Private Business Loans: What Makes Them Different From Bank Loans?
A 2023 survey of small business owners reported that 93% had financial troubles in the past 12 months. As a result, 53% had to use their personal savings to fund their businesses. Of those who applied for loans, lines of credit, or merchant cash advances, only 51% were approved.
These numbers emphasize how difficult it is for small businesses to get the financing they need to keep afloat, let alone expand. This is why private business loans are becoming an appealing solution for entrepreneurs. They offer flexible financing options without the stressful and restrictive loan applications.
In this article, you’ll learn:
What private business loans are
How they differ from traditional bank financing
The types of businesses that benefit from these loans
What Are Private Business Loans?
Private business loans mostly cater to small businesses not affiliated with banks or credit unions. This alternative financing, typically ranging from $25,000 to $2 million, has simpler eligibility requirements and application processes. That's because private lenders aim to offer easier options outside the strict underwriting practices of traditional banks and financial institutions.
Note that private business loans differ from venture capital or angel investment funding, which are also considered alternative funding. Private lenders don’t exchange a company’s equity for financing. Instead, as long as borrowers can prove they can repay, they can quickly access loans with little documentation and lower credit scores.
Private business loans are term loans, meaning they have a short- or medium-term repayment timeline (typically 1-5 years). As such, this funding option is typically not available to new businesses.
7 Examples of Private Business Loans
Private business loans can be personalized or customized to business needs and preferred payment plans, which are their major advantages. Here are the common examples of this type of small business financing:
A business line of credit is a revolving fund that you can draw from and pay at any time. This is especially useful during emergencies, like fixing or replacing critical equipment.
Working capital loans can be used to pay for daily operational expenses, such as payroll and utilities. However, they are not meant for long-term investments, like buying commercial real estate.
A merchant cash advance is a short-term small business loan that offers lump-sum payments upfront for a percentage of future credit or debit card sales. The main purpose of this funding is to prevent cash flow shortages.
Equipment financing is used to buy new equipment and machinery. This includes anything from service vans to software to office furniture.
Invoice factoring, or invoice financing, allows you to sell your past-due invoices (accounts receivables) at a discounted rate. This provides immediate cash flow while giving you additional time to recover outstanding payments.
SBA loans are funds partly backed by the U.S. Small Business Administration. SBA 7(a) is the main loan program for small businesses, which has a low interest rate and a 25-year repayment term for real estate loans.
Bad credit loans are for companies who cannot qualify for a traditional bank loan. Note that this doesn’t automatically mean that these borrowers have bad or low credit scores; they could be new businesses that don’t have a credit history yet.
4 Differences Between Private Business Loans and Traditional Bank Loans
Private lenders are championing that alternative financing cuts out the red tape from credit applications ーa direct contrast to how traditional banks do business lending. Below are the major differences between alternative and traditional business funding.
1. Application/Approval Process
Online lenders, like Backd, use cloud-based platforms to streamline applications and fast-track approval. Borrowers simply apply online with less documentation, which can include a few months of bank statements, and a business bank account and license. The funds are also released between 1-2 business days once approved.
In contrast, traditional banks can require applicants to have a banking relationship with them first and submit complicated paperwork. This can include a business plan, accountant-certified tax returns, and financial statements. As a result, approval can take as long as three months.
Both private and bank lenders typically charge an origination fee for processing a loan application. However, you might be able to negotiate to have this lowered, depending on the loan amount and your business profile.
2. Interest Rate
Because they often come with no collateral, private term loans have fixed or variable (floating) interest rates that tend to be higher than banks. It all depends on the borrower’s profile and the loan amount/product.
For example, fixed-rate loans tend to have higher interest rates because they can't be adjusted for market conditions. This makes them riskier than floating rates. In 2024, the average online business loan interest rate was 9%-75%.
Meanwhile, banks’ intensive reviews allow them to screen for borrowers with the least risk of defaulting. As a result, they can offer lower interest rates. The average bank business loan rates in 2024 were 7.85%-8.79%.
3. Eligibility Requirements
Private business lenders have more flexible requirements because they are less restricted and regulated than Federal Deposit Insurance Corporation-insured banks. This means they have more wiggle room to think out of the box when it comes to lending solutions.
For example, they can consider revenue and monthly cash flows more than credit scores. Backd accepts at least a monthly revenue of $100,000, a 625 credit score, and one year of operations for a Working Capital Advance (and two years in business for a Business Line of Credit). Plus, private lenders typically don’t require collateral. General term loan products can also waive down payments.
In contrast, the major banks require intensive background checks and FICO Scores of at least 680. For example, Bank of America’s no-collateral Business Advantage Credit Line requires a personal credit score of over 700. Banks can also require a down payment of up to 20%, depending on the loan amount.
4. Repayment Terms
Another flexible aspect of private business loans is the repayment terms. You can choose or negotiate a schedule that works best for you, whether that’s daily, weekly, or monthly payments. At the end of the day, private lenders want to give you the best conditions possible to successfully repay.
In contrast, banks generally stick to a fixed monthly payment. This schedule could be difficult for businesses that would like to have more control of their cash outflows or pay off loans as soon as the money is available.
Types of Businesses That Benefit From Private Business Loans
While all businesses can take up this type of loan, there are some groups that can benefit the most, including:
Startups: Startups often have high upfront costs, including office rent and equipment, and research and development. Lump-sum financing that can be accessed quickly provides a much-needed cash injection that could spell the difference between success and failure.
Unique business needs: Some business owners prefer private lenders because they want someone who understands the challenges that small businesses face. They often want to consult with these lenders to get the type of financing that would help their companies thrive in an industry that might have distinct certifications, requirements, or regulations.
Nonprofits: Nonprofits often struggle with working capital because they’re reliant on donations and government funding, especially during their early years. Banks also typically have higher requirements and restrictions for these businesses because they’re not revenue-generating.
Get Quick and Easy Funding Through Backd
Alternative funding can give many struggling businesses another chance. For example, Backd’s Working Capital Advance offers up to $2 million worth of funding, while the Business Line of Credit offers up to $750,000.
Our website also facilitates a stress-free and fast application. What’s more, we do a soft credit pull, so it doesn’t affect your credit score.
Our requirements:
$100,000 in monthly revenue
A 625+ credit score
Established business credit
A brick-and-mortar address in the U.S.
One year of operation for the Working Capital Advance and two years for the Business Line of Credit
Apply now and start growing your business.
