Everything you need to know about private business loans

Fri | April 2023

As a savvy small business owner, you're no stranger to the importance of securing funds that can help you propel growth and navigate unexpected financial hurdles. But let's face it; traditional bank loans can be a frustrating maze of credit requirements and lengthy application processes that leave you feeling stuck.

Luckily, there's a better way. Private business loans and financing offer the flexible, tailored financing solutions you need to achieve your business goals, whether you're just starting or looking to expand your operations. These alternative options are quickly gaining popularity due to their ability to provide quick access to funding when you need it most.

And that's where we come in. This guide will take you through the world of private business loans, showcasing some of the best options in 2023. After reading this article, you'll be equipped with the knowledge you need to make an informed decision about financing your business.

What is a private business loan or financing?

Private business loans and financing are working capital provided by investors or funders not associated with a traditional banking institution. This type of financing can come in various forms and structures, depending on the funder and the business's specific needs. Due to the higher risk involved, they may be secured or unsecured and cost more than traditional bank loans.

Nonetheless, the funding partners usually have flexible requirements allowing you to obtain funding quickly and with fewer hurdles. Private business funding provides a comprehensive range of business financing products, including short-term loans, lines of credit, equipment financing, invoice financing, and revenue-based financing; this gives businesses more options to select the perfect funding that aligns with their unique needs.

Seeking guidance from a qualified business financing professional is crucial to comprehensively understand the funding arrangement and its potential implications for your business.

Best private business loans and financing

Now that you know the difference between private and traditional loans, let's explore some of the best options on the market. In the following sections, we will explain the main benefits of each type of financing and how they can help you reach new heights in your entrepreneurial journey.

Term Business Loan

Term business loans are a type of business financing that involves borrowing a fixed amount of money and repaying it over a set term with regular payments that include both the principal and interest.These small business loans can be used for various purposes and are suitable for long-term investments.

Payments are regular and these include both principal and interest. It's like getting a specific amount of funds for your business and paying it in installments over a predetermined period. The cost for term loans can be fixed or variable, depending on the business loan agreement.

Additionally, you may need to provide collateral, financial statements, business plans, and other documentation to qualify for a term loan. It's important to note that you should carefully review the terms and conditions of a term loan before committing to it, including the interest rate, repayment schedule, and any fees associated with the loan.

Equipment Financing

Equipment financing involves using capital to purchase assets such as machinery, vehicles, or other physical equipment. These loans are specifically for buying or leasing equipment, and the equipment is used as collateral. That means the financier can claim the equipment if you do not comply with the loan or lease terms.

You will usually need to provide a sizeable down payment as financiers typically only cover 80-90% of the cost of the equipment, and the borrower must cover the remainder. Equipment financing terms usually last from 2 to 7 years, and borrowers make monthly payments to the equipment financier with interest included.

One of its advantages is that you will pay a specific amount monthly, making it easier to prepare payment budgets. In addition, equipment financing can provide businesses with tax benefits. The interest paid on equipment financing loans may be tax-deductible, which can reduce the overall cost of the loan and give the companies additional savings.

Line of Credit

With lines of credit, you can choose when to withdraw the money, return it and repeat the transaction (once you pay off all the money borrowed). In this sense, they work very similarly to credit cards. Of course, depending on the line of credit you request, the payments will be weekly or monthly, and you must pay on time.

There are two types of business lines of credit: secured and unsecured. Secured lines of credit require some form of collateral, such as a lien on your assets or a certificate of deposit. By contrast, unsecured business lines of credit do not require you to post collateral and may have a variable interest rate.

If you apply for a line of credit, you should pay attention to the payment terms. These include the length of the payment term and any other fees, such as the annual percentage rate (APR), which can help you estimate the total costs of the loan.

Invoice factoring

Invoice factoring is a financial process where a company sells its outstanding invoices to a third-party financial company, known as a factor, at a discounted rate in exchange for immediate cash.

Let's say that a small business has an outstanding invoice for $10,000 that won't be paid for another 60 days. The company needs cash now to purchase new inventory. The business decides to sell the invoice to a factor for immediate cash.

The factor agrees to buy the invoice at a discounted rate of 80%, or $8,000. The factor then takes over responsibility for collecting the payment from the customer in 60 days. Once the customer pays the total of $10,000, the factor keeps the $8,000 paid for the invoice and returns the remaining $2,000, minus any fees or charges, to the business.

Invoice factoring can be a valuable tool for businesses that need cash quickly or help obtain traditional financing. However, it's essential to carefully consider the costs and fees associated with invoice factoring before deciding if it's the right option for your business.

Revenue-Based Financing

Revenue-based financing (RBF) is a relatively new financing model that has gained popularity as an alternative to traditional financing options such as bank loans. RBF allows businesses to obtain capital in exchange for a percentage of their future revenue.

One of the advantages of the RBF is that companies can receive funding without giving up equity or taking on debt. The repayment terms are based on a percentage of your monthly revenue, meaning that payments fluctuate with your business's revenue. During slower revenue periods, the payments may be lower, which can help with cash flow management.

Suppose a company generates $25,000 in monthly revenue and seeks funding through RBF. A potential investor agrees to provide the company with $100,000 in exchange for 8% of the company's monthly revenue until a total of $120,000 has been repaid.

Under this agreement, the company would make monthly payments to the investor equal to 8% of its monthly revenue, or $2,000. If the company's monthly revenue stays at $25,000, it will take 60 months, or five years, to fully repay the investor. However, if the company's revenue increases to $30,000 monthly, it would take only 48 months, or four years, to fully repay the investor.

You can access RBF from several sources, including specialized income-based financing providers and alternative financiers. It doesn't matter if you don't have a good credit history. You will also not be required to present substantial assets as collateral. RBF providers focus more on the business's earning potential than on your historical financials.

It is a good option for companies with a predictable revenue stream and growth potential.

Fuel your business growth with One Park Financial!

One Park Financial could be a great option if you are looking for a financing option that aligns with your business's revenue and growth potential. We have been committed to small businesses for over ten years, providing them with the support and resources they need to succeed.

If you want to work with us, your business must have operated for over 90 days and generate a monthly revenue of at least $7,500. If you meet these criteria, we encourage you to contact one of our financial agents today. If you want to take the plunge, fill out our quick online form, and one of our agents will contact you as soon as possible.

Please take advantage of this opportunity and contact us today to find out how our fast-working capital programs can benefit the growth of your business!

Disclaimer: The content of this post has been prepared for informational purposes only. It is not intended to provide and should not be relied on for tax, legal, or accounting advice. Consult with your tax, legal, and accounting advisor before engaging in any transaction.