Whether you are a start-up company proprietor, small business owner, or a large-cap company holder, at some point, you will have to seek capital infusions to meet short-term and long-term financial requirements and obligations whether it is for business working capital, property purchase or refinance needs. The good news is, there are many different types of business loans that can assist you with your financial worries. In this article, you will discover why many business owners mainly depend on private mortgages over traditional mortgage lenders. This may come in handy for people who have been struggling to get a mortgage the old-fashioned way. As a business owner, you must determine which loan is suited for you, the purpose of the loan for your business, the payment terms and risks that you can handle, and the number of funds you need. You may be asking yourself, what do you need to qualify for this huge loan. When a borrower submits a mortgage application, the lender will review the overall credit history, stable income, and the purpose of the loan itself.
When we say private mortgages, the funds are coming from a private source such as peers, colleagues, family, or a business, that is why it has a more personal approach that can benefit both the lender and the borrower if it’s implemented accordingly. On the other hand, if mishandled, things can go worse in terms of your reputation and your relationship with the lender as well as your overall finances.
Private mortgages have been used by investors, business owners, and borrowers as an investment and funding in Western Australia for over 100 years.
Let’s look at the traditional mortgage first so we can see the difference between the traditional and private mortgage. For start-up companies, the business owners which are also referred to in this article as borrowers would have to submit a lot of paperwork as part of the requirements by the bank or other traditional lenders. The banks or these traditional lenders have different ways of qualifying a borrower which sometimes results in a denied business loan application. They have stricter guidelines because lenders take on greater risks because for them, a new business venture is just too risky and since bank financing is traditionally less expensive, they are harder to work with and more difficult to get a loan approved with. On the other hand, a private mortgage allows borrowers to have access to the funds quicker than the traditional loan by setting up initial or down payments of around 20 percent or less to protect the lender if the borrower defaults. They tend to be more lenient and they respond in real-time to queries.
As a borrower, it is always important to understand the terms and conditions before you get into an agreement with the lender because this will also affect the risks you hold as a borrower. You have to make sure that the terms you are agreeing upon are also favorable to you to ensure that you will be able to pay the loan entirely. Most of the time, business owners opt for short-term business loans for their working capital and other needs which is typically a secured business loan. They often prefer short-term business loans over fast cash loans which have higher interest rates and most of the time, the terms and conditions are less favorable to the borrower. A secured business loan is easier to get than an unsecured business loan because, with a secured business loan, it is backed up with some form of collateral which is typically the property itself. This collateral serves as security on the part of the lender. The lender will attach a lien on the property and if the borrower cannot repay the loan, the collateral will be taken by the lender as a form of payment to the unpaid loan so foreclosure is still possible. With a private mortgage, in case unforeseen events arise, causing the borrower to run short on cash which may lead to late payments, it is easier to discuss it with these private lenders. The borrower can reach out to the lender before the payment comes due and the lender has a higher chance to help by lowering the associated late payment fees or even temporarily freezing the payment for a given time. Repayment in this context is a lot more flexible than when dealing with a bank.
In conclusion, business owners are turning to private mortgages where the lenders are their friends and relatives and even more distant members of their circle for help with financing. This is considered as one of the easiest ways to have access to funds since their friends and relatives have known them and have sufficient background history to assess the capacity of the borrower to pay. These private lenders also have fewer fees such as origination fees, loan servicing fees, yield spread premium, and many more which will cause an additional burden on the borrower’s end. The cash flow of the business owner becomes more stable as they grow their business and at the same time pay off their loan to the lender with more flexible terms. It is a win-win deal both on the part of the lender and the borrower. The borrower gets the cash they need and the lender earns interest at a rate equal to or even higher than they could have gotten elsewhere. As discussed in this article, funds borrowed from friends and family can come with the lowest interest. This is indeed one of the best reasons to get a loan from them instead of banks and commercial lenders. When approaching a relative, you must be formally armed with a business plan, income projections, outlines of how the funds will be used, and the significant involvement of your relative in your business. Though it sounds like more of a personal deal, it is always a good business practice to put the loan in writing and it is still advisable to have a professional such as an attorney write up the paperwork or just review the letter of commitment. Do not rely exclusively on a handshake.