by Susan Paige
Banks aren’t the only people out there willing to give loans to small businesses. Many private lenders have sprung up in recent years to take advantage of the huge market in providing funds for businesses that will be paid back over time. They make their money through miscellaneous fees, but most importantly, through their interest rates. Also, they help businesses that banks are usually wary of dealing with, making them even more attractive to would-be debtors. Many people are woefully uneducated on what opportunities are beyond the doors of their local private lender.
But then, inevitably, there must be more going on underneath the hood of all of this, right? You’d be correct by that assumption. Let’s take a look at the benefits and drawbacks of private lender loans:
Pro: Quick approval time
Often, a private lender will process your application for a loan much faster than a bank, sometimes by several days or even several weeks in rare cases. This is because lending money is their sole operation. Banks, on the other hand, have a lot of moving parts and other aspects to consider before they can accept your loan.
Con: Short-term lengths
Unlike banks that have been around for decades, most private lenders aren’t particularly old in relative terms. Since they haven’t been around that long and need an influx of serious enough cash monthly to stay afloat, they very often don’t offer term lengths as long as a bank might.
Pro: Lower credit needed
Private lenders are a favored choice of those with a short credit history, or even a poor credit history as their barriers for entry are much lower. These types of lenders are willing to take more risk in exchange for more profit, with each loan being a potential opportunity to gain instead of a potential opportunity to lose compared to a bank. Many private lenders such as Deal Struck give much fanfare to the fact that they help secure loans for businesses that banks are less willing to work with.
Con: High interest rates
Because of the business nature of being a private lender and their lower credit requirements, the interest rates on loans by this type of creditor are typically much higher, sometimes even double of what a bank offers. There’s a trend among private lenders that have been around for a while to begin offering more favorable interest rates, but by and large, a private lender will almost always have a higher interest rate than a bank.
Just because the bank can’t get you what you need doesn’t mean you’re up to a certain creek without a paddle. Private lenders play a crucial part in the financial system by helping to accommodate those with low-to-no credit, as well as specialized loans depending on that particular creditor’s clientele. In fact, some private lenders offer loans that banks don’t. For instance, it’s to purchase a niche type of equipment, or make an expansion in a new industry that banks aren’t familiar with yet. While there’s a premium for their service, it’s difficult to argue that it isn’t justified.
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