When considering business funding, you can ask your lender these 5 things. These 5 questions provide you with the most relevant information upfront.
- Interest rate: Low (less than 8%), Medium (9% – 15%), High (16% or higher)
- Time to funding: Fast (days), Moderate (weeks), Long (months)
- Repayment terms: Daily, Weekly, Monthly
- Upfront collateral required: Real estate, Equipment, or other property
- Origination Criteria and late fees
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 the 5 factors in action, in two different scenarios.
Scenario 1: Need capital for supporting quick 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 provide large amounts of money quickly, usually in 3-5 days (and as fast as 24 hours with Thinking Capital).
In this scenario, time to funding is the most crucial factor. Getting the money within days can mean avoiding permanent short-term damages like bounced rent or supplier payments and credit score impacts. Using a private lender that may be more expensive is a good trade-off to avoid these 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 it is a small amount (under $25,000) then the higher interest rate is only a matter of a couple thousand dollars.
E.g. if the interest rate is 25%, , that’s (0.25)*(250000)= 6,250. Meaning you are buying $25,000 for $6,250.
Scenario 2: Need capital for a new project in a couple of months
You have everything already planned out. You are willing to put up property as collateral and don’t need the money for at least another couple of months. You are now shopping for the best deal for your funds. Then your primary concern is 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 from a bank is typically the lowest interest rate financing option available with the most flexibility. However, lines of credit require superior credit history and can take an upwards of a month to be approved and to get access to funds.
When speaking with a private lender, it’s in your best interest to ask for these questions up front. This way there are no unpleasant surprises down the road. 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 are unable to 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. Asking these questions allows you to compare between private lenders and choosing the right one for you.