You may come across a common question when you want to borrow money for your business of for your personal reasons- whether to borrow it form a commercial bank of from a private money lender. Well, both have different characteristics and pros and cons that you should consider to make your final choice. When you look for the answer to your question, which is a better source to borrow money, the answer is pretty simple: it is the one that you get approved for.
However, most people, especially businesses want to have their loans approved from a bank. There are even a few business owners who are of the opinion that it is their bank which is the only and most reliable source to get a business loan. This however is far from the truth.
The lower rates
Nevertheless, most people want to take out a loan from a bank rather than any private money lending source whether it is from https://libertylending.com or any other. The primary reason for this preference is that banks typically offers loans at a much lower rate of interest rates as compared to the private money lenders.
Now, you may think how it is so and how can banks afford to sustain offering loans at such a low rate of interest. There are several reasons to this.
- Banks normally have a very low cost of funds as compared to other lenders.
- Moreover, they have a large number of depositors who ideally are their retail customers, who keep a lot of money in their savings and checking accounts.
This means, the banks have a large amount of money that is easy to access. They can lend this money out at a lower cost which in turn reduces the rate of interest.
- Moreover, if the banks do not pay interest on the deposits made by their customers or pay a very low interest such as half a percent as they do today, then these funds are available to them at a much cheaper cost to use and lend out.
- In addition to that, all commercial banks have the legal right to access federal funds. These funds are also offered at a much lower rate such as 2.5% now as compared to the rate of the previous times that were as high as 4%, 6% or even 19%.
On the other hand, the private money lenders face a dissimilar set of challenges.
- They usually have limited funds available at disposal. This means they have to make the most out of the available funds.
- Apart from that, they also have to get these funds from other investors whom they need to attract with better returns and higher rates as compared to the commercial banks.
- Moreover, they also have a higher cost of operation and marketing for both attracting the depositors as well as the borrowers.
All these factors raise the cost of acquisition of funds as well as the cost of lending by these private lenders. This high cost is usually passed on to the borrowers who have to pay higher interest rates on their loans to acquire these.
This means the commercial banks can easily earn their spread on their loans disbursed in terms of the direct expenses and the cost of overhead. On the other hand, it is not so easy for the private money lenders, which is why they offer loans at higher rates.
Banks are more opportunistic
In spite of easy accessibility to funds and capability of lending money at a much lower rate as compared to the private money lenders, the commercial banks are also very opportunistic for that matter. They hardly do lend money at a very low rate. This is because:
- They consider the private money lenders as their main competition that lends money out at higher rate of interest. Therefore, all these banks have to do is offer you a loan at a rate lower than the rate offered by the private lenders to win your business. This rate is much higher than the minimum rate margin they could have afforded while lending out the money.
- They also make use of the other avenues to the maximum to earn more money. That means they really do not care or worry much if you do not want to pay high rates of interest for your loan. They can still make a lot of money in terms of banking fees. They can even earn a lot by investing this huge sum available at a cheaper rate by investing them in stocks, bonds or through other acquisitions.
- Moreover, the commercial banks have a very stiff set of regulations to follow which almost compels them not to lend money to new or small businesses. These regulations are however designed by the government and put in place simply to protect the money of the depositors. These regulations however tie the hands of the commercial banks while making a loan. These regulations include specific things such as high credit score requirements, longer time in business, low Debt to Income Ratio and high cash flow requirements.
- Lastly, banks also do add a lot of other costs while disbursing a loan. These include different types of fees, covenants, reporting requirements and others that are usually not included in their rates. However, these costs increases the overall cost of your loans.
The private lenders, on the other hand, do have such restrictions or any other alternative ways to make money apart from the loan origination fees which is only applicable when they close a loan. In fact, their business involves only and only making loans. This is why you will find it easier to get approved and avail a private loan rather than a loan from a commercial bank, especially if you want it for your new business.
However, getting a loan can be signified as putting your head on a double edged sword. You may get cheaper loans but those will be hard to find or you can get loans easily but may come with higher rates of interest.