June 20, 2019, 1:04 pm

Why Private Lending is Often Better for Start-Ups

by: The Financial Blogger    Category: Social Lending
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You have what you believe is a great idea for building a successful business. What you don’t have is enough financing to get your business off the ground. You have some in savings and family and friends are willing to help out too, but you don’t have enough even when all of you pool your resources together. You are going to have to borrow.

The point of this post is to help you understand that, when it comes to start up business loans, private lenders are often the best choice. Yes, there are exceptions to every rule. But for the most part, private lenders are more apt to give start-ups a fair shake. Keep reading to learn why this is so.

Lending Money to Start-Ups

The first thing requiring exploration is what it actually takes to loan money to start-ups. First and foremost, it takes a willingness to assume a high level of risk. By definition, a start-up is a brand-new company without a history behind it. Lenders have to be willing to put their money up with the realisation that they may never get it back.

Commercial banks are simply not set up to operate this way. They have to be rather conservative about all of their loans and investments so as to not jeopardise deposits. Too much risk could lead to complete financial collapse and losses that would be exceedingly difficult to quantify.

Private lenders do not work within the same kinds of constraints. They loan their own money, not money given to them by depositors. Any risk they assume is assumed only on themselves. That makes it easier for them to look at start-ups with less aversion to the risk presented.

What Lenders Look At

Commercial banks have another big problem when it comes to start-up business loans: their lending criteria. They have to be so strict about who they lend to that it is nearly impossible for a new business owner with no history to get appropriate funding. Commercial banks have to look at everything from the business owner’s personal finances to his or her credit history.

Private lenders do things differently. They tend to look at the four following criteria:

  • The Idea – Lenders start by looking at the business owner’s new idea. Is it a revolutionary idea that could disrupt an entire industry? Or is it an idea that plenty of others have tried to capitalise on but still failed miserably with? The idea has to be solid enough to impress lenders.
  • Likelihood of Success – A great idea makes for a good starting point. Lenders next look at whether or not the start-up looks to have a reasonable chance of success. A lender with confidence in long-term success is more likely to make a loan. Any lack of confidence could mean no business financing for the start-up.
  • The People – Next are the people behind the idea. Private lenders are not necessarily looking for PhDs or business owners with prior CEO experience. But they are looking for passionate people who believe in the start-up, its idea, and its mission and vision. They are looking for people who are willing to work as hard as is necessary to succeed.
  • Their Experience – Finally is the experience of the people behind the start-up. Do they have any experience in business? Do they have any experience with the idea they are proposing? Experience certainly isn’t the only thing, but it’s still important in determining whether or not a company is likely to succeed.

A third-party lender that sees only good things in these four categories is less concerned about the risk of lending to a start-up. Less risk aversion means higher chances of approval. From the perspective of company ownership then, convincing a private lender is more about demonstrating what the company is all about.

Combining Financing Resources

Private lenders are usually a better option for start-ups. They tend to have less stringent borrowing requirements and less averse to risk. But know one more thing: sometimes start-up business loans are not enough. There are times when ownership has to combine multiple financing resources to come up with enough funding to keep the business in operation.

Loans from private lenders can be combined with personal resources, loans from family members and friends, and even venture capital. The right mixture of financing resources can supply all the operating capital a start-up needs, and then some.

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