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Small businesses are increasingly turning to private credit to finance business expansion or ongoing operating costs. Private credit represented approximately 30% of the credit market in 2021, rising from $400 billion in assets to more than $1 trillion since 2012.
This type of financing usually includes flexible terms, customized solutions and quick access to capital. So, if your business needs financing but you don’t want to apply for a traditional bank loan, here’s how private credit works and how you can access it.
Related: How Alternative Financing Solutions Can Help Your Business Weather the Current Financial Storm
What is private credit?
The term private credit usually refers to non-bank loans made to businesses: peer-to-peer lenders, online lenders and financial markets are all examples. This financing option has been particularly useful recently for small businesses, considering that banks do not lend to businesses due to market conditions and their known risk-averse behavior.
Private credit offers businesses access to various short- and long-term financing options. Your business can then use this financing to finance startup costs, business expansion or working capital.
Advantages of private credit
Here are the major advantages of private credit for small businesses:
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Quick access to capital: When you apply for a bank loan, the application process can take weeks or months to process. By comparison, loans from non-bank lenders typically take less than a week. Some lenders also offer same-day financing. This is a huge advantage for companies that need to act quickly on a business opportunity.
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Flexible financing: Private credit is also more flexible with regards to guarantee requirements and repayment conditions.
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High approval rate: Banks prefer to lend to larger, more established companies. Non-bank loans have a much higher approval rate for small and medium-sized businesses.
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Personalized solutions: Because non-bank lenders have experience working with small businesses, they can provide customized financing solutions to meet your business’ needs. For example, some lenders offer asset-based financing where the loan is secured by the company’s assets.
Related: This non-traditional financing solution lends money to people rejected by banks
How small businesses can access private credit
Here are the steps you will take to evaluate your situation, find the right lender and successfully access financing.
Determine your needs:
Start by determining why you need financing and what you plan to use the funds for. For example, are you taking out a loan to cover everyday expenses, such as payroll or inventory? Or do you want to purchase new equipment to increase your production or improve efficiency?
Evaluating your current and future lending needs will help you determine the type of financing you are looking for. For example, if you have a good idea of how much you plan to spend, it might make sense to take out a loan. But if you’re not sure how much money you’ll need, you may want to opt for a line of credit.
Prepare the necessary documents
It is a good idea to gather the necessary documentation before applying for private credit. Specific requirements will vary between lenders, but most will want to see the following information:
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Business Information: Not all lenders require a business plan, but you will need to provide some basic information about your business. At a minimum, you will need to provide your company’s name, address, and Employer Identification Number (EIN).
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Financial statements: You will also need to provide financial statements such as a profit and loss statement, balance sheet and cash flow statement. This information helps your lender understand the financial health of your business.
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Tax returns: Most lenders will want to see at least a year’s worth of personal and business tax returns. Tax returns help your lender evaluate your financial situation and your ability to repay the loan.
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Bank statements: You will also need to provide at least six months of bank statements.
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Company documents: Your lender will also want to see your company’s articles of incorporation and any relevant business licenses.
Compare your offers
It’s always a good idea to get pre-approved with several lenders before selecting the one you want to go with. Applying with a minimum of three different lenders allows you to compare potential interest rates, fees and repayment terms. It also gives you more negotiating power because you don’t put yourself in a situation where you have to accept the first offer that comes your way.
Of course, submitting multiple loan applications can become tedious and time-consuming. If you need a quicker solution, consider using an online lending marketplace. When you use a lending marketplace, you will apply once and receive offers from multiple lenders.
Related: 4 Reasons Why Small Businesses Need Non-Bank Lenders More Than Ever
If you are looking for alternatives to bank loans, private credit is a great option. These loans are more accessible and give your business the resources it needs to continue growing.
When you take out a private loan, you can have access to support that goes beyond the application process. But it is important to look for the right non-bank lenders. National Business Capital has been operating in private credit for 15 years; We are already experts in this market.