When it comes to finding the right loan for your small business, understanding the different kinds of loans and what they bring to the table is key. Loans from private individuals and groups and those that are issued by banks are generally what small business owners are looking for.
Both private loans and bank loans have attractive benefits. However, these loans also have their share of downsides to keep in mind. Researching both types of loans is instrumental in picking the one most suitable for your particular small business needs.
Private loans are capital that private investors or lenders/companies lend out for investments. These lenders typically follow unorthodox qualifying rules and issue loans with more expensive terms because of the above-average risk they’re prepared to take on.
These loans are often awarded to entrepreneurs and small business owners who don’t qualify for standard bank loans. There are many reasons why small business owners might seek out private lending instead of a traditional bank loan. The PMLG provides a list of reasons why these loans are sought after, including:
- A need to make extensive repairs on a property to renovate it or “fix-and-flip.”
- The desire to find better loan-to-value rates than what banks normally grant.
- Require money for projects that are difficult for banks to fund, such as land or construction projects located in areas with higher-than-average default rates.
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Bank loans are capital issued and lent to businesses and individuals by banks or third parties to finance medium- to long-term business projects or assignments. With these loans, the bank sets a fixed period over which the loan must be repaid, along with the interest rate and amount of the repayments. All banks have access to federal funds, which has been at a relatively low rate of 2.5% since December 19th, 2018.
While private lenders consider credit scores as a factor for issuing loans, banks use credit scores as the primary factor for making the decision to approve a loan or not.
Banks also require loan borrowers to have good credit with documented sources of income. More often than not nowadays, banks use automated underwriting software to make the final decision to approve or reject a loan application.
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Private Lenders: Pros and Cons
The following are the benefits and hazards of choosing private loans to finance small business projects, as stated by the PMLG:
Bank Loans: Pros and Cons
So, in the end, which type of loan is the best option for a small business owner? Ultimately, it depends on your credit score, borrower criteria, and funding timeline.
If your small business is in a tight bind for funding, you have a low credit score and you only need the funding temporarily, taking a private loan might be your best bet.