Private Money Lending: An Alternative When Banks Say No?
As a business owner, you know that having access to capital is essential to taking advantage of growth opportunities. Two of the most common financing options for businesses seeking capital are private money loans and traditional bank loans. Not sure which is best suited to your needs? Here are the key differences between these two financing options.
What is a Private Money Loan?
A private money loan, sometimes referred to as a hard money loan, is any loan that is not offered by a bank or similar financial institution. With these loans, private investors are providing the loan funds rather than large financial institutions.
The terms vary significantly from one private lender to another — with far more options than conventional bank loans — thus offering business owners in various industries a wider range of borrowing options. For instance, a car dealer may opt for a lender that specializes in inventory-backed financing, whereas a farmer may choose to do business with one that deals exclusively in agricultural-zoned land financing.
However, one standard characteristic that all private money lenders share is that their qualifying guidelines are considerably less strict than those for traditional bank loans. As such, hard money loans are often used by borrowers who lack the qualifications to be approved for a traditional business loan from a bank.
Although banks that offer business loans are ubiquitous, finding a private money lender typically requires the prospective borrower to look a little harder. Usually, a prospective borrower needs to do some networking in order to find private money borrowing opportunities. That being said, it’s sometimes possible to find a private money lender by consulting with a mortgage broker or a directory service online.
The Pros and Cons of Private Money Loans
The biggest advantage to taking out a private money loan is that it makes financing possible for companies that wouldn’t otherwise be approved for a bank loan. However, this isn’t the only advantage of private money loans.
Borrowers enjoy the flexibility that private money loans offer. For example, some lenders will provide more opportunities to create a repayment schedule that makes adjustments for periods when the company is likely to experience a lull in business.
On the flipside, one potential disadvantage of private money loans is that they typically cost borrowers a lot more in interest payments. Because they’re riskier loans, lenders need them to be more profitable than traditional bank loans.
Bank loans for businesses tend to be available only to fairly well-established companies: a company will typically need to have been in business for serveral years and built up a strong credit score in order to be eligible.
Banks will go through a thorough process to evaluate each applicant for a business loan. Not only will the company’s credit be checked, but the personal credit score of anyone who has an ownership interest in the company may be checked as well. The bank will also want to see documents detailing the profits that the company is bringing in.
The terms of bank loans for businesses tend to be fairly standard from one bank to another. Once they are granted to a company, they will impact that company’s credit score.
Traditional Bank Loans vs. Private Money Loans
One big advantage of pursuing a bank loan is that it’s far easier to find a bank and apply for a loan than it is to track down a reliable private lender offering acceptable terms. Plus, borrowers have a better idea of what to expect when working with an established bank over a private lender.
Another advantage of a conventional bank loan is that it helps to build credit when the interest payments are consistently paid on schedule. While many private money lenders don’t report to credit bureaus, banks always do. Of course, there’s always the possibility that the loan will harm the borrower’s credit if too many late payments are made.
Probably the biggest disadvantage of conventional bank loans is that they’re inaccessible to many small businesses, and that the best options are only available to lenders with higher credit scores. Often, it’s only well-established companies that get approved for them.
Which Type of Loan Is Right for Your Company?
If you need a loan for your business and have been turned down by a bank, you can always look into your options with private money lenders. Private money loans are an excellent way for smaller and less established companies to get the capital they need to grow. Sometimes, even more established companies opt for private money loans to enjoy the greater flexibility they offer.