Small Business Loans – Private Lenders
To show these lenders that your business is worthy and has potential for future growth, you need to demonstrate that you will be able to pay back those private small business loans, whether you are:
- Starting a new business
- Developing a new product for an existing business
- Expanding into new locations
- Developing new markets
- Purchasing new equipment as part of expansion
In order to successfully secure a small business loan, whether you are looking to a bank or the private sector, you should prepare a professional business plan to demonstrate that your business is a worthwhile investment.
1. Debt Financing
Debt financing is a loan of money that you borrow to run your business. You must repay your money in full, usually in instalments, with interest. There are several types of debt financing:
Commercial term loans: Generally have a specified period for repayment, usually ranging from 3 to 5 years. They usually have a fixed interest rate as well. The loan will have a predetermined schedule for repayment of the principal interest.
Lines of credit or operating loans: Provides a business with money to cover day-to-day expenses. As funds are used, the established credit line is reduced. Your line of credit is replenished when you make payments towards it. Like a demand loan, it’s usually secured by assets, receivables, inventory or other means. The loan has a limit and you pay interest only on the amount outstanding, usually on a daily basis.
Credit cards: One of the more costly options. The interest rates on credit cards are often double or triple the interest rates offered on commercial loans and on lines of credit.
Microcredit: Involves providing small loans to individuals that would not qualify for traditional bank loans. These loans can help you start a very small business.
Supplier credit: Manufacturers provide the goods; you pay for them, with interest, over a specified period. In addition, some suppliers will offer various terms of sale, letting you take three months to pay, for example, or they may offer discounts for prompt payment.
Commercial mortgage: If you are purchasing real estate (land, or a building) for your business, you may be able to get a commercial mortgage. A mortgage is considered long-term debt. It is offered by various financial institutions, including commercial mortgage companies, insurance companies, trust companies and chartered banks.
Leasing: Leasing is like a long-term rental. At the end of the lease, you don’t automatically own the asset – you have the option to buy it at its residual value. A lease requires little or no money down and is an alternative to purchasing such items as cars, machinery or office equipment. By leasing instead of buying, your business can usually write off the monthly lease expenses.
2. Equity Financing
Investors that provide equity funding get a share in the ownership of your business and in your profits in return for their contribution. The amount of money that you pay the investor depends on how well your company does.
There are a wide variety of equity financing solutions:
Angel investors: Generally wealthy individuals who invest in small businesses and start-ups with the intent of earning a higher rate of return than they could through other investments.
Venture capital: Make equity investments in businesses with high growth potential, typically in the early stages of business development.
Crowdfunding: Usually done over the Internet, for a fee, through crowdfunding platforms and funding portals. Online communities dedicated to this type of fundraising can help you collect donations, offer rewards and take pre-orders.
Business incubators: Not all business incubators provide funding, but many of them do. Not all incubators offer the same list of services, but they behave as a one-stop shop to support entrepreneurs through the start-up stage. They provide a wide array of business support services, including business plans, office space, administrative and technical support services, access lawyers and accountants, and many other services.
Initial public offering (IPO): The process of listing your business on a stock exchange. You sell shares in your business over the stock exchange and the shareholders collectively are the owners of your business.
3. Other types of private-sector financing
Beyond traditional debt and equity financing, there are other options you can consider to finance your business and keep your cash flow running.
Love money: Money that your friends and family invest in your business.
Advance payment: Payments or deposits from clients may provide your business with a source of financing.
Factoring: Selling your accounts receivable at a discount today at a percentage of their future value.