Private lending or bank loan?

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person signing paperwork

When your small business is ready for a loan, you know you have options. One question you may need to answer is whether you are seeking a loan from a bank or from a private entity? Both have pluses and minuses, and the specific nature of your situation may dictate which type of loan is best for you. Here is a brief analysis of the differences between private and bank loans.

Private loans are really a form of investment. This is capital that comes from individuals or companies that are not part of the formal and regulated banking system. This type of lender usually employs a more unorthodox set of qualifying criteria and the terms and/or rate are usually more expensive than what a bank would charge. 

Certainly, private lending can be a resource for borrowers who are unable to qualify for bank lending. That is not, however, the only reason that a small business might turn to a private loan. These include situations where extensive repairs or renovations are needed to fix and flip. There is also the possibility of a more preferable loan-to-value ratio compared to a traditional bank. 

Bank loans provide a more structured lending environment. There are definitive rates and terms for repayment. Credit scores become the primary factor in qualifying for a bank loan. Banks are increasingly using an automated underwriting system which makes the final decision regarding loan qualification.

Private loans can be expected to fund faster and approval traditionally requires fewer pieces of documentation. Also, there is a wider range of collateral that can be used. Unfortunately, a more unknown entity with less of a known track record (regardless of credit score) may find it harder to take advantage of private lending. 

Bank loans have the advantage of being less expensive. This is because banks, unlike private lenders, are able to leverage funds on deposit. The savings is then passed on to the borrow in the form of a better interest rate. Sometimes this interest is even tax deductible

There are definitely pluses and minuses each way. The real question is what is best for your small business? Knowing what’s available will help you make the right choice. 

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