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How private lending is re-imagining the small business landscape

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This picture show a lot of bills representing loan money.

Even if you have a solid plan and a great business idea, as a small business owner, getting a bank loan can be difficult.

Although the approval rate for small business loan applications has risen slightly this past year, it is still relatively low at 28%.

Without proper funding, a business can’t grow and succeed. Luckily, for those who don’t have the necessary collateral to obtain a bank loan, private lending offers a viable alternative.

What is private lending?

Private lending is an alternative to loans from traditional institutions such as big banks. The funding can come from various sources such as family, friends, crowdfunding, angel investors, and venture capitalists.

Angel investors and venture capitalists usually expect some equity in your small business in exchange for a loan. In addition, many want to have a say in how you run your business.

There are, however, several types of private loans that don’t require small business owners to give lenders partial ownership or input.

We will discuss several examples below.

Friends and family

Borrowing money from friends or family is a common way to finance a new small business venture. However, if your credit is bad, they might be reluctant to lend you the money you need.

Mixing business with personal is not always the best option. After all, the potential cost of failure is not only financial; it’s personal as well.

Before approaching a friend or family member, consider how much money they have access to, be sure they understand your plans thoroughly and make sure they are comfortable with the risks involved.

Small business administration (SBA) loans

Microloan programs are available through the U.S. Small Business Administration. There is a limit to how much they will lend, so the funding might not be sufficient for all borrowers. Also, these loans are difficult to obtain. They are typically awarded to businesses that can provide collateral such as equipment or real estate.

Not only are the qualifications strict, but the application process often takes several months.

These loans are not ideal for start-ups as they don’t have the necessary requirements.

Microlenders and no-profit lenders

Small business owners in need of capital often turn to non-profit lenders. For many, this is a less complicated route to obtain the funds needed.

Many of these lenders focus on traditionally disadvantaged, minority, or small businesses from communities that are struggling economically.

Not only can small business owners obtain loans from these types of lenders, but they are also able to establish better credit and grow their business. As a result, they will qualify for other types of financing in the future as their business grows and makes more money.

Nonprofit lenders often go beyond making loans. They also provide the small business owner with additional benefits that traditional lenders don’t, such as:

  • Start-up businesses often can obtain loans from microlenders up to $50,000 to help them get their business off the ground.
  • Many microlenders focus on missions or causes they want to help. As a result, profit is not their primary objective. Their goals are philanthropic, and they want to help disadvantaged communities.
  • Not only do they offer loans, but many nonprofits and microlenders will also provide pro bono training, consulting services, and assistance in building credit to the small business owner.

Personal business loans

It is possible to get financing through personal loans. However, they often carry with them a high APR (like credit cards).

If you are a small business owner with a steady income and excellent personal credit, a personal loan is an option.

Personal loans are best for situations where business only needs a small amount of money for a limited amount of time.

Growth in private lending for small business

In its white paper titled Small Business Lending: Banks, FinTech, or SBA?, Garnet Capital Advisors laid out the following reasons for the growth in private lending for small businesses:

  • Small businesses have experienced greater challenges in securing financing in recent years than larger companies.
  • Even as economic conditions have improved, small companies need additional capital to expand and invest.
  • Bank regulations are becoming more stringent, they are more risk-averse, and have stricter underwriting guidelines.
  • Fewer banks are willing to incur the costs associated with small business loans.
  • Because fewer community banks are active commercial lenders, private lenders have stepped to the forefront to pick up the slack.
  • Alternative lenders are offering a new approach to help small businesses get the funding they need.
  • By leveraging innovative technology and models, the needs of borrowers are matched and connected with lending opportunities and investors.

In contrast to many banks, private lenders view small businesses as an opportunity for mutual financial growth, and not as a liability.

The reasons for private lending growth

Small businesses are the backbone of economic strength. Since 1995, 60% of the new jobs in the U.S. were created by small businesses.

They bring innovative products and services to market and economic opportunities to a diverse group of people.

A large part of their success depends upon their ability to get business loans. Before the financial crisis, small businesses relied on getting loans from banks.

The US Small Business Administration Office of Advocacy conducted a study to understand how small business bank loans and credit were affected by the financial crisis.

The overall findings concluded that small businesses saw a more severe decline in bank lending than larger companies. When banks made it more difficult for small businesses to get loans, the demand for private lending grew.

Dozens of online lending firms offer programs for various requirements. Some of the specialities they cover are niche market businesses, short-term loans, and franchises. If your credit score is not exceptional, you will most likely not be approved for a bank loan. However, private lenders will look beyond your credit score and are more understanding.

The application process for private lenders is less cumbersome and faster. They require less documentation and are usually more flexible in the types of financing options they offer. Private lenders look at the market segments and specific industry and tailor their loan options accordingly. Because private lenders don’t have to follow the same regulatory requirements that bank lenders do, they can be more flexible, as mentioned above.

Private lenders have filled the gap for small businesses left by the big banks by providing a valuable source of needed funds.

In general, lending requirements are more relaxed and less stringent than bank loans. The approval process is much shorter, making it a viable source for small businesses that need capital quickly.

(Featured image by Rudy and Peter Skitterians from Pixabay)

DISCLAIMER: This article was written by a third party contributor and does not reflect the opinion of Born2Invest, its management, staff or its associates. Please review our disclaimer for more information.

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David Trounce is a small business consultant living in Port Stephens Australia. He is the Founder of Mallee Blue Media and specializes in small business marketing and management. David also writes for, My Customer and the Huffington Post.