Many small business owners often need financing assistance to get started or to get out of a financial problem that comes up along the way. However, it is very difficult for banks, credit unions or traditional lenders to agree to provide financing to small businesses.
With this in mind, private lenders are an interesting option to explore in order to jump start a business, ensure the continuation of business operations or even prepare for the future.
What is private lender financing?
Private lender financing for small businesses is any loan that is neither made by a traditional financial institution, such as a bank or credit union, nor backed by the government through the Small Business Administration (SBA).
How does private lender financing work?
Financing through private lenders can be obtained through different types of lenders. For example, through companies that offer online loans, fintech companies, mortgage companies, individuals, etc.
This type of loan is applied for like any other but the requirements may vary. In some cases it will only be enough to present an acceptable credit score or in others you will not need collateral.
Types of small business loan
A traditional small business loan is typically used to cover working capital expenses, equipment purchases, or even to purchase real estate. These loans are usually financed by banks or the SBA and are characterized as long-term loans, with a lot of documentation required and with the need to have a very good credit history.
In contrast, when these loans are funded by a private lender, they may be shorter term options and require slightly looser credit standards in exchange for a higher cost of capital. Here are some types of small business loans:
Line of credit
A line of credit for your business is similar to a personal credit card or even a home equity line of credit and works in much the same way. This means that you can access a pool of money that has been pre-approved and you only have to pay interest on what you actually use.
The line of credit is a very flexible source of financing and can be used to cover a variety of things such as getting extra inventory, hiring seasonal labor or transitioning your business to digital.
Bridge loan
A bridge loan is a form of short-term financing that can serve as a source of funding and capital until a person or company secures permanent financing or removes an existing debt obligation.
Bridge loans are usually short term, with a repayment period between 3 and 18 months with daily or weekly payments. This type of loan is often used in the real estate sector for the purchase of a new home or any other type of property.
Merchant Cash Advance
A merchant cash advance, sometimes referred to as a business cash advance, is a purchase and sale transaction in which the business sells a portion of its future credit card or other receivables.
Payments on a merchant cash advance are based on the performance of your business, taking a percentage of your credit card collections until the full amount of the advance is satisfied. Therefore, there is no fixed term, which makes them very flexible.
Private financing to small businesses is an interesting area to explore as an option to help different types of businesses. If you have further questions about this type of lending, feel free to contact a loan servicer to see what options you have in relation to your needs.
If you would like to contact us, please write to customerservice@myfci.com and we will be happy to assist you.
