Private Business Loans : What You Should Know Before Applying

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What to Know About Private Business Loans

Private Business Loans are loans made directly between two parties with little or no bank involvement. They are often used as short term financing for small businesses looking to purchase equipment, expand operations, or fund new projects.

In recent years, private business loans have become increasingly popular among entrepreneurs seeking funding for various projects. However, many people aren’t aware of how these loans work, what lenders look for, and how to get approved. This makes it difficult for them to find the right lender and ensure they qualify for the loan.

This post will help you understand the basics of private business loans, including what lenders look for, how to apply, and what happens after approval. It also includes tips on choosing the right lender for your needs.

When your company is short on cash, the best thing you can do is to investigate all the available small business loan choices. Traditional sources of finance, including bank loans and grants, should be considered first, but private company loans are also an option.

Financial institutions are notoriously wary of lending money to small firms unless they receive suitable security – the small business loan acceptance rate is less than 25%.

Private business loans come in various types, such as small business loans, merchant cash advances, and equipment leasing. These loans finance inventory purchases, working capital requirements, fixed assets, startup costs, growth opportunities, and expansion. These loans primarily reflect your cash flow and ability to repay.

There are several ways to obtain private business loans, including bank loans, asset-based lending programs, venture capitalists, and equity funding rounds. Each type of loan requires a different set of criteria and documentation. For example, banks typically prefer companies with strong financial statements, while VC firms look for high-growth potential and strong management teams.

What’s a Private Business Loan?

Private business loans are different from traditional bank or personal loans, and they are usually easier to qualify for because you don’t need collateral. A private business loan is financing offered by a financial institution other than a traditional lender like a bank, credit union, or another business lender.

The term “private” refers to banks or other financial institutions not offering these types of loans. Private lenders frequently charge higher interest rates than traditional bank loan programs, but they can offer flexible repayment options and lower credit requirements. The advantage of using a private business loan instead of a bank loan is that it usually has fewer restrictions and requirements.

For example, some banks won’t lend to start-up businesses because they don’t want to deal with the risk of losing their capital if the company goes bankrupt. In addition, banks may charge higher interest rates on private loans than on regular business loans. However, private loans have a reputation for being more flexible than bank loans when it comes to terms and conditions.

What Is a Private Money Lender?

A private lender is an entity that lends money to individuals or businesses not affiliated with a bank or credit union and is, therefore, not subject to regulation. A private lender can fund many loans, including personal, business, auto, home equity lines of credit (HELOCs), commercial real estate, and more.

States may regulate private lenders, but they do not have the same protections as banks and credit unions. Private lenders also cannot provide deposit insurance for their customers’ funds.

What’s the Purpose of Private Business Lending?

The purpose of the private business lender is to provide small business financing for small businesses. The bank will loan money to a borrower and then charge interest on that loan. The loan amount depends on the borrower’s creditworthiness and the collateral the borrower offered as security for the loan.

There are multiple reasons why business owners choose to borrow money from private lenders rather than banks. Some borrowers prefer to work directly with a private lender because they feel more comfortable dealing with someone who knows them personally or is more knowledgeable about the challenges of running a small business. Others prefer to avoid going through a bank to get a loan. Still, others may be unable to obtain a bank loan due to poor credit history or lack of collateral.

Regardless of your reason for borrowing, you should always ensure that you understand the amount of interest or fees on any loans you take out and the repayment terms.

If you do not understand these things, it can lead to problems. For example, if you’re paying too much interest, you could owe significantly more than the borrowed amount, which means you’ll have less overall money to pay off your debt.

How Do I Find a Good Private Loan Company?

Finding a suitable private lender isn’t difficult. You only must know where to look. Start by asking friends or business associates for recommendations. Ask local bankers and attorneys for referrals, as well.

Then, check online directories such as Yelp and Google. Finally, ask around at your local Chamber of Commerce or Small Business Association.

Plenty of online resources allow you to search for private lenders based on location, industry, and other criteria. Many of these websites also include reviews of each lender so you can find out which ones are most reputable.

If you decide to use a private lender, keep in mind that risks are involved. Make sure that you fully understand all the terms of the loan before signing anything. Contact them to set up a phone meeting if you find a private lender that is a good fit. You’ll learn more about their lending practices and policies during this initial meeting, and you’ll also be able to see whether they seem trustworthy and honest.

You might want to consider using a private lender if:

1. Credit scores are low
2. You don’t make the cut for a traditional bank loan
3. You need a large sum of cash quickly
4. You have bad credit (business credit included)
5. You plan to invest some of the proceeds from the loan
6. You want to avoid going through a bank
7. You want to borrow money without giving up ownership
8. Types of Private Money Lenders

The first type is known as a ‘direct lender,’ while the second is called an ‘indirect lender.’

Direct Lenders

A direct lender will lend money directly to you or your business. They may offer you a higher rate than a bank, but they can usually provide the loan in less time. Synonymous with the term direct lenders are “hard money lenders” because they don’t use credit checks on their applicants.

Instead, they rely on brokers who refer them to the business or use a soft credit pull and preliminary underwriting with borrowers who come direct. Otherwise, they offer private funding on tangible assets and use it as collateral.

You should always check out any company offering loans before applying for one. As a small business owner, you want to ensure that it has a good reputation and will make it easy to repay the loan and potentially reborrow down the road.

Because of the more informal or streamlined application process, lenders sometimes have shorter approval times than banks or credit unions. In addition, private lenders may be more ready to engage with persons with poor credit. A credit score at the “poor credit” level is standard for online private or an alternative lender, as your credit score isn’t all that important.

Indirect Lenders

An indirect lender is a financial institution that lends money to borrowers who are not its customers. The term “indirect” means that the borrower does not directly maintain a checking or savings account with the lender but instead with another bank.

Indirect lenders include banks and credit unions, which lend funds to their customers through third-party intermediaries such as brokers, mortgage companies, etc.

Private Lenders and How They Work

A private business loan is just like a bank or credit union loan. For example, you can use the money to buy inventory, advertise, consolidate debt, or meet next week’s payroll. You pay back the money lent to you with interest or fixed rate fees.

All lenders will put your application through underwriting. While no two lenders are alike in their process, here are many items they will consider, and you should understand.

If you’re contemplating taking out a loan for your business, here are 38 things you should know about them before you do.

Interest Rates. Interest rates vary depending on the type of loan and the term of the loan. Generally, interest rates are higher for longer terms or higher-risk loans. 

Loan Terms. Loan terms vary based on the type of loan. Some loans offer flexible repayment terms like weekly or monthly installments, and others provide fixed daily payments based on your daily sales.

Repayment Options. It’s important to understand that loan terms can vary. Most loans have standard repayment periods ranging from 6 months to 18 months, and you can also find longer terms from 5 to 10 years, depending on the lender and type of loan.

Fees. Fees associated with a loan can range anywhere from 1% to 5% (points). There can be additional fees charged for processing and underwriting the loan application.

Closing Costs. Closing costs refer to the expenses incurred at closing. They can include legal fees, title insurance, appraisal fees, and more (primarily for commercial real estate).

Down Payments. You will need a down payment for most real estate loans. Depending on the type of loan, down payments can range from 10% to 20% of the total cost of the loan.

Payback Periods. The amount of time it takes to repay a loan is entirely contingent on the loan. Short-term loans generally have shorter payback periods than long-term loans.

Prepayment Privileges. Prepayments with a discount are allowed on loans. Speak to your lender for terms and conditions.

Lender Qualifications. A lender will want to ensure you meet its qualifications before approving you for a loan. The lender may ask questions about your credit history, business, and personal assets, revenue, profit and loss, etc.

Credit Score Requirements. The credit score minimum needed to qualify for a particular loan varies with the loan type and term. For example, short-term loans only require a minimum credit score of 500 – 620, while others may require a score of 700 or higher. 

Gross Revenue Verification. Verification refers to verifying your current financial situation. A lender must know if you’re in good standing with the state, your monthly/annual revenue, etc.

Time in Business. Time in business is how long you have been in business, and it dates from when you started your business bank account (and not when you formed your company). 

Bankruptcy

Bankruptcy is another negative mark on your credit report. If you file bankruptcy, it stays on your credit report for seven years. Lenders would like to know if and when the BK is discharged. If discharged, is it at least one-year post bankruptcy?

Collection Accounts. Collection accounts refer to debts that creditors have already written off. These types of debts won’t appear on your credit report but could affect your ability to get approved for other kinds of loans. 

Late Payment Charges. Late payment charges are when you fail to make timely payments on your debt obligations. Late payment charges can range anywhere from $25 to $100 per late payment. Lenders want to know that you are current on all your debts.

Defaulted Debts. Defaulted debts are those that haven’t been paid back in full. When you default on a loan, it remains on your credit report for seven years. Lenders may decline a loan based on how recently you have been in default.

Collections. Collections are debts that go to a collection agency. Collections don’t stay on your credit report for very long but negatively impact your credit score.

Public Records. Public records are court documents available to anyone who wants to see them. Examples of public records include judgments, liens, bankruptcies, foreclosures, tax liens, etc.

Tax Liens. Tax liens are government claims against unpaid taxes. Credit reports will show tax liens for an entire decade. Many lenders will allow for tax liens under $200,000 if you have a written payback agreement. Tax liens under $50,000 are sometimes allowed without a payback plan.

Judgments. Judgments are legal orders from the court demanding payment to you and tend to remain on your credit record until they are satisfied. Many lenders will allow for Judgments under $200,000 if you have a written payback agreement, and judgments under $50,000 are sometimes allowed without a payback plan.

Foreclosure. Foreclosure is the process of selling property at auction to recover money owed on a mortgage. After foreclosure, the house sells, and the proceeds pay off the remaining balance on the mortgage. A foreclosure will devastate your credit and make potential lenders wary of lending to you.

Bad Debt. Bad debt is an amount of money written off because it was uncollectible, which means you couldn’t be found after multiple attempts to collect the debt. Lenders will not lend to business owners who have not paid a previous business loan in full. Many lenders subscribe to a negative database that tracks borrowers who do not repay their loans. These same lenders will also report bad-paying customers. 

Charge Offs. Charge-offs occur when a creditor writes off debt as being uncollectable. You might hear this as “charge-offs” instead of “bad debt.” 

Delinquent Bills. Delinquent bills are overdue payments on bills. To avoid getting charged interest on outstanding bills, you should try to pay these bills before they become delinquent. 

Identity Theft. Identity theft is when someone else uses your personal and private information (without your knowledge or consent) to commit fraud or other crimes.

Fraudulent Activity. Fraudulent activity refers to activities like identity theft, charge-offs, collections, bad debt, late payments, etc., that aren’t yours. The FTC reports that fraud increased more than 70% from 2020 to 2021, and they anticipate it to rise in 2022. However, fraud also includes tampering with or providing false bank statements, checks, and corporate records. 

Negative Information. Negative information is any type of information that appears on your credit report that isn’t accurate. For example, if you apply for a loan and check your credit report, the lender may find negative items. 

Positive Information. Positive information is any item on your credit reports that helps improve your credit score. For example, if a company checks your credit history, they will see positive information such as a new account, a recent increase in limit, etc. 

Credit Score. Your credit score quantifies how likely you are to pay back loans. The higher your credit score, the better.

FICO Score. Most banks and credit unions use a credit scoring model the Fair Isaac Corporation created to determine if a potential borrower is creditworthy.

Equifax. Equifax is one of the three leading credit reporting agencies. Its stated goal on its website is to shield customers from deceptive credit tactics.

Experian. Experian is another of the three main credit bureaus. Their website states that they help businesses make informed decisions about consumer credit.

TransUnion. TransUnion is the third of the three central credit agencies. Their website says they provide data to companies so they can offer products and services to consumers.

Annual Percentage Rate (APR). An APR is the annualized percentage rate of a loan, and it shows what the monthly payment would be over the life of the loan.

Loan Type. A loan type is a specific kind of loan. For example, a car loan is a different type of loan than a home equity line of credit.

Interest Rates. Interest rates are the fees you pay for borrowing money depending on the loan type.

Factor Rate. A factor rate is a technique for representing business finance interest rates in decimal form. Specific short-term funding options, like merchant cash advances or short-term loans, are more likely than others to represent the cost of funding with factor rates.

Lender. Lenders are financial institutions or individuals who give out loans. Many lenders include banks, credit unions, online business lending companies, etc.

The Following are the Different Types of Lenders:

Banks

Banks are financial institutions that provide various services like checking accounts, savings accounts, mortgages, car loans, home equity lines of credit (HELOC), student loans, business credit card, etc. They also offer investment banking, treasury management, asset management, etc.

Credit Unions

Credit unions are like banks in many ways, but they are not-for-profit and have lower fees.

Merchant Cash Advance Companies

If you need a fast way to get financing, you may want to consider a merchant cash advance. MCAs are short term cash advances provided by merchants to small businesses. These advances are typically unsecured, and you repay within 6 – 18 months. The business cash advance allows companies to draw funds from their checking accounts within 24 hours. The amount borrowed reflects your daily sales and the value of the goods sold, so merchants don’t need to worry about providing collateral.

The repayment fluctuates with your sales, and you pay more when you make more and, conversely, less when you make less. It’s an excellent financing option if you need a working capital loan.

Small Business Administration (SBA) Loans

The SBA offers several types of loans specifically designed for small businesses.

The Small Business Administration offers many types of loans, which includes 7(a), 504, and SBIC loans. An SBA7(a) loan is one of the most common types of private business loans because it provides low-interest rates and flexible repayment terms. However, there are some downsides to applying for an SBA loan.

1. First, you must apply for the loan through the SBA, which takes longer than other options.
2. Second, you cannot use the money to buy or refinance existing debt.
3. Third, you cannot take out another SBA loan without waiting six months.
4. Fourth, the SBA does not provide uncollateralized loans, meaning that you will have to put up personal guarantees and property as collateral if you want to borrow more than $150,000.
5. Finally, the maximum term is 10 years (maybe not a real downside).

Equipment Leasing Company

Equipment leasing is another option for obtaining quick financing. Equipment leasing involves borrowing against the value of the equipment being leased. You pay back the total cost of the equipment over time, plus a monthly fee. An equipment leasing program allows a business owner to lease equipment from a finance company instead of buying it outright.

Commercial Real Estate Lenders

These loans help businesses purchase commercial properties.

Invoice Factoring

Factoring programs allow businesses to sell their accounts receivable to a factor and receive a percentage of the value upfront. Factors then collect money from the company and distribute the remaining funds minus their fees to their clients once the company pays the invoice.

Venture Capital

Venture capitalists invest in start up companies. They are looking for promising ideas that could potentially grow into big businesses.

Angel Investors

Angel investors invest their own money in other people’s start-ups. They will provide a startup loan because they believe in the company’s success.

They are business experts and may offer guidance on various issues, including marketing, product development, staffing, etc.

If you want to raise capital from angel investors, you need to ensure that you get them excited about your idea. Having a solid business plan and writing an amazing pitch deck for your company are essential.

Private Equity Funds

Private investors pool their resources; these are private equity funds. These companies can be public or privately owned and may be involved in any industry, from manufacturing to retailing.

The primary benefit to the investor is the possibility of profit distribution in the event of business success. The disadvantage is that investors don’t get their money back with interest if the company goes bust.

Hedge Funds

Hedge funds are groups of private individuals who pool their money together and then invest it. They can make big bets on the stock market or look for more speculative investments, such as buying a company outright.

Private Equity Investors

Private equity investors buy shares of private companies that allow them to influence how they operate and run. They can also invest in the management team, which is an excellent way to ensure they get what they pay for in the company.

Private, Alternative, or Online Lenders – WhaT’S GOOD FOR ME?

In terms of private lending, private lending firms are like banks. They are in it to make money off the interest you pay them. Online or alternative lenders are private lenders who only do business online to help companies obtain business loans. Moreover, they don’t have any branches, and their loan officers work from home.

The most noticeable distinction between a bank and an online lender is that the latter requires you to submit your loan application via the web, while the former requires you to visit a branch physically.

You’ll also be required to provide basic information like an application (usually one page) and at least three months of business bank statements. When you speak with a potential lender, ensure you know how much money you need and the purpose of borrowing the funds. Be prepared to supply any other financial documents or information so that they can evaluate your situation.

Private Business Loans: Pros and Cons

Two types of loans are available when financing your business: unsecured secured and. A secured loan needs collateral (like real estate, inventory, or receivables), while an unsecured loan does not. From the lender’s perspective, the advantage of a secured loan is that if you default on payments, the lender can take possession of the collateral.

However, don’t overlook the downsides of this form of borrowing. You may not qualify for a secured loan if you have a low credit score or no collateral to put up as security.

In contrast, the lender has no legal claim on your property in the case of a default on an unsecured loan. However, the lender may place a UCC lien on your business, or you sign a personal guarantee.

Types of Private Business Loans

Secured vs. Unsecured

There are two main types of private business loans: secured and unsecured. Secured loans require collateral from the company to be used to secure the loan. Unsecured loans don’t have collateral, so the lender has no guarantee of payment.

Business owners can use both types of loans to finance their businesses. However, they should be aware of the differences between them before making a decision.

Secured Loans

When you take out a secured loan for your company, you pledge an asset (equipment, inventory, real estate, automobiles, etc.) as security for the loan. The lender will take possession of this item if you fail to repay the loan. You won’t qualify for a secured loan if you don’t have any of these items.

Unsecured Loans

On the other hand, an unsecured loan does not need the borrower to put up any security in exchange for the money. If you default on an unsecured loan, the lender may repossess any assets owned by the company.

Small businesses typically use these loans looking to get started, or they don’t have collateral or assets (or decide against using them if they do). Most business owners use these loans to grow or expand their business.

What is the Cost of Getting a Loan?

Getting a loan is not free, and it costs money. Many factors determine what the cost of getting a loan will be. Some of those factors include:

• How much you need
• Your credit score
• What kind of business financing do you want (e.g., business term loan, business line of credit, merchant cash advance, equipment financing, accounts receivable or inventory financing, etc.)
• Where do you plan to get the loan from
• Whether you need a personal guarantee
• Any fees associated with the loan

The more information you give them when applying for a loan, the better they can match you with the right loan type, and the lender is a good match for you.

How Much Can I Borrow from a Private Lender?

The maximum amount you can borrow from a loan reflects the type of loan you apply for and your gross annual sales. Some online lenders will loan a few thousand dollars to $5M to fifty million. The interest rates are also different, so comparing loans is essential before choosing one.

What Are the Benefits of Getting A Loan?

Getting approved for a loan means starting to use the funds immediately. You also avoid having to wait to receive the cash. Many lenders can fund your loan either the same day or within 24 – 48 hours.

You can use the money to fund new projects, expand your existing business, buy inventory or meet payroll. Once you’ve found a lender that you think would be a good fit, you’ll want to compare their rates and terms to those offered by traditional banks or competitors. Remember, private lenders aren’t required to provide the lowest rates or best terms; they can charge whatever rate they want and need whatever terms they want.

Speed, ease, lack of paperwork, and efficiency are just a few reasons to go with a private lending company.

Once you’ve found a lender that you think would be a good match, you’ll need to complete some paperwork. The first thing you’ll need to do is complete a short application form, and this form includes essential information about yourself and your company.

If approved, you’ll want to sign an agreement. Your contract should delineate all the details of the loan, including the type of loan, the loan amount, the length of time you plan to repay the loan, and the interest rate. It should also specify when payments are due.

When’s The Best Time to Apply for a Loan?

Many factors can affect how much you will pay in interest and fees on any loan. If you’re still not sure if you should apply for a new loan or not, though, you can use these broad principles as a starting point.

First, it’s essential to consider your current financial situation. If you have an existing loan, do you need more money? Are you able to make extra payments toward the second loan?

Next, you need to consider whether you want a loan from a bank, credit union, or internet lender if you’re planning to apply for a business loan.

Banks tend to charge higher interest rates than credit unions, but they also offer other benefits. For example, banks often require collateral (like your house) when you apply for a loan, while credit unions don’t. Online lenders charge more than the other two; however, they can approve and fund you on the same day.

A more significant loan request may require information about your financial situation, current debts, and ability to repay the loan. You may need to discuss the type of loan(s) you want to apply for and the terms under which you’d like to borrow.

Before you can get approval, you will likely have to fill out some paperwork. The lender usually requires proof of revenue and assets (for secured loans) and information about your current financial situation. They’ll also want to see copies of your tax returns for loans over $100,000.

Should I Use a Private Lender?

It’s important to remember that using a private lender does not guarantee that you’ll receive favorable financing terms. Most private lenders charge higher rates.

Once you’ve found a private lender that you think would be a good match for your needs, you’ll need to complete some paperwork. The first thing you’ll want to do is complete a short application form and provide bank statements. Please allow 24 hours for a response after submitting this form.

The lender will schedule a call to review the terms and conditions if everything looks good. They will schedule a bank verification call if you agree and sign the agreement.

This call ensures that you are who you say you are, that your bank account is in good standing, and that you have not recently taken funding from another source.

When choosing a private lender, try to find one with experience working with small businesses. They should be willing to help you grow your business and advise you on ways to improve your finances.

Who Are Private Business Loans For?

Private business loans are often easier to obtain than bank loans.

The main reason why private business loans are so popular is that they allow you to get the capital you need quickly without having to wait weeks or months for a bank to approve your loan.

If you need a fast way to get the funds, a private business loan might be just what your company needs to keep growing.

How Do I Find a Private Loan Company?

Finding a private business loan can be difficult if you don’t know where to look. Fortunately, plenty of companies specialize in providing these types of loans.

If you’re interested in finding a private business loan, you’ll need to start by researching different options. Several websites offer free information on how to choose a private lender.

For example, you could visit the Small Business Administration website at sba.gov/loans/small-business-loan-guidelines.

There are other resources available online that can help you narrow down your search.

One resource is the National Association of Commercial Finance Brokers (NACFB). Their site offers a list of private lenders specializing in small business loans.

Another option is to contact local chambers of commerce. These organizations typically maintain lists of reputable private lenders in their area.

Conclusion

In conclusion, if you’re looking for a private business loan, you should first determine why you need one. Are you trying to expand your business? Do you need money to buy equipment? Or perhaps you’re starting a new venture and want to invest in marketing.

Once you have a clear idea of what you need, you can begin shopping for the right lender. Remember, lenders will look at many factors when deciding which loans to approve.

They may consider your credit score, your personal financial situation, and even your previous track record with other lenders. But ultimately, they’ll decide based on their criteria.

About Sunwise Capital

To solve a significant challenge faced by small businesses, we began in 2010 by providing business loans instead of personal loans.

At Sunwise Capital, our loan specialists know the ins and outs of various forms of financing. We are all aware of the challenges faced by small business owners—especially access to capital.

Processing business loans is a race; the winner is typically the business that reaches the customer first. Our underwriting team has the resources to assist the business owner who contacts us in need of loans and operating capital. We can grant a loan in a matter of minutes and provide choices for same-day funding in hours.

As a direct private lender, we want to work with you to establish a stable financial base for your company so you may increase your personal and family wealth. We can approve your application in minutes and fund it in hours the next business day.

We employ a distinctive strategy highly predictive of actual risk and give our customers higher approval rates and a wide selection of personalized financing options with favorable terms. Call 888.456.9223 or Apply Now.