Mention borrowing or business loans to most people and they’re likely to think of the big banks. The big banks spend lots of advertising dollars on images of smiling loan staff shaking hands with beaming small business owners who now have the funds they need. The same ads are made to convince small business owners that business loans are easy and, with the internet at everyone’s fingertips, just one click away.
Ask any small business owner whose business doesn’t tick all the big bank boxes just how easy it is to get a business loan. Chances are, they’ll tell you an entirely different story. Just have a read of this recent report that says that ‘Half of SMEs unable to secure sufficient or any funding in the last 5 years.‘
But what if it really isn’t you, it’s them?
What if, in our modern world of out-of-the-box thinking and the type of global entrepreneurship on a scale never before witnessed by humanity, it’s the traditional lenders who are the problem? With their antiquated methods, outdated processes and, most glaringly, their obsolete way of thinking.
And what if there was a better, but usually unnoticed, way to borrow much-needed capital to take your business to where you want it to be?
Welcome to the overlooked lending option that is private lending and private business loans.
Private lending is pretty much what it sounds like. You’re borrowing from a group of private individuals who pool their money into an investment fund (usually looked after by a fund manager), then loan it out to a variety of borrowers for a number of business loans. Borrowers who are small business owners, just like you. Small business owners who, again just like you, have a tough time sourcing finance from the more traditional lenders, for any number of reasons. Reasons such as:
It’s fair to say most small business owners are accustomed to bank financing. So when they need a business loan, they’re going to talk to the more traditional lenders. Perhaps even their own personal bankers. But personal banking is very different from business banking and, as mentioned above, if you don’t tick all the right boxes, you’re unlikely to secure financing.
At this point, you may have started to consider a private business loan and, because you’re a savvy business owner and are researching first, you want to understand how private loans differ from bank loans. Some of the biggest differences are:
Because of the stringent lending requirements of the banks, many small businesses find it difficult to scale up their businesses.
If the big banks and other lending institutions are letting you and your business down, maybe it’s time to think about private business loans.
At this point, it’s worth noting that, as in most industries, not all private lenders are good eggs. Adding to the many misconceptions about private lenders (which we’ll discuss in more detail below) are those private lenders who use less than savoury techniques to get you to sign on the dotted line. You can read our full article on private lending red flags but the main things to look out for are:
This is why it’s always in your best interests to do your research and ask your potential private lender lots of questions. Here are some of PMA’s most frequently asked questions.
Much like any other kind of non-traditional banking system, private lending and private lenders are caught up in a world of misconceptions and untruths. This is why so many businesses miss out on the opportunities to seek and find the finance they need to take their business to the next level. Let’s look at some of the most common mistaken beliefs many people have about private lending.
While private lending interest rates may seem higher than those of a bank, borrowers need to look at the total cost of the loan. While a private lender may charge higher interest for a shorter loan term, a bank loan with a lower interest rate but over a long period of time will often end up being more expensive. Check out this article we wrote about ‘why interest rates are irrelevant.’
Many people think that private lenders are a little like loan sharks – that they’ll lend to anyone, even if they can’t afford the loan and won’t be able to make repayments. This is entirely untrue and usually, private lenders are even more conservative with who they’ll lend to than banks.
Private Mortgages Australia has an extensive due diligence process that they go through with each and every loan application to make sure the lending decision is wise. While banks will usually lend up to 80% or even 90% of the value of the property securing the loan, private lenders will usually lend a lot less than this, especially if the security property is in a location that would be deemed riskier.
In addition to dispelling the high interest rate and predatory lending myths above, here are a few other private lending realities.
Private loans are ideal when you need the money fast. Within days and not weeks. To secure the deal or plump up your cash flow over a slow period or, perhaps, during a supply chain crisis brought about by a global pandemic.
Everything from paperwork to financials and repayment schedules has fewer requirements than the banks. You don’t have to prove serviceability and, if you’re a developer, even pre-sales aren’t always going to be needed.
Private business loans aren’t a one-size-fits-all product meaning they’re flexible and can be tailored to your businesses’ specific needs. This includes loan terms and repayment schedules.
While it may be an often-overlooked lending option, private business loans could be the best option for you and your business. Private lenders, like smart, modern-day business owners, always have their eye on the future. And that includes the bigger picture.
If you have any more questions or want some more information, please contact us. We’re happy to answer all your questions.