When considering business funding, you'll want to ask your lender these 5 things. These 5 questions provide you with the most relevant information upfront.
- What's the interest rate? Is it low (less than 8%), medium (9% - 15%), or high (16% or higher)?
- What's the time to funding? Can I expect to get the funds fast (days), in a moderate timeframe (weeks), or will it take longer (months)?
- What are the repayment terms? Daily, weekly, or monthly?
- Is there upfront collateral required? Is it real estate, equipment, or other property?
- What are the origination criteria and late fees?
When you ask the interest rate, that's the same as asking for the price. Time to funding means how soon you can have the money delivered to your bank account. Repayment terms are how long you will be paying the money back for. Upfront collateral is what you are willing to give up if you cannot give the money back. Origination criteria are what the private lender requires from you at the time of application (business documents, personal identification, proof of address, etc.). Late fees are fees charged when you miss a payment.
TIP: In the financial world, this type of funding is called "debt financing." This means that you are not giving up any equity from your business, just paying money to borrow capital or funding for your business. Below, you'll see these 5 factors in action in two different scenarios.
Scenario 1: Need capital to support immediate business needs
An investing opportunity or emergency situation arises that requires money quickly. You have already tapped out all other sources, and to keep your business running, you need to get capital (funds) as soon as possible. At times like these, private lenders can quickly provide large amounts of money, usually in 3-5 days (and sometimes as fast as 24 hours).
In this scenario, time to funding (question 2 above) is the most crucial factor. Getting the money within days can mean avoiding permanent short term damages like bounced rent or missed supplier payments and credit score impacts. Using a private lender that may be more expensive is a fair trade-off to avoid these longer-term damages. Also, look for a lender that won't ask for any upfront collateral since you've probably already put them up for your other loans. Also, if you're asking for a small amount (under $25,000), then the higher interest rate is really only a matter of a couple of thousand dollars.
For example. if the interest rate is 25%, that’s (0.25)*(25,000)= $6,250. Meaning you are buying $25,000 for $6,250.
Scenario 2: Need capital for a planned new project
You have everything already planned out for your latest project. You are willing to put up property as collateral, and you don't need the money for at least another few months. You are shopping for the best deal, so your primary concern will be the interest rate. The interest rate is the amount in addition to the borrowed amount you need to pay back.
Business owners are always on the hunt for the lowest interest rate for their loans, but you should keep in mind that business loans generally cost more than personal loans. A line of credit (LOC) from a bank is typically the lowest interest rate financing option available with the most flexibility. However, lines of credit require a superior credit history and can take upwards of a month to be approved and access funds.
The Bottom Line
When speaking with a private lender, it's in your best interest to ask these questions up front. This way, there are no unpleasant surprises down the road. Asking these questions allows you to compare between private lenders and choose the right one for you.