Bank Loans vs. Private Lender Loans

Ezra Cabrera

Updated: January 6, 2019
quick small business loan
When shopping for a small business loan, the first stop is usually the local bank. Many business owners have bank relationships, but that doesn’t mean it’s the only option. Banks and credit unions offer great financing products, however, they might not be the best solution for you or your business.

Most business owners aren’t aware that private and non-bank lenders offer other funding options not available at their bank. Ask yourself, which is a better option for you – a bank loan or a private lender loan?

In practical terms, both a bank loan and a private lender loan are great options. However, your focus should always be centered on a loan that fits your business best.

Realistically, both bank loans and private lender loans each have their own set of pros and cons. Below are some of the differences between them.

Bank Interest Rates are Lower for Quick Small Business Loans

Generally speaking, bank interest rates are lower for quick small business loans than private lenders. Banks have the luxury of using bank deposits to lend. Additionally, banks pay very little interest on deposits which gives them the ability to provide low rate quick business loans.

Moreover, banks have multiple sources of income. Banks make money on various types of business and personal lending. They also offer treasury and retirement account services that private lenders can’t offer. With multiple sources of income, banks can make a lower margin on quick small business loans.

On the contrary, private lenders make money in only one way, lending. In addition, they rely on sources of capital that are higher than banks. Quick small business loans from private lenders have higher rates because of this.

However, quick business loans with higher interest rates typically have more flexibility than bank loans. Private lender loans might lose on rate, but they win on flexibility and process.

It’s Easier to Get Approval from Private Lenders

Banks are heavily regulated which means they are more conservative when it comes to making quick small business loans. Due to regulations, banks end up declining applications from business owners who request financing. Businesses can be declined for size, revenue, time in business, or commonly because the bank cannot offer an ideal solution.

Interestingly enough, the creation of private lenders was a result of this. Private lenders can approve you for a business loan when a bank cannot. In addition, a private lender requires less documentation than a bank. The application process is faster, easier, and smoother for a small business owner. Now, would you pay a higher rate to have an easier process and more flexibility?

Risk Level

As much as possible, traditional lenders will lower the risk on their part. The loan you qualify for is based on several factors, such as credit rating, cash flow history, sales forecasts, and payment history. They will also ask for collateral to secure the money you borrow. This prerequisite isn’t ideal for companies that are just starting out.

On the other hand, alternative lenders take on most of the risk. They have funded businesses with poor/no credit rating, making it easier for startup companies and small businesses to secure funding. Alternative lenders can also work their way around financial issues like tax liens, bankruptcy, negative balances, etc. This is something banks and other traditional lending companies don’t usually do.

Time It Takes to Receive Funding

For bank loans, the underwriting process can take as long as 60 to 90 days. You’ll have to wait for days or weeks to receive the money if you do qualify. Banks have a systematic approach when it comes to assessing applicants. Several employees and officials will review your application. Additionally, there is more paperwork to complete and submit.

Private lenders can pre-approve your application online and can update you on your status within 24 hours of submitting your application. Generally, you can receive the money within 24 to 48 hours after approval. However, this usually depends on the loan option you’re eligible for, and whether you qualified or not.

Which is the Better Option?

The answer depends on where your business is at. Both private lender loans and bank loans have distinct pros and cons. If you need immediate financing with flexible terms, it might be better to work with private lenders.

Private lenders are ideal for startups and small businesses that want to secure funding without going through any setbacks. Most alternative lenders don’t charge prepayment penalties and they don’t ask for collateral either, so this option is very appealing.

For companies that have been operating for more than 3 years, have a good credit score and a profitable revenue can try applying for bank loans. Generally, businesses at this stage no longer need funding. But if you need additional working capital, you have a better chance of qualifying for traditional loans.

Ezra Cabrera
Ezra Neiel Cabrera has a bachelor’s degree in Business Administration with a major in Entrepreneurial Marketing. Over the last 3 years, she has been writing business-centric articles to help small business owners grow and expand. Ezra mainly writes for SMB Compass, but you can find some of her work in All Business, Small Biz Daily, LaunchHouse, Marketing2Business, and Clutch, among others. When she’s not writing, you’ll find her in bed eating cookies and binge-watching Netflix.

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