What About a Private Lender?
Another Source of Small Business Financing
It happens everyday. Well-prepared entrepreneurs are walking into the banks with brilliant business ideas backed by well developed business plans — and are walking out empty-handed. Financial institutions are notoriously reluctant to provide debt financing to small businesses unless adequate collateral is available. Fortunately many of these professionals are ultimately able to obtain small business financing from private lenders, such as Tom McKenzie, through business capital brokers.
Private Lenders Are an Alternative Worth Pursuing
For individuals who do not want to give up a certain percentage ownership in the business as is often required by venture capitalists and deal with angel investors who may demand a board position or significant day-to-day control, the private lender may be a small business financing alternative worth considering.
On the whole, when it comes to small business financing, private lenders are looking for the same information and will conduct a similar due diligence as the banks to make a positive funding decision. They are looking for great business ideas, at the right time, with an airtight business plan, that includes contingency scenarios and realistic forecasts, backed by experienced and professional people with some financial stake in the business.
Private Lenders Understand Particular Market Segments
However, most private lenders are “specialists” who engage in higher risk ventures because they clearly understand both the opportunity and risk associated with selected business types or market segments.
Private lenders will not only fund projects the banks reject, they will creatively structure loan repayment and sometimes be a helpful resource.
For example, Mr. McKenzie has a background in the automotive market; accordingly, he has funded projects such as automobile dealerships, transportation and trucking businesses and manufacturing for the automobile sector.
While he does not have a professional background in medicine, he has also developed an interest in providing capital to medical practices because of the doctor shortage and because doctors on the whole are responsible debtors. Additionally, businesses like wineries are attractive because they are high asset based and offer more security. He will also provide funding in emergency and rescue situations.
How Do Private Lenders Decide to Fund a Particular Business?
When asked how he makes the decision to fund a project, Mr. McKenzie laughed and said, “You do the best due diligence you can and then it’s just like gambling at a slot machine. You put your money in and take the risk and hope for the best, knowing that statistically some of the businesses will do well and others will fail. You learn the most from failures.” After twenty years of investing in both winners and losers, he has developed an evaluation methodology to help him select the businesses with the highest probability to be profitable and succeed long-term.
Businesses Can Use Capital Brokers to Find Private Lenders
Given the relatively low profile of most private lenders, Mr. McKenzie says that a significant number of the best projects come to his attention via business capital brokers.
“Brokers screen the projects, giving me a wider selection of projects that match my specific parameters”. Capital brokers develop relationships with hundreds or thousands of lenders and investors, so the key is to sell the broker on your business plan and get him or her sufficiently excited about your project to recommend it to the right lenders or investors.
A good capital broker can submit your loan application to their extensive network of lenders and hopefully get you the best financing rates. However, it is important to do your homework when selecting a capital broker - make sure you thoroughly check their references, privacy policies, etc. and find out in advance what the total cost of the loan will be (inclusive of any additional charges or fees the broker may add to the agreement).