Is Private Lender Financing Right for Your Small Business?

Woman business owner speaks on phone with private lender while sitting at a desk with a notebook

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As most small business owners can tell you, even with a great business idea backed by a solid business plan, it can be very difficult to obtain financing from a bank, credit union, or traditional lender. Financial institutions are not always willing to provide debt financing to small businesses unless adequate collateral is available. Fortunately, many small businesses can access funding elsewhere.

Private lenders and investors are an option to explore if you're looking for money to start or grow your business, but it's not right for everyone. Consider the pros and cons, plus the other options you have, before making a decision.

Key Takeaways

  • If you're not interested in getting a traditional small business loan, private lender financing is an option.
  • Private lenders come in the form of peer-to-peer lenders, fintech companies, private investors, and more.
  • While the requirements to secure the funding may not be as strict, interest rates may be high and terms may be short, making these lenders riskier for business owners.
  • Do your research and a background check on the private lender to make sure they're trustworthy.

How Does Private Lender Financing Work?

Private lender financing allows you to get a private loan through a variety of lenders. From online business loan firms, "fintech" companies, and more. Some private lenders may specialize in short-term loans, while others may know niche markets well, such as franchises.

You'll have to apply just like any other loan, but the requirements may be different. For example, you may only need a fair credit score, or you may not need collateral. It's an option worth exploring before going to a bank.

Types of Private Lenders

Peer-to-Peer (P2P) Lenders

Peer-to-peer lenders are usually online firms that connect investors with businesses that are in need of funding. Online P2P services match lenders and borrowers and charge a fee for the service. Interest rates tend to be on the lower side, and approval is usually quick and easy, such as in a few days. There may still be origination fees and other fees, so make sure you read the fine print.

Merchant Advances For More Established Businesses

Merchant advances provide immediate access to capital in return for a percentage of future credit/debit card sales. Approval is rapid, but the fees are typically much higher than interest rates paid on loans.


While more traditional, a good alternative to private lender financing is an SBA loan. These loans are bank or private loans guaranteed by the government via the Small Business Administration (SBA). The high amounts, low-interest rates, and long terms make them ideal for small businesses.


Investor loans are somewhat similar to merchant advances in that some private lenders will provide funding in exchange for a percentage of future profits (for example the development of a new product or service that has high potential but needs funding to get to market).

Hard Money Lenders

Usually geared toward real estate businesses for "flipping" houses, hard money loans are usually provided by local businesses in your state. You may be able to find one online that will provide a short-term, high-value loan. They're risky, though, as interest rates are usually higher, and the terms are short. The property is also used to collateralize the loan.

Pros and Cons of Private Lender Financing

  • Typically tailored for businesses in niche industries

  • Application and funding can be quick, with less requirements

  • Usually higher interest rates

  • Terms may be short, making them riskier

Pros Explained

  • Typically tailored for businesses in niche industries: Private lenders tend to have more understanding of specific industries and market segments and can tailor their funding offerings accordingly. 
  • Application and funding can be quick, with fewer requirements: The application process is usually much quicker with private lenders. Your business may be approved for a private loan and you may be able to receive the funds in just a couple of days, rather than weeks or months. Your credit score may not have to be as high, nor may you need collateral or a large amount of money in your savings in order to apply.

Cons Explained

  • Usually higher interest rates: Private lenders usually charge higher interest rates of interest. Banks can loan money at lower rates because they have access to funds from federal institutions and depositors. Private lenders may not have the same backing.
  • Terms may be short, making them riskier: Private lenders may be lending to fewer borrowers, or they may set their own terms, which can be short. such as less than one year. This makes them risky as you'll have to pay the money back fast, and if you don't there could be penalties.

5 Private Lenders To Help You Get Started

If you're looking to explore private lenders, these are a few on the internet that you can research and learn more about. One private lender may not fit all, so ask friends, family, and colleagues if they have recommendations for private lenders in your area. A financial advisor may also be able to help.

  • Upstart is a peer-to-peer (P2P) lender that offers personal and business loans up to $200,000. Upstart is popular with startup businesses that don't have an extensive credit history.
  • Bluevine is a popular online business loan lender that provides funding primarily in the form of small business lines of credit.
  • Funding Circle is an online P2P lender that can provide funding for more established businesses in as little as three days.
  • CAN Capital offers term loans up to $250,000 for six to 24 months, as well as equipment financing.
  • LendingClub provides business loans of up to $500,000. It also works with the SBA to provide loans, and offers commercial real estate and equipment financing.

Frequently Asked Questions (FAQs)

What is private lender financing?

Private lender financing is when you get money for your business from a firm other than a traditional financial institution, like a bank or credit union. This may be a peer-to-peer lender, a fintech company that offers loans, or even a friend who decides to invest in your company.

How do you find a private lender?

You can find some private lenders—non-traditional lenders—online through a simple search, but be sure to check and see if they're trustworthy first. You may also be able to network and meet private investors willing to lend you money directly. While definitely more of the "traditional" route, the Small Business Administration may also be a good starting point.

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The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. SBA Office of Advocacy. "Peer-to-Peer Lending: A Financing Alternative for Small Businesses."

  2. Federal Trade Commission. "Merchant Cash Advance Operators Settle FTC Charges for Bilking Small Businesses."

  3. Small Business Administration. "Loans."

  4. "Finance Your Business."

  5. Consumer Financial Protection Bureau. "I Was Told I’m Buying a Home That Was Flipped and That I Have To Get a Second Appraisal. How Does That Work?"

  6. Peer Street. "Hard Money Lenders for New Jersey Real Estate."

  7. Upstart. "Small Business Loans."

  8. BlueVine. "Elevate Your Business With a Line of Credit."

  9. Funding Circle. "Business Term Loans."

  10. CAN Capital. "Products."

  11. LendingClub. "Business Lending."

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