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  • Writer's pictureSeth Block

What to Expect When Repaying a Loan from a Private Lender and How it is Different Than a Bank Loan

A business owner who is used to borrowing from banks will find there are key differences in repaying a loan to a private lender. While banks generally have lower borrowing rates, they also have more inflexible payment plans and fee structures. By the time a business owner adds fees, compliance, and prepayment penalties, they may wind up paying significantly more for a bank loan than anticipated. While private loans have minimal fees and associated costs, their term is usually less than a conventional loan so the repayments may be higher.


Private lenders offer more flexible payment terms whereas most banks require fixed monthly repayments. Private lenders may agree to daily, weekly, biweekly, or monthly installments, so it’s easier for a business owner to align repayments with their cash flow. Private lenders don’t have pre-payment penalties, so if company revenue increases, a business owner can repay more of the loan or even pay it off entirely without incurring extra fees. Banks charge penalties for discharging a loan early.


A business owner won’t have to prove to a private lender how they used a loan, which is normal bank practice. Private lenders can decide to fund a company based on revenue and time in business, letting owners figure out how best to spend the funds or credit. In addition, as private lenders are more willing to lend to businesses with lower credit ratings, businesses can use private loans to raise their credit rating. This will make them more attractive in the future to both private lenders and banks.



Sources:


Actium Partners: Top 3 Advantages of Private Lending: https://actiumpartners.com/hard-money-loans/top-3-advantages-of-private-lending-or-hard-money-loans/


Corporate Finance Institute: Private Money Loan: https://corporatefinanceinstitute.com/resources/commercial-lending/private-money-loan/


Investopedia: Lenders: https://www.investopedia.com/terms/l/lender.asp


Shield Funding: A Complete Guide to Private Business Loans: https://shieldfunding.com/a-complete-guide-to-private-business-loans/


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