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What is a private lender?

This happens everyday-well-prepared entrepreneurs are walking into the banks with brilliant business ideas backed by well developed business plans, and are walking out empty-handed. When small business owners have exhausted all of their options for financing they will often turn to private lenders. Many of theses small business owners are ultimately able to obtain small business financing from private lenders. While private lenders are not as often used as other types of investors, they can provide a stable option, for small business owners who need more capital.

Besides being able to gain the financing you need, for individuals who do not want to give up a certain percentage ownership in their business, as is often required by venture capitalists, and deal with angel investors who may demand a board position or significant day-to-day control, the private lender may be a small business financing alternative worth considering. It is important to keep in mind, that when it comes to small business financing, private lenders are looking for the same information, and will conduct a similar due diligence as the banks to make a positive funding decision. You will need to understand that they are looking for great business ideas, at the right time, with an airtight business plan, they should include:contingency scenarios and realistic forecasts that are backed by experienced and professional people, with some financial stake in the business.

It should be understood that most private lenders are "specialists" who engage in higher risk ventures, because they clearly understand both the opportunity and risk that are associated with selected business types, or market segments. Generally, private lenders will not only fund projects the banks reject, they will creatively structure loan repayment and sometimes be a helpful resource. In addition, many private investors may be willing to invest in an "emergency or business rescue" situation.This can mean that if your business fits outside the traditional box of a new business startup, you may have better luck with a private investor.

Examples of businesses that have been funded by private investors include but are not limited to:

  • Automobile dealerships

  • Transportation and trucking businesses

  • Manufacturing for the automobile sector

  • Medical related businesses (including medical practices because of the doctor shotage and because doctors on the whole are responsible debtors).

  • Wineries (these are attractive because they are high asset based and offer more security).

You must understand however, that despite the "risk taking" nature of private lenders, you must still be able to sell them on why your business is the one they should invest in. A well-thought out and well-written business plan is the key to do this.

When questioned many private investors are unable to describe why they fund the companies they do. Many report that they conduct due diligence and then just take the risk. They often put their money hoping for the best. Private investors are well aware of the fact that statistically some of the businesses they invest in will do well and others will fail.

This leaves many small business owners wondering where they can find a private lender. It is important to note that given the relatively low profile of most private lenders, a significant number of the best projects come to their attention via business capital brokers. These brokers screen the projects, and then pass on a wider selection of projects that match private lenders specific parameters. Keep in mind that brokers like will develop relationships with hundreds or thousands of lenders and investors, so the key is to sell the broker on your business plan. Then when you have gotten him or her sufficiently excited, about your project, they can recommend it to the right lenders or investors.

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