Can Private Lenders Provide Financing for My Startup?

Can Private Lenders Provide Financing for My Startup?
The Siliconreview
26 May, 2020

Most governments have encouraged lending for upcoming businesses to support them in their establishment. Even so, it’s still a struggle for startups to access these loans. Most financiers like banks tend to be hesitant in providing support to such new businesses, which is understandable. They fear because lending to new entrepreneurs may be risky as opposed to already established ones whose financial records can be easily traced. The good news is that startups can quickly obtain finances from other sources like private lenders. This blog discusses the financing of new ventures by private lenders.

Private Lenders to Finance Your Business 

Getting a private loan is considered the ideal solution to your financial problems if banks cannot assist. Most people will prefer private lenders like A1 Credit to equity financing since they won’t have to share their business control with anyone. Venture financing from investors is a significant source of capital for your startup only that you have to accept them to have a say in how to run your business. If you don’t wish so, then face it off with the best option- private lending.

Fortunately, there is an increase in the need for new businesses to receive working capital from the private sector, which has resulted in several lending firms starting. You can get help from these lenders based on your needs, like short-term loans. They majorly deal in debt financing, meaning that you have to pay back, so you need to be vigilant before you ask for such loans. There’s no point in acquiring a loan if you don’t have a proper plan on how to use the money and of refunding.

The Loans Offered by Private Lenders 

If you need a quick startup loan, then consider these types of private loans:

  • Investor loans- these loans are provided in exchange for an agreed percentage of profits made in the future. If you plan to invest in something promising and marketable but need high funding, consider getting this type of loan.
  • SBA loans- these loans (Small Business Administration) are assured by the government and provided by both private lenders and banks. They are long-term, have high lending limits, and low-interest rates. They are a perfect choice for your startup.
  • P2P loans- these are peer to peer loans with low- interest rates and easily attainable. They are provided by investors and accessed via online P2P services. The platform allows borrowers to interact with lenders and get loans with fast approval.
  • Merchant advances- are meant for established entrepreneurs and are provided to you in exchange for an agreed proportion of future credit card sales. The fees charged are higher than those for loans though the approval is fast.
  • Term loans- they are offered to established businesses that are capable of paying from returns. They have higher rates than bank loans.
  • Credit lines- they are like business credit cards and involve borrowing up to your credit limit. They are incredibly flexible but with relatively high-interest rates.

The Cost of Private Startup Loan 

Just like any other startup financier, private lenders will charge various fees and rates for loans.

  • Upfront costs- these are the application fees imposed on your loan when you borrow. They are added to the loan amount and are part of the total money to repay.
  • One-off costs- are costs linked to managing a loan like amendment fees, repayment fees, or any others.
  • Ongoing costs- these are daily, monthly, or yearly fees paid to service your loan. They may also include line fees, transaction costs, and debit fees.

What to Know Before Deciding on Private Lending?

Yes, private lenders will give you the loan you need that might have been impossible with the banks. However, as a startup, you should consider some points before seeking financing. Ask yourself; why does your business need the loan, how will it be repaid, and is obtaining the loan the appropriate choice for your business? Responding suitably to those questions will help you know the next step- whether or not to approach the private lender of your choice.

Finally, private lenders aren’t charity organizations; thus, a new entrepreneur won’t just get a loan because it’s needed. There are specific eligibility requirements you must meet, depending on your lender. Usually, these include:

  • Excellent business plans. It is what will speak for your business as you won’t be having any track record to prove your worthiness for a loan.
  • High credit score. Most lenders require a score of 680 or more.
  • No latest bankruptcies or delinquencies. You shouldn’t have problems with late debt payment or bankrupt in the months leading to your loan request.

If you happen to be eligible, then you can proceed with the loan application. Always try and compare various lenders to check their terms of service. After that, request for application instructions and documents for your lender and proceed as required. Most private lending occurs via an online platform though you can still get help from customer care desks.

Pros and Cons of Private Loans 

Pros: Any business can obtain them and even startups, the approval process is faster than bank loans, and there are various types of these loans a business can obtain

Cons: The main drawback of these loans is the high fees and interest rates that are charged. The bank loans have lower rates since banks can quickly get funds from government institutions and the central bank. Private loans have highly charged rates as the lenders receive funds from banks or investors, thus having to contain the high cost of financial support.

The Bottom Line

There’s no need to worry about how to finance your startup anymore. The private lenders got your back. They will support you financially and ensure that your business excels. so do not hesitate to apply for a loan. If you do your part well, you will likely obtain the funds you need to get you started. Feel free to review this blog for an in-depth understanding of private lending for startups.