Obtaining a private loan can enable a business to boost its structure and flexibility. New resources and a quality staff can also be designed and implemented with additional cash on hand. Yet, as with any type of loan options for businesses, there are both pros and cons to receiving private loans for all business expenditures. Knowing these potential money management needs will help businesses make better decisions and secure better loan agreements.
First, here is a quick overview of what a private loan actually is. Private loans fall into a broad category that excludes banking systems as options of credit. With the exclusion of banks and other formal loan operations, private loans can be from any entity interested in or encouraged by a business model’s potential for returns. Securing a loan from a friend, family member or mentor are common occasions of private loans. This also includes the benevolent option of angel investors who are generally wealthy investors that forward cash for expansion or operations during a specified period of time.
Listed in the following are a few basic pros and cons of private loans whether they are sourced directly from friends, family, mentors or philanthropic investors.
– A Few Pros
Filling Time: Unlike the usually stint at a bank, where patrons must discuss loan interests with varying staff members, private loans are instead more informal in their structure. There are usually no papers to fill out, no background checks, no credit history reports and no tallying of assets for the purpose of collateral holdings. Since most private loans will be received from people a business has a standing with, they are also personal in nature.
Flexibility: When a business receives a private loan, the terms of these loans are at the discretion of the lender and the loanee. No government sanctions will intrude to enforce the parameters of these agreements. Even so, family or friends are much more likely to pardon lateness and other discrepancies when an entrepreneur is repaying back funds. Additionally, depending on whom the agreement is made with, these funds may never have to be paid back at all.
Interest Rates: Like the other boundaries of an agreement, the interest is set in an agreement as well. Unlike visiting a bank, a private lender will not have set interests rates that one must abide by. This leeway gives business owners more negotiable flexibility in money management and liability.
– A Few Cons
Ethics: Unfortunately, when there are lenient rules to be followed, there can also arise unexpected expectations not set forth in one’s initial agreement. Due to the less stringent parameters of dealing with personal friends or family members, all business ethics can be discarded. For example, a family member upset by a non-related issue could in turn renege their responsibilities or financing. Without stringent guidelines, the unexpected can happen in an environment lacking ethical standing.
Lack of Guidelines: In all legal proceedings over disputes where one side claims to have had an agreement with another party, the only dividing factor will be ruled on the basis of a contract. Though it seems quite ideal not to have a formal disclosure like this, not having things in writing can backfire on entrepreneurs when they or the other party involved does not live up to expectations.