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Public vs. Private Business Loans

The time is now to search for a loan to fund your business, but the question is how do you get this loan? You can either choose a public or private lender; however, it may not be obvious what the difference is and how that affects the fine print of your loan agreement. There are a few details to consider before deciding whether to choose a public or private loan lender. We’re giving you an overview on notable distinctions between the two.

Loan Lenders

It seems like the discussion is between private and public loan lenders, but it’s a bit more complicated than that. Firstly, what is the difference between private and public lenders? We need to draw a bit of a distinction. It’s not as obvious as “government vs. not government,” though there is a kernel of truth in an assumption like that. Retrieving loans from the government is an option.

However, broadly speaking, private lenders operate as their own entities separate from traditional financial institutions. By traditional, we mean the institutions that have a long-standing association with the storing and exchange of money, like banks and credit unions. Private lenders are outside these banks and credit unions, functioning with their own set of rules beyond the stricter regulations traditional lenders tend to follow.

Qualifying for Loans

Qualifying for loans is known to be a lot easier if you go through a private lender. Private lenders can and will reject loan requests at their discretion, but they tend not to have the same priorities as banks and credit unions. Banks are usually the strictest of all potential loan lenders. You will need a good credit score to secure a bank loan. 

Credit unions look at your credit score too, but may accept a bad credit score if other boxes are checked. For example, proof of stable employment, and collateral. At credit unions, you can increase your chances of landing a loan with bad credit or lower income by adding a cosigner who has a stronger credit score and income. The caveat is you must be a member of the credit union to apply for any loan—and credit unions can be pretty picky about who they grant membership status. An upfront fee is also required to join a credit union.

Private lenders are usually the most flexible of loan lenders. They do care about your financial health like other financial institutions, but may accept loan applications based on a combination of factors that banks and credit unions won’t prioritize, like your overall character, your unique needs, capacity to succeed, and collateral that is not related to the loan you’re intending to take out. A poor credit score and a rocky financial situation aren’t necessarily roadblocks to obtaining a loan from a private lender.

Private lenders are generally quicker too. While it might take weeks for a bank to process a loan, a private lender can have your loan out in days. Private lenders’ speed and willingness to accommodate might work for anyone in a financial bind.

Interest Rates

Unfortunately, what private lenders gain in flexibility, they lose in interest rates. Despite banks also being for-profit organizations like private lenders, banks offer the lowest interest rates. Private lenders, on the other hand, demand the highest interest rates. 

If you go through a bank, you may only stack up interest on your loan at a rate between 0.5 and 15 per cent. The starting rate at banks is significantly lower than the starting rate of eight per cent offered by private lenders. The maximum rate of banks, 15 per cent, also doesn’t compare to the maximum interest rate private lenders offer, 35 per cent.

Banks and private lenders are both using interest rates to generate profit on their services, but banks seem to benefit from demand (and more interest from investors). They are able to create a profit with a lower interest rate margin, due to the size of their customer base, compared to private lenders. Banks also offer additional services that bring in profit, which private loan lenders do not offer, such as bank accounts and credit cards. In other words, banks can afford to offer lower interest rates.

If the amount of interest you might incur and be required to pay off is a major concern of yours, private lenders may not be your preferred option. However, private lenders are an excellent alternative to traditional financial institutions. Private lenders sometimes make the process easier than banks, or even credit unions and government units.

Credit unions ask for an interest rate of 3% or more—and as non-profit organizations, the leftover money credit unions make through interest rates goes back to the members in the form of dividends, which would be sent to external shareholders if the organization is for-profit.

Jacob Carmichael | Contributing Writer

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