Most people don't know that more than half of all businesses in the United States are funded by money from family and friends. In reality, everyone turns to their own groups when they have nowhere else to go. A person with bad credit might have trouble getting a loan from a bank to start a business, but Mom and Dad will always help out if they can.
Taking a look at the pros and cons
There are risks and benefits that come with getting a private loan instead of a bank loan:
Risks:
- When money comes into play, it can hurt relationships. If you don't pay back your loan, your lender may feel used or taken advantage of. And either person can feel hurt if they think the relationship is less important than the money.
- Not making it clear what each person wants. If you don't have a clear plan for paying back the lump sum and stick to it, it's easy to fall behind or never save up enough money to pay it off.
Advantages:
Flexible terms: Usually, you don't have to start paying back the loan right away, and you can set up a payment plan that works for you and your lender.
Better interest rates. This is especially true if your other option is to use a credit card. And banks will probably point you in that direction for most new businesses.
Get outside help to show them you mean business.
By making legal documents and keeping track of payments, loan administration companies reduce the risks that come with private loans. By bringing a legal agreement to your friends or family to sign, you can help ease some of their worries. Asheesh Advani, who is the president and CEO of CircleLending.com, says, "The more you do to reassure them that you have a plan in case you can't make a payment, the more they feel like you've thought this through and that the relationship will survive the transaction."
If something comes up and you know you won't be able to pay, you can talk to the person in charge of your loan ahead of time. If your private lender agrees, your missed payment will be spread out over the rest of the loan. Or, they will change how the loan is set up and lower your payments. But they will help you come up with a plan that works for both of you.
Having a loan administrator gives your investors a lot of peace of mind that your loan will stay on track. By direct debit and direct deposit, the loan servicing company moves the money from your account to the account of your lender every month. So, you won't have to worry about forgetting to pay or being late if you're out of town. Advani says, "It's a great way to avoid falling into a hole."
