If you’re planning on starting a business or purchasing a property, you may think that however you get the initial funding is fine. The reality is that there are very different rules based on the type of loan you get. Each brings something different to the table with its own different sets of strings attached. Here, we’ll go over some of the major differences that can be found between personal loans from bank lending as well as private lending money loans.
Bank lending is, for many, the more officially recognized money lending option between the two. It is, as the name implies, financial capital issued out to businesses specifically by a bank or third-party finance medium. This capital is meant to handle long-term business projects or plans. These loans are set to a fixed period of time for repayment, with variable interest rates applied based on the nature of the loan.
- Lower Interest Rates: The biggest draw for bank lending is the fact that the interest and repayment rates are generally much more manageable compared to many private lenders. This is because their initial cost of the funds is lower due to being federally backed.
- Tax-Deductible Expenses: When paying the interest on a bank loan, the debt is paid off is tax-deductible so long as it is for business-related reasons.
- More Secured Loan: While it may still feel somewhat predatory while amid repayment, bank loans are more secure and less likely to have tricks and “gotchas” laced in the fine print compared to private lenders.
- Less Negotiating Power: A huge issue here is the fact that bank lenders either can’t or have no reason to work with you. Essentially, their rules are hard-lined, and if you don’t meet them exactly how the bank wants, you can’t get the loan. This can be problematic for most people.
- Restrictive Regulations: Just the same, most banks cannot lend to small or new businesses due to their more restrictive regulatory practices.
- Risk-Averse: Ultimately, bank loans are very risk-averse. As such, many will actively avoid supporting any business that is deemed too “high-risk” or too “low cash-flow”. Because of this, most small businesses won’t get much funding even if they otherwise meet all of the other requirements.
Private lending works similarly to bank lending with the one exception being that this is from money lenders in the private sector. Because they are privately owned, they are not forced to hold the same regulatory standards as banks. This can lead to some predatory lending but also some much more reasonable terms and acceptance options, as you can often negotiate your situation easier with a private lender than a bank.
A great example of a legitimate private lender is California Hard Money Direct. This is a Los Angeles hard money lender that offers reasonable rates with their clients as well as fast approval times.
- Faster Approval Times: Provided you meet their respective requirements, getting approved can be surprisingly fast, especially if coming from bank lending, where you must go through weeks of pending approval for an answer. Here, it can be completed within two weeks.
- Easier Approval Chances: The biggest leg-up private lending has over bank lenders is that their approval requirements are considerably easier to meet. In most cases, if your credit history is good enough, this can be all you need to get a loan.
- More Easily Negotiable: While certain lenders have a predatory slant to them, these will often be much more ironclad in what is negotiable and what isn’t. Legitimate private lenders will generally have negotiable terms or options, as they want your business.
- Higher Interest: Because they are not backed by the federal bank, private lenders have a higher cost for getting their money. This means interest rates will generally be higher compared to bank lending.
- More Difficult For Newer Businesses: You also have to understand that, while private lenders are more willing to accept risk than bank lenders, they also want to be certain that they’ll get their money back. This means you can expect newer businesses to have terms that are a bit less favorable as the lenders try to ensure they get their money back.