When it comes to urgent cash needs, banks are not the only options for borrowing money. There are private investors who would be willing to lend their money in exchange for fair returns on investment. Finding these lenders and negotiating with them directly can be a good alternative for borrowers. Usually, these lenders are angel investors and venture capitalists. In some cases, they can be any of your friends or relatives.
Advantages Of Private Investor Financing
- Negotiable interest rates. Because borrowers would be dealing with individuals instead of institutions, loan terms are not set in stone. Interest rates, loan amount and payment terms can be negotiated more flexibly with the lender.
- Private lenders look beyond credit history. Even with a low credit score, a private lender may still lend money based on the prospect of a favorable return on investment.
- Faster approval than banks. Private investors are not subject to the same documentary processes seen in banks. So it’s generally faster to get approved for private financing.
Disadvantages Of Private Investor Financing
- Higher than average interest rates. Because private lenders don’t have larger sums to invest (compared to financial institutions), they are more eager to make the most out of their capital. This leads to higher than average interest rates than what you would get from bank loans.
- Not ideal for personal emergencies. Private investors look for potential growth when deciding to lend money. Low income earners and those looking for funds to cover a personal emergency may find it hard to get approved.
Who Should Borrow From Private Investors?
The ideal borrowers for private lending are startup businesses, entrepreneurs, or freelancers with no sufficient assets or work history to apply for secured loans. Private investors are interested to fund individuals with money making projects in mind.
What To Consider When Borrowing From Private Investors
Ask around your area for referrals. Someone near your location may know of a private lender who is looking to invest his or her money for reasonable returns. When dealing with a private lender personally, make sure everything you agree about will be reflected in writing. Create signed and notarized agreements that will form the legal basis for the loan. If you prefer to find private lenders online, feel free to read our separate article about Peer to Peer Lending.