Private investor loans are loans made by individuals or groups to new or existing businesses in exchange for future returns. They are outside the scope of loans made by banks and have competitive interest rates and more liberal repayment terms. However, investors may have more input into the business and interest rates may be higher. Entrepreneurs should consider the benefits and drawbacks before committing.
Also known as private lender loans, private investor loans are loans that are made to a new or existing business by an individual or group of individuals in exchange for a promise of some type of return in the future. Loans of this type are outside the scope of loans made by a bank or institution and are governed by the terms and conditions agreed between the lender and the loan taker. While the benefits of a private investor loan are many, there are also some drawbacks that need to be considered.
The distinguishing feature of private investor loans is that the loans are not issued by any type of financial institution. Instead, they are private loans made by an individual or group of investors who believe that new or expanding business is a good risk. Typically, the interest rates charged to the business are very competitive with the rates offered by more formal lenders. At the same time, repayment terms with private investor loans are often much more liberal, which can be particularly attractive to the small business receiving the loan.
In the best of all worlds, both the borrower and the lender benefit from a private investor loan. Borrowers are able to secure the funds needed to start or grow a business without all the red tape and stringent conditions required to obtain a standard business loan from a bank or other type of lender. At the same time, angel investors who give private investor loans to entrepreneurs often receive a decent return on their investment, in the form of interest charged on the principal or shares that eventually increase in value. Assuming the business attracts new customers and grows as expected, the loan can be pulled in accordance with the terms agreed to by both parties, and the business owner and angel investor can move on to pursue other goals.
As with any type of loan situation, there are some potential downsides to private investor loans. Depending on the terms governing the loan, investors may be entitled to more input into the business transaction than the owner intended. Investors may choose to pay off the loan early if the owner is having difficulty making payments on time, as a means of protecting the investment. In some cases, the interest rate may be higher than the rates offered by lenders if the business owner doesn’t have enough credit to get those better rates. Entrepreneurs should consider the disadvantages of a private investor loan along with the potential benefits and determine whether this means of financing is indeed in the best interest of the company before making any kind of commitment.
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