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If you’re trying to start your own business in your province or territory, one of the first things you must consider is how you’ll be financing the whole operation. Unless the money is coming out of your own pocket, you’ll also have to figure out which lender you’ll be applying with, in which case you will typically have two choices. 

Although many aspiring business owners choose to apply with their bank, credit union, or another top tier financial institution, there are also many non-traditional lenders who can offer you an assortment of private business loan products. Keep reading if you’re interested in learning the benefits and pitfalls that come with this type of financing. 

What Is A Private Business Loan?

As mentioned, a private business loan is a lump sum of cash that you can borrow from an alternative lender that works outside of banks and other conventional financial institutions. As you would with a traditional lender, you can use whatever funds you acquire to finance various parts of your business, then repay what you owe over time.

While most bank financing is meant for you to build your organization in some way, private business financing is often used for paying down debt and can come in several forms, such as a term loan, a line of credit, or a merchant cash advance.

All this said a private business loan can also help you:

  • Lease or purchase assets
  • Hire additional staff members
  • Invest in marketing strategies
  • Introduce a new product or service
  • Develop within a new market or area of the country
  • Consistently restock your inventory      

Who Are Private Business Lenders? 

Basically, private business lenders cater to the subprime market, meaning start-up companies and borrowers who don’t have amazing credit or strong finances overall. While every subprime lender has a different way of accepting clients, their approval restrictions are generally much easier to pass than the average prime lender. 

On the other hand, prime lenders like banks and credit unions have stricter regulations and may only be willing to approve 20% – 40% of applicants, especially when it comes to business loans, which can involve significant amounts of financing. They tend to focus more on your credit history and won’t always understand your particular industry. 

Even though most private lenders can’t offer as much funding as prime institutions, they will normally focus on your ability to adhere to your repayment plan, rather than on your credit. This makes private lending a great option if you’re just getting your business off the ground and you have minimal financial power.

Types Of Business Loans Available In Canada

Remember, there are actually several types of business financing products that you can access through a private lender in Canada, including but not limited to:

Term Loan

One of the most basic forms of private business financing is the term loan. Since this is a cash loan that’s deposited directly into your bank account, you can use it for all sorts of purposes, such as:

  • Purchasing assets/properties (equipment, real estate, etc.) 
  • Gaining additional business capital
  • Expanding your enterprise
  • Purchasing a secondary business 

One of the main benefits of a term business loan is that most lenders charge fixed interest rates, which are easier to calculate and won’t change throughout your repayment term. This loan type can also come with a set repayment term of 3 to 5 years, but every lender has different specifications. 

Merchant Cash Advance

A good option for retail and service-based businesses that are already well established. A merchant cash advance allows you to leverage a percentage of your upcoming debit and credit card sales in exchange for additional working capital

Although approval is relatively quick compared to other forms of business financing, interest rates are often higher and you’ll typically have to make payments more frequently, such as on a daily or weekly basis. 

Line Of Credit

Similar to the way a credit card works, a business line of credit allows you to dip into a revolving credit limit and make payments on a monthly basis. While rates can also be pretty high here, a line of credit is a good option because you can make minimum payments to avoid defaulting or multiple payments to improve your credit. 

Depending on how much credit your business is actually approved for, a line of credit is usually a better choice for paying down your smaller or recurring expenses, such as new inventory, permits, licenses, taxes, and bills.

Commercial Mortgage 

Unlike other private business loans, a commercial mortgage is used specifically to buy land, buildings, and other real estate properties. Similar to a regular home mortgage, it also has a much longer repayment term than almost any other loan product, allowing you to pay off the property over several decades if necessary.

In this case, the property itself will act as collateral and you may be given a greater chance of approval and better loan conditions if you make a large down payment or your business is considered very profitable.

Asset-Based Leasing and Financing

This type of leasing and financing allows you to leverage assets you already own, such as equipment, vehicles, and other properties, in exchange for additional money, which is a good option if your business is new or doesn’t have great credit. You can then use your acquired funds to improve or expand your business however you need. 

As it is with any form of secured loan, be wary of the fact that your lender would take temporary ownership over your collateral until your repayment plan is complete, which will give them the right to seize it if you default on too many installments.

The Benefits And Pitfalls Of Private Business Loans

Although private business loans can help improve your enterprise in many ways, they can also have some drawbacks that could cause you financial problems later on, so it pays to study up before you apply. If the pitfalls outweigh the benefits for you, it may be a better idea to choose a bank, credit union, another prime lender.

Benefits

  • Approval is faster and easier than with most traditional business lenders
  • Repayment plans and interest rates are usually adjustable
  • Some private lenders can offer you a wide variety of financing options
  • Start-up businesses and credit-constrained borrowers can access the funds they need with less hassle 

Pitfalls

  • Business lending is riskier and more expensive for private lenders than it is with banks, so they usually charge higher interest rates and administrative fees
  • Private lenders are often smaller and cannot approve as much financing as banks (who can secure funds through federal organizations and depositors)
  • Private companies are harder for the government to regulate, so there may be a greater risk of unreliable products, scamming, and identity fraud

Looking For A Private Business Loan?

Whether you’re looking for a term loan, a line of credit, or another type of business financing, Loans Canada can help you avoid the constraints of big banks and find the right private lender in your area. 

                       
Bryan Daly avatar on Loans Canada
Bryan Daly

Bryan is a graduate of Dawson College and Concordia University. He has been writing for Loans Canada for five years, covering all things related to personal finance, and aims to pursue the craft of professional writing for many years to come. In his spare time, he maintains a passion for editing, writing screenplays, staying fit, and travelling the world in search of the coolest sights our planet has to offer.

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