When looking for a small business loan, most prefer dealing with a bank. In fact, many business owners don’t realize there are other loan options aside from those offered at your local bank.
So, consider this. Which option is better for you – a bank loan or a loan from a private lender?
Actually, both sources are viable options for a small business owner. It generally boils down to which lender approves your application.
However, you need to know that bank loans and private lender loans each have their own set of pros and cons. Here’s how both differ from one another.
Bank Interest Rates are Lower for Quick Small Business Loan
Generally speaking, banks tend to offer lower interest rates compared to private lenders, due to the bank’s depositors keeping large sums of money in their accounts. The banks in turn lend this money out to borrowers. Banks also have a tendency to pay very little interest to their depositors. In fact, some don’t even pay any at all – giving them access to a continuous flow of cheap funds.
Additionally, banks have access to federal funding. Currently, the rate of federal funds is very cheap – 2.25%! Over the course of the past few years, it rose as high as 19%, before dropping down to 4% or 6%.
However, it’s much harder to get loan approval from banks compared to private lenders. Here’s why:
- Banks don’t rely on loans to make money. They have numerous other ways to make money such as banking fees, share equity, wholesale deposits, and more.
- They also have strict regulations, resulting in numerous denials of loans from startups or small businesses. These include higher credit scores, larger cash flow requirements, and low debt-to-income ratios. A bank’s focus is always on the protection of their depositor’s money.
- On the other hand, private lenders are a bank’s number one competition when it comes to loaning out funds. Subsequently, banks know they only need lower interest rates in order to win a larger share of business. For example, when private lenders charge 10%, banks may offer 9%.
It’s Easier to Get Approval from Private Lenders
Private lenders rely on investors, banks, and other financial institutions for their source of funds, resulting in you the borrower paying a higher rate of interest, since the lender must repay their funding source. This makes it considerably more expensive to acquire funding privately, compared to a bank.
The choices come down to getting cheap money that’s hard to acquire, or easy approval, and slightly higher interest rates.
If you currently don’t qualify for a bank loan, continue to grow your business, and then reapply at a later date. If you already qualify for a private lender loan, by all means, go for it! You can always switch over to a bank loan or other low-interest source of funding once your business grows.
If you’re like most business owners, you don’t want to hinder the growth of your company. So, while banks do offer lower interest rates, it’s probably in the best interests of you and your business to acquire funding from a private lender, if you are not qualified at a bank.
The good news is, SMB Compass works with small businesses owners just like you, helping you acquire funding that is just right for you and your business. Our loan experts immediately go to work for you, locating and securing financing that suits the exact needs of your company.
Don’t hesitate to give us a call today at (646) 569-9496 or email us at email@example.com.