Bank Loans vs. Private Lender Loans

Written by promotiondept

September 24, 2018



Last Updated: Aug 28, 208
When tryng to get a loan to grow your busness, s t better to borrow from a bank or a prvate lender? Here are some pros and cons of each to consder.

So, what s better; a busness loan from your bank or a busness loan from a prvate lender?

The answer s smply the one loan that you can get approved for.

But, every busness owner w a bank loan. n fact, many busness owners thnk that ther bank s the only place they can get a busness loan. But, that s far from the .

Everyone w a bank loan. Why? t s usually because bank nterest rates can be lower.

Why do bank loans offer lower rates?

Banks typcally have a lower cost of funds than other lenders. Depostors (ther retal s) keep a lot of money n ther checkng and savngs accounts. Thus, banks have easy access to those funds to lend out. And, f banks don’t pay nterest for those deposts or pay very lttle nterest lke they do today (most pay under ½ percent) – then those funds are very cheap for the bank to use.

Plus, all banks can access federal funds. And, rght now the federal funds rate s (.25%) – very cheap consderng that n the past t has been around 4% or 6% and has been as hgh as 9%.

Prvate lenders on the other hand ether have to get funds from nvestors who are lookng for decent returns or from other banks and nsttons who lend these prvate lenders funds at hgher rates then t costs them to acqure that money.

Ether of whch rases prvate lender’s cost of funds whch n turns gets passed on n ther loan rates.

Let’s look at an example:

A bank needs to earn a spread on ther loans of say 6% to cover the bank’s drect expenses and overhead costs (ther cost of beng n busness).

f they can acqure funds at .25% then they can lend them out at 7.25% and stll earn ther spread.

A prvate lender mght need to earn a spread of 4% to cover ts operatng costs. But, ts cost for the funds t lends out could be 6% or more to ether repay the bank that lent them that money or to repay nvestors.

f the prvate lender’s cost of funds are 6% and ts needs to earn a spread of 4% – t has to charge 0% at a mnmum or go out of busness.

Thus, t s easy to see why everyone w a bank loan as opposed to a prvate lender loans.

But, banks are also opportunstc.

Whle banks can lend out funds at lower rates, they hardly do. Here’s why:

Plus, banks add a lot of other costs to ther loans – ncludng fees, reportng requrements, coven, etc. that are not ncluded n ther rates but make the overall cost of ther loans hgher.

Prvate lenders, alternatvely, don’t have all those restrctons or alternatve ways to generate revenue (besde fees whch only happen when they close a loan). n fact, they are usually n busness only to make loans.

Thus, prvate lenders tend to be easer to get approved by.

Knd of a double edged sword. Cheap money but hard to get on one hand and easy to get loans but hgher rates on the other.

However, gong back to the orgnal questons, whch s better? The answer stll remans the loan that you can actually get; but t only remans true whle you can’t get the other.

f you don’t qualfy for a bank loan, make t your goal to grow your busness to the pont that you qualfy for bank fundng (you mght not actually need t when you can qualfy for t). But, n the mean tme, f all you can get approved for s a prvate lender loan, then by all means; knowng that t s only temporary as your busness grows.

Two thngs to remember here:

Example: f you have an opportunty to earn $0,000 above the prncpal of the loan but can’t get a bank loan – do you just let the opportunty de or do you take the prvate loan and only realze say $9,000 n s due to the hgher nterest rate?

You do what you have to do untl you qualfy for somethng better.

So, when seekng a busness loan, whch s better a bank loan or a prvate lender loan? t really all depends on what you can get approved for, be to repay, and from.

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