Banks and other traditional lenders are often hesitant to give money to small businesses that don't have a track record of making money, unless there is enough collateral.
If you don't qualify for a traditional loan, you may find that a private business loan meets your needs. But it's important to know what private loans are and how they work.
Private business loans: Everything You Need to Know:
A private business loan is a loan from a lender who is not a bank. Anyone can be the issuer, such as:
- A member of the
- Friend Angel investor
- Venture capitalist
- Alternative lender
Private loans are often easier to get than traditional loans, but they can also have less favourable terms and in some cases higher interest rates. Small business owners can get private financing in a number of ways, the most common of which are:
- Cash advances for businesses
- Term loans
- Loans of money
- Loans to cover working costs
- Invoice financing
Cash advances and short-term loans are often the most expensive options, but not always.
For example, a business that gets a merchant cash advance can get money almost right away, but it usually has to pay back 20–40% more than what it borrowed. They are also the easiest for small business owners to get to.
On the other hand, private lines of credit and working capital loans usually require you to put up your company's assets, like accounts receivable, as collateral to secure the loan.
Most of the time, you can borrow up to 90% of the value of your unpaid invoices. Of course, to get this kind of loan, you have to have sales coming up.
Qualifying for Private Business Loan
Whether or not you can get a private business loan depends on what the private lenders Australia want, but it's usually easier than getting a traditional business loan.
Private lenders, like angel investors and venture capitalists, tend to know more about certain parts of the market than traditional lenders, like banks.
They make decisions about your business based on how well it could do, not how well it has done in the past. So, you'll probably need a good business plan and a market that can support your business before they'll agree to give you money.
Alternative lenders, on the other hand, usually have easier requirements to meet, so it's easier to get a loan from them. Private lenders will look at the following things about your business:
- Your credit rating.
- Your annual revenues
- Time in business Past business failures
- Industry
- How money is most often used
- Outstanding debt
Lastly, if you borrow money from a friend or family member, a good-faith agreement may be enough to get the money. The IRS needs a formal contract, but the terms of the loan can be better than what you would get from a private lender.
How to Get and Pay Back a Private Business Loan
The process of getting a private loan is usually much faster than getting a traditional bank loan. This is because most alternative lenders need less paperwork and less information about your credit history.
With a traditional loan, it could take weeks or months to get approved. With an online loan, you could get approved in just a few days.
The loan agreement spells out how private business loans will be paid back. With a merchant cash advance, you'll probably have to send back a certain amount of your daily sales until the loan is paid off.
Accounts receivable financing may be needed for private lines of credit or working capital loans. This means that the lender is entitled to a portion of your sales that haven't been paid yet. Term loans usually have more traditional ways to pay them back, like weekly or monthly payments until the loan is paid off.
