Pros and Cons of Private Loans

There might come a time in your small business when you are ready to grow but do not have enough cash to take that next step. Private loans can help a small business find money to grow. Although there are multiple loan options to choose from, a private loan might be right for you.

What are Private Loans?

Private loans are loans from non-bank entities. This loan originates from entities that believe your business has potential to grow and will lend you money to get started. You can get a private loan from friends and family. Borrowing money from them can be simple and a timely way to get financing for your business. People that are close to you will know you and your business well will want to help you succeed.

Pros of Loans from Family and Friends

  • Easy access – there is not tons of paperwork that you need to fill out.
  • No collateral – in most cases you will not be required to put up any collateral.
  • Interest rate - a friend or family member is more likely to be lenient than a financial institution regarding the interest rate.
  • No background check – since you will be borrowing from someone you know, they probably will not run a credit check on you.
  • Flexible terms – you will have more flexible terms with the length, payment date, and loan amount than if you were dealing with a lender from a bank.

Cons of Loans from Family and Friends

  • Relationship strain – you must be aware that your relationship with this person might change. Especially if you miss a payment or cannot afford to pay it off at all.
  • Not formal – not filing out tons of paperwork is a benefit, but it can work against you if the person feels the other is not living up to the terms that was initially agreed upon. If you don’t have terms on paper, you will end up in a he said/she said situation where no one comes out the winner.

Private Loans from Angel Investors

An angel investor is someone who is willing to provide capital for a business, in exchange for convertible debt or ownership equity. Angel investors are a viable option for a private loan if you are a small growing company with a solid business model and prospects for rapid growth.

Pros of a Loan from an Angel Investor

  • Can provide capital in small amounts – angel investors are able to provide private loans for less than $500,000 using their own personal funds unlike venture capitalists who pool from different sources.
  • Flexibility – angel investors have looser requirements than traditional financial lenders, including banks and venture capitalists.
  • Knowledge and experience – angel investors can bring their experience to the table since they have so much experience. Many angel investors have walked in the shoes you are in and have founded and led many companies in the past.
  • Keeping it local – angel investors like to invest locally. It also provides many benefits for the community. Angel investors like to invest back into the communities that helped them grow, paying it forward.

Cons of a Loan from an Angel Investor

  • Loss of control – while an angel is giving you a private loan, it does not mean you are handing over your business to them. You might need to give up some degree of control to make your angel investor happy.
  • No national organization - While there are well-documented directories of venture capital firms available, there is no national register for angel investors. Compared to venture capital firms, angel investors are much harder to research and contact.