those unable to secure financing from a bank.
The demand for private business lending has led to an explosion in the online business loan marketplace - there are dozens of "fintech" online lending firms to choose from, depending on your requirements. For example, some specialize in short-term loans, others in niche markets such as franchises, etc.
Types of Private Loans
SBA loans are bank or private loans guaranteed by the government via the SBA. The high amounts, low interest rates and long terms make them ideal for businesses.
Lines of Credit
Lines of credit are a form of private loan similar to a business credit card. Lines of credit are highly flexible - you may borrow up to your credit limit and pay the balance at any time. Interest rates are relatively high unless you qualify as a prime borrower.
Peer to Peer (P2P) Loans
Peer to peer loans are made by investors to businesses that are in need of funding. Online P2P services match lenders and borrowers and charge a fee for the service. Interest rates are low and approval is quick and easy.
Merchant Advances (For 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.
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).
Like financial institutions, private lenders also offer term loans to established businesses that can demonstrate the ability to make the payments from revenue. Rates and fees are higher than loans from banks.
The Advantages of Private Loans
Banks offer generic term loans based on credit history, whereas private lenders tend to have more understanding of specific industries and market segments and can tailor their funding offerings accordingly.
The application process is also much quicker with private lenders - a business approved for a private loan can receive the funds in days rather than weeks or months as with a bank loan.
The Disadvantages of Private Loans
The main disadvantage of private loans is the higher rates of interest. Banks can loan money at lower rates because they have access to funds from federal institutions and depositors.
Private lenders get money from banks or investors and consequently need to charge higher rates to accommodate the higher cost of funding.
Top Private Lending Institutions
· SmartBiz offers Small Business Administration (SBA) backed term loans - one of the best ways to finance a small business.
· Upstart is a P2P site that offers personal and business loans up to $50,000. 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 for unpaid invoices (invoice financing) and short-term lines of credit to small businesses.
· Funding Circle is an online P2P lender that can provide funding up to $500,000 for established businesses in as little as 10 days.
· CAN Capital offers both merchant cash advances and term loans (up to $250,000 for 6-18 months) to existing businesses. Funds can be available in a few business days.
· Lending Club is a P2P lender that provides business loans of up to $300,000 in 1-5 year terms for businesses that have been operating for at least 12 months and have at least $50,000 in annual sales.
· ForwardLine offers short (up to 18 months) and medium (up to 5 year) term loans for amounts up to $500,000 to established businesses with annual sales of $100,000 or more.
· Internex Capital provides short-term revolving lines of credit to small and mid-sized businesses. Approval is based on account receivables and funds can be available in as little as 3 business days.
· Fundbox is an online lender that offers financing based on the value of unpaid invoices. To approve funding, they require access to your accounting software or bank account. Funds can be available in one business day in amounts up to $100,000.