Projects need funding. Conventional commercial loans are often the default choice, but are they the smartest?
What is a commercial bank loan?
According to Entrepreneur's A Basic Guide to Bank-Term Loans, standard commercial loans are term loans that are used to finance major business investments or acquisitions with both intermediate and long-term loans available. They typically have fixed interest rates, a maturity date, and monthly or quarterly payments. They may also require collateral to secure the loan.
Though banks immediately come to mind when finance is needed, they are extremely picky with strict requirements. You might not qualify due to a high down payment requirement, a below-average credit score, or insufficient income. What's worse, it could take up to 90 days for a decision to be made. That's a lot of time wasted -- a delay that prolongs the amount of time until a project can turn a profit. Bank loans also tend to have long terms with hefty prepayment penalties. For those looking to flip a property, taking out a 20- or 30-year bank loan might not make sense.
What is a private loan?
A private loan comes from a private lender, not a bank. According to The Balance - Small Business, private financing tends to be much more flexible with no set lending requirements. The lender and borrower work out their own terms.
Private party commercial loans are an alternative with numerous benefits. Private lenders tend to be less concerned about personal creditworthiness and more interested in the project's potential.
Benefits of private party commercial loans include:
•Flexible lending requirements – The borrower and lender come to their own terms.
•Fast funding -- A project's funding can be secured quickly. Faster access to capital means the project can get started right away.
•Easy to qualify -- Qualifying for a private commercial loan may be easier than qualifying for a bank loan. The merits of the project can counteract any shortcomings the borrower’s personal credit history might have.
•Short approval process -- Rather than waiting months to get approved, an answer usually arrives within a week or two. Again, the sooner your loan is approved, the sooner you have access to capital, and the sooner you can put that money to work.
•Short loan terms -- Private party commercial loans are generally short-term loans, making them ideal for certain commercial real estate projects. For example, if you need to quickly renovate an office building before selling or leasing it, a short-term loan could be preferable to a 30-year mortgage. They're also a good choice for situations where a property needs short-term funding to get started before ultimately securing a conventional term loan once it’s underway.
What Else You Need to Know about Private Party Commercial Loans
Private party commercial loans may come with a higher interest rate than conventional loans. But don't let that put you off from exploring this option. Weigh the interest rate difference with some of the other potential cost savings by going the private party route such as lower closing costs, fewer delays, faster funding, shorter-term, and no prepayment penalty.
This type of business funding isn't for everyone. But for many, a private party loan is a much better choice than a conventional bank loan. Contact us today to see if private funding makes sense for your project.