Are you a business owner in search of financing to either expand or maintain operations? If so, you should consider all available options. Your priority is to get the best deal for your company and negotiate the best rates, terms, and repayment schedule. Your first instinct may be to turn to a traditional lending institution for your first loan. But, before you do that, let’s examine some of the advantages and drawbacks of exploring bank products or private investors for your funds.
Bank Loan Pros
A traditional bank loan will have some definite advantages for you over other means. Bankers are specially trained to deliver lending products. They will prepare you with all expectations of the agreement. Lenders have specific retail products to offer you that match your circumstances. You will be very clear about how to repay the loan.
With the appropriate collateral, the potential exists to get fixed-rate financing. Fixed-rate financing means your rate will not change over the term of your loan. Furthermore, your business can continue growth plans for the future based on the known payment schedule.
Bank Loan Cons
Bank loans are difficult to get. Without the appropriate collateral to secure funding, approval is challenging. Bankers do not like risk, and less than secured loans make loan committees uncomfortable. Additionally, banks do not like partnerships in industries they are unfamiliar with. If you have a niche business that requires some unique understanding, your local community lender may not be a good option.
If you know you need out of the box thinking, you will want to seek a private lender for your funding needs. A private lender or “angel investor” is an excellent option for a business that does not meet the traditional bank credit standards.
Let’s explore the opportunities available by working with a private investor.
Private Investor Pros
Private investors play a significant role in the world of lending. They support great business ideas that would otherwise never come to fruition. These investors are also referred to as venture capitalists. They are beneficial to small businesses in that they are willing to take on a risk that a bank would not.
Often, they are well versed in specific business niche areas and are more comfortable with lending to businesses in those spaces. Sometimes, the right private investor can be a crucial player or mentor in the operation of your business. They are helping it to grow and become profitable. After all, they do have a stake in your business’s success, whether that be an equity share or interest income.
Private Investor Cons
The biggest obstacle to partnering with a private investor is that you must prepare to pay higher interest rates. This is a fact of lending. The more assumed risk, the more you will pay for access to capital.
In the negotiation process, you may also find you are giving up a portion of your business’ equity to obtain your funding.
Giving away a portion of equity can be a significant drawback for business owners who are opposed to giving up ownership in their company. Essentially, you are taking on a partner who may want to share in the decision-making.
This choice puts both investor and business owner in a very awkward position.
As you can see, there are many factors to consider when exploring your options to borrow money. Each of these methods can result in a successful deal. But, it will depend on the borrower, and the specific business needs to determine which option is best. Weigh your options carefully and trust your business instinct!