Bank Loan vs. Private Lending for Your Small Business

When it comes to financing a business, one of the most crucial decisions you’ll face is whether to pursue a traditional bank loan or explore alternative options like private lending. Each avenue comes with its own set of advantages and considerations, but in recent years, private lending has emerged as a compelling choice for entrepreneurs seeking flexibility, speed, and tailored solutions. Let’s explore some of the factors that are influencing private lending as an increasingly popular option for small and medium businesses. 

Traditional Bank Loans

For decades, bank loans have been the go-to choice for businesses in need of capital. With established processes and stringent eligibility criteria, bank loans offer stability and reliability. 

However, many businesses have become increasingly frustrated with traditional banks in recent years as they fail to meet modern concerns and expectations. 

Traditional bank loans are incredibly restrictive in their eligibility criteria, preferring to use more dated information such as credit scores to assess risk. This does not bring a holistic or full picture view of a business’s financial status or risk assessment. 

Speed is another issue that banks struggle with. The application process can be lengthy with many in-person meetings, paperwork, and bureaucratic processes that can make it difficult for businesses to access money when they need it in a timely manner.

 

• • Credit History Requirements 

Traditional banks typically require a strong credit history from borrowers. They may scrutinize your credit score, payment history, and debt-to-income ratio to assess your creditworthiness. If your credit score is below a certain threshold, securing a bank loan may be challenging. Many banks require a minimum credit score above 680 or higher.

 

• • Collateral 

Banks often require collateral to secure the loan, such as real estate, equipment, or inventory. Collateral provides the bank with assurance they can recoup their funds if you default on the loan. While this reduces the bank’s risk, it can be a barrier for businesses without valuable assets to pledge as collateral. While collateral protects the bank’s best interest, it puts your business assets at risk and should be considered extensively before signing any agreements.

 

• • Longer Approval Process 

Bank loans usually involve a longer approval process compared to online lenders. You may need to submit detailed financial statements, business plans, and other documentation, which can prolong the time it takes to receive funding. If you need funds quickly, a bank loan may not be the best option.

 

• • Lack of Funds 

Traditional banks may not be able to give businesses the full amount of funding that they need. In 2021, only 31% of businesses who borrowed from a bank received all the funds they asked for. That means 69% of borrowers did not receive the total funds they required.

The Question of Private Lending

In recent years, online lending has gained traction as a viable alternative to traditional bank loans, particularly for small and medium-sized businesses. In 2021, 23% of all small business loan applicants chose an online lender, and the number is increasing every year. Private lenders, including individuals, investment firms, and peer-to-peer lending platforms, offer a range of benefits that set them apart from banks:

 

• • Flexibility in Eligibility Criteria 

Online lenders are often more flexible in their lending criteria compared to banks. They may consider factors beyond credit scores, such as business performance, industry trends, and future prospects, making it easier for businesses with less-than-perfect credit to secure financing. At Forward Funding, we take a holistic approach to your business’s financial health by looking at recent transactions, sales volume, and more. 

 

• • Faster Approval and Funding 

Private lending transactions typically involve less red tape and bureaucracy than traditional bank loans. As a result, businesses can often obtain approval and access funds more quickly, sometimes within hours, allowing them to seize time-sensitive opportunities or address urgent financial needs without delay.

 

• • Customized Solutions 

Private lenders are adept at crafting tailored financing solutions to meet the unique needs of individual businesses. Whether it’s a short-term bridge loan, a flexible line of credit, or a revenue-based financing arrangement, private lending offers greater customization and agility to adapt to evolving business requirements.

 

• • Personalized Service 

Working with a private lender often entails a more personalized and collaborative approach compared to dealing with a large bank. Private lenders are typically more accessible and responsive, providing businesses with the attention and support they need throughout the lending process.

 

• • Opportunities for Growth 

Private lending can open doors to strategic partnerships and networking opportunities beyond traditional banking relationships. By tapping into private lending networks, businesses may gain access to valuable resources, expertise, and potential investors that can fuel growth and expansion initiatives.

While bank loans have long been regarded as the gold standard in business financing, the landscape is evolving, and banks are struggling to evolve. Private lending is emerging as a formidable contender. With its flexibility, speed, and personalized approach, private lending offers a compelling alternative for businesses seeking financing solutions tailored to their unique circumstances and objectives. Whether you’re a startup looking to get off the ground or an established enterprise pursuing growth opportunities, private lending may hold the key to unlocking your business’s full potential. Consider exploring private lending options and discover a world of possibilities for fueling your business’s success.

Brush up on other popular lending options such as our in-depth comparison on grants vs. loans or read our comprehensive guide to small business loans in Canada.

 

Key Takeaways

• • Speed and Flexibility: Private lending offers quicker access to funds and more flexible eligibility criteria compared to traditional bank loans.

• • Customized Solutions: Private lenders tailor financing options to suit the specific needs of businesses, providing personalized solutions for growth and stability.

• • Personalized Service and Networking: Private lenders offer attentive support and access to valuable networks, enhancing the overall lending experience and potential for business growth.

 

About Forward Funding

Forward Funding is a leading Financial Technology provider serving small and medium businesses across North America. Our mission revolves around empowering businesses with quick, easy, and efficient funding solutions to help them thrive. Our dedicated team is here to help you every step of the way, from conventional loans to supplementary funding solutions to help you save and maximize your growth potential.