You have a fabulous business idea, or you are operating an amazing business and looking to expand, and need a loan to help kickstart your plan and give your business the boost it needs.
How do you go about this and what’s involved?
Here’s everything you need to know about setting up a private business loan.
Finding The Right Funding
It’s no secret that in order to succeed, a business needs a certain amount of funds behind it to get off the ground. While financial institutions and banks are the well-known avenues for securing a loan, funding can come from many different sources.
Funding that comes from a non-bank lending source is referred to as ‘private funding’.
What is Private Funding?
A private business loan is receiving money from a non-bank source to finance your business. Often these types of loans are seen as short-term solutions, when other more traditional types of funding may not be available to you. The lending criteria also isn’t nearly as strict as with banks, making it easier to take out the loan in the first place.
For this reason, they come with higher interest rates than the banks but could be just what you need to get your business up and running, pay for that equipment you need, and more. Often, businesses take out a private loan for that cash injection they need, and once the business is off and running, they approach the bank for a loan and use this to pay off their private loan. This then offers them a lower interest rate with the bank once they have their footing.
Types of Private Funding
There are many benefits to taking out a private business loan. It is much easier to obtain one than it is to get a loan from a bank or financial institution. There is also a lot less documentation to fill out, and you have access to the funds very quickly.
Here are three different types of private funders you can choose from:
These firms invest money in start-ups, often in exchange for equity in the company. They often work as mentors to these companies as well, giving them access to development opportunities to help them get off the ground.
Once again, these private investors work with start-up companies in exchange for equity in the company. The main difference is that Angel investors are smaller and provide different value. The deal will be structured in a different way.
Alternative lenders such as ALC Commercial offer short-term, high-interest loans, to help businesses that need a quick cash injection to get themselves off the ground. They often have the most flexibility in terms of the deal offered, and rarely require any equity.
Benefits of Private Funding
One of the benefits of private funding is that it often comes with involvement from the investor. If you get a loan from the bank, they offer financing without any other assistance. A private lender on the other hand often offers guidance and advice to help your business succeed.
Other benefits include:
- You can often receive more funding than if you went through a bank.
- Banks traditionally work under debt capital, where you take a debt plus interest, in exchange for the capital. Most private lenders offer equity capital where you forfeit partial ownership of your business in exchange for the funds.
- Private loans offer much shorter approval times.
- It is much easier to get approved for a private loan.
Steps for Securing a Private Business Loan
As long as you have a solid business idea, it shouldn’t be too hard to get a private loan. However, in order to secure a private business loan, you need to ensure you put your best foot forward and sell the idea behind your business or your plans to grow your business from where it is:
- Develop a well-thought-out and in-depth business plan that details both your long-term and short-term goals.
- Note your expected revenue, as well as any expected expenses.
- Estimate how long it will take you to pay back the loan.
Whether you are looking for a loan for equipment for your business, to help your business upscale, or to get your business off the ground, before you look into a private loan, it’s important that you work through these three steps and ensure everything is well planned and documented.
Consider what type of private loan is right for you and your business and whether your end goal is to grow enough to take out a bank loan (to pay off the private loan) and secure yourself a lower interest rate.
If this is your end goal, ensure you have a plan to get you and your business there and what needs to be done.
When NOT To Take A Private Business Loan
If you have the means to get a loan from the bank or a similar financial institution, then this is often the best scenario for your business. The interest rate will be lower than a private loan, giving you better terms on which to pay the loan off. Of course, this isn’t always an option, which is why private loans make a great alternative.