Having the money to expand your business is critical, and that’s where private loans come in. Getting money from an alternative lender can help your small business seize opportunities quickly. Private lending offers a streamlined process and different acceptance criteria.
Businesses need to understand the risks of these loans rather than just the many positive attributes.
How Can Businesses Use Private Loans For Expansion and Growth?
Private loans help businesses expand into new markets, increase inventory, and buy new equipment. You’ll need to take several steps because different types of loans are available. These include everything from startup money to cash for tech investments.
The first step is determining how much financing you should be asking for. An excellent way to get started is to update your cash flow projection. This will allow your business to see low and high working capital points for 12 months.
The Loan-to-Value (LTV) ratio is a number that you’ll need to understand when looking for a private mortgage. The formula here concerns the appraised value divided by the requested mortgage amounts. Private lenders look for one of these that doesn’t exceed 75%.
Businesses should also decide where to use the money for expansion and growth. Some possibilities include hiring expert advisors, creating websites, buying franchises, and buying assets.
It’s a good idea to have financial statements like a balance sheet and cash flow statements ready when you’re looking at using a private lender.
What are The Advantages of Private Financing for Business Development?
Unlike banks and credit unions, private lenders are individuals or companies not regulated by federal standards. Their streamlined process can take only several days, whereas more traditional avenues can take weeks.
One of the other advantages of private financing is that it covers people with irregular sources of income. Recent statistics say that the percentage of people with a home office in Canada as of June 2021 was 32%. Many of these people are self-employed, and getting a private loan is a good move.
Private loans are suitable for businesses such as startups that must establish credit histories.
How do Lenders Assess Business Plans and Potential for Growth?
Private lenders and small businesses share some common ground when assessing a business and deciding on an application.
- Having your financial statements in order is a good starting point. Putting together some statistics that include your business numbers for several years helps. You can compare them to industry averages to highlight your position.
- It’s always a good idea to have a solid business plan regardless of the size of your enterprise. These are important for lenders who want to know more about your business, and they need to include financial projections and forecasts, operational plans, and a market and sales strategy, to name a few categories. Here is a guide to help you get started.
Other items like finding a credible private lender can help you overcome a financing hurdle. That means looking for a lender governed by the Mortgage Brokerages Lenders and Administrators Act (MBLAA). Private lenders don’t need licenses from the Financial Services Regulatory Authority of Ontario (FSRA), but the brokers they work with do.
However, like any financial product, any enterprise has some risks.
What are the risks for businesses taking private loans for expansion?
Private loans have higher interest rates than their more contemporary counterparts. One reason is that many people applying have a credit score below the accepted average of 600. Plus, the terms are usually shorter than those of a bank loan. These factors increase the risk of default.
However, a small business needs to be aware of some other risks before taking out this type of money.
Not Borrowing Enough
Watching how much debt you take on is always a good idea. However, your business can face a cash crunch if you don’t take enough money for a project. There are always unexpected expenses.
To avoid this, develop a cash flow forecast for every project with high and low scenarios. Remember that alternative lenders are an excellent solution when you need money quickly for a startup. Traditional bank loans usually take more work to secure.
Only Focusing On The Interest Rate
The Interest rate is significant, but it’s not the only factor a business needs to look at. Looking at the loan terms to decide which is best for you is essential. Other suggestions include looking at the flexibility involved in repayment terms.
You should also consider that a property will need to be used as collateral and appraised with a private loan. Private lenders usually require more than 25% of equity, and putting that up can present a risk to your business if you default. Remember, private lenders rely on what’s called a loan-to-value ratio, which relies on this equity.
It’s also important to consider the private lenders offer interest only loans quite often. That means that an applicant or borrower won’t be making a dent in their principal. There’s also several different fees that need to be considered including an appraisal fee.
Are You Looking for a Private Loan To Expand Your Business?
Mortgage Broker Store focuses on private mortgage-related products, including private mortgages. Mortgage applications that don’t meet traditional lending requirements are a specialty. Our team of private lenders, brokers, and licensed mortgage agents is ready to help. Let us help you get a mortgage loan that fits your requirements today.
Email ron@mortgagebrokerstore.com or call 416-499-2122.
