- Private financing is an option for small business owners that allows them to expand their businesses.
- It encompasses many types of financing, including bank loans, cash from family and friends, and investments from individuals on crowdfunding sites.
- There are several advantages to using private financing for your business, including the ability to access cash more quickly and the advice you can receive if you are working with an investor.
- This article is for small business owners who are interested in learning about financing options available to them outside of government sources.
A small business cannot grow without capital. Capital can come from many sources, but it is not always easy to find the right source for the funds you need. Private sources of finance are primarily non-bank credit sources. These could be family members, angel investors, venture capitalists, or private lending institutions.
Private financing is a source of liquidity that a business owner can access to finance their operations, grow and meet their cash flow needs. Private funding sources are used to help small businesses that might otherwise not be eligible for a bank loan.
“Obtaining sufficient capital could literally be the factor that makes or deteriorates a company’s ability to grow,” said Simon goldenberg a lawyer specializing in debt relief and financing law for small businesses and individuals. “Without private funding, many of these businesses could struggle to start or keep their doors open. “
Types of private funding sources
Options abound for small business owners looking for private financing. Of course, this is not a government grant, but when you need money for your small business, there are several possible sources, including:
- Personal investment. For some small business owners, taking out a loan or borrowing from friends and family is a mistake. They may not want to go into debt and instead use their savings (or sell an asset, such as a vehicle) to get started and operate. Some use part of their retirement savings. Using your personal savings can be risky because you could lose your life savings if your business goes bankrupt.
- Family and friends. Funding for family or friends can be provided as a gift, an interest-free or interest-free loan, or in exchange for a stake in your business. However, be careful. If the investment doesn’t pay off or you can’t repay the loan, it could cause permanent conflict with your loved ones.
- Angel investors and venture capitalists. Many angel investors and venture capitalists are ready to finance small businesses. Instead of lending you money and collecting interest, they get a stake in the business. These investors usually provide information and advice, but if you want full control over your business, venture capital financing is not for you.
- Term loans and lines of credit. Term loans, in which you pay a set amount each month to a bank, credit union, or online lender, are popular with small business owners, as are lines of credit, in which you withdraw money. money when you need it. Your credit score, years in business, and sales income determine how much you can borrow and at what interest rate.
- Crowdfunding. There are several crowdfunding websites that allow entrepreneurs to fundraise for their idea. Investors on platforms like Kickstarter or Indiegogo invest sums in exchange for helping a product come to life. Companies generally offer rewards in exchange for contributions. Crowdfunding might not make you rich, but it can also serve another purpose and test consumers’ interest in your product.
- Alternative financing. Term loans and lines of credit aren’t the only sources of private financing that small business owners can access from lenders. Cash advances to traders and microloans are other options. With a merchant cash advance, lenders give a business owner money in exchange for future sales. Microcredits are small loans, typically $ 50,000 or less, that are available to businesses that are not likely to be approved for loan from banks and traditional lenders.
To remember : Small business owners have several options for private financing, including using their savings, applying for a loan from friends and family, taking out a bank loan or line of credit, starting a crowdfunding campaign, or seeking financing. alternative, such as a cash advance to the merchant or a microcredit.
Editor’s Note: Need financing for your business? Fill out the questionnaire below so that our supplier partners can contact you with free information.
What is private financing?
Advantages and disadvantages of private funding sources
There are pros and cons of working with private lenders. You can get access to capital faster, but the interest rate can be higher and you can have a demanding payment plan.
Benefits of private finance
Private sources of finance provide a valuable service to small businesses – they have more flexible loan requirements and extend quick financing.
Unlike bank loans, the time it takes to get the money into your hands is much faster. There are often lengthy approval processes with bank loans. Private finance options generally do not have these same guidelines.
Plus, if you’re using a venture capitalist or angel investor, there is the added benefit of being able to get advice from those who have seen it all. Venture capitalists and angel investors usually have a lot of experience running a business. They have a lot to offer in terms of the knowledge and resources they can provide.
Disadvantages of private financing
Private business loans come at a price – literally. Loans from private sources may have a different rate structure, additional fees, or other costs that are not typical of bank loans. Goldenberg stressed the importance of reading and understanding the loan agreement before signing.
“Some agreements will stipulate that attorney’s fees, collection costs and other substantial costs could be assessed against a defaulting account,” he said. “Some go so far as to require the borrower to sign an admission of judgment, which would allow the court to pronounce an expedited judgment against the borrower, without trial, in the event of default.”
These types of terms and conditions can be present with VCs or angel investors; you are also more likely to see them in the agreements of private lending institutions online.
Another downside to a private business loan is that you can have a more demanding payment schedule than a traditional bank loan.
Before making a final decision on whether private financing is the right option for your business, weigh the pros versus the cons.
To remember : One advantage of private funding is that you can get financing quickly, and if you’re going to venture capitalists or angel investors, they can provide you with helpful advice. The downsides of private financing are that you can pay more fees and higher interest, and if you bring in investors, you give up control and equity in your business.
Tips for getting a loan
Getting a loan from an angel investor or venture capitalist is likely to come from networking. Some businesses cater to startups, but if you’re starting a business, it’s a good idea to network and seek out investors.
If you need financing quickly, you may be able to get a merchant cash advance, where a lender advances you money against credit card receivables, as well as traditional short and long term loans. Depending on the lender you work with, you may not receive the same attention and mentorship that you would with angel investors or venture capitalists.
Goldenberg said that one of the most important parts of any small business loan agreement is understanding the terms of the loan. Be aware of personal guarantees, UCC-1 liens, and other forms of collateral before accepting the loan.
“At the end of the day, if you see a term that you don’t feel comfortable with, don’t sign the deal,” he said. “You might not be able to get by.”
To remember : You need to have a detailed financial plan that you can share with lenders and investors. It is also important to understand the terms of the loan and to find trusted partners.
Additional reporting by Matt D’Angelo. Some source interviews were conducted for a previous version of this article.