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Also known as private lender loans, private investor loans are loans that are extended to a new or existing business by an individual or a group of individuals in exchange for the promise of some type of return in the future. Loans of this type are outside the scope of loans from a bank or institution, and are governed by the terms and conditions agreed upon by the lender and the recipient of the loan. While the advantages of a private investor loan are many, there are also some drawbacks that must be considered.
The distinguishing characteristic of private investor loans is that the loans are not issued by some type of financial institution. Instead, they are private loans that are made by an individual or group of investors that believe the new or expanding business is a good risk. Typically, the interest rates that are applied to the venture are very competitive with the rates offered by more formal lending institutions. At the same time, the terms of repayment with private investor loans are often much more liberal, which may be particularly appealing to the small business receiving the loan.
In the best of worlds, both the debtor and the lender benefit from a private investor loan. Debtors are able to secure the funds needed to launch or grow a business without all the red tape and rigid conditions that are involved with obtaining a standard business loan from a bank or other type of lending institution. At the same time, the angel investors who extend private investor loans to business owners often receive a decent return from their investment, either in the form of interest applied to the principal or shares of stock that eventually increase in value. Assuming that the business does attract new customers and grows as anticipated, the loan can be retired in accordance with the terms agreed upon by both parties and the business owner and the angel investor can move on to pursue other goals.
As with any type of lending situation, there are some potential drawbacks to private investor loans. Depending on the terms that govern the loan, investors may be entitled to more input into the business operation than the owner anticipated. Investors may choose to call the loan early if the owner has difficulty making payments on time, as a means of protecting the investment. In some cases, the rate of interest may be above the rates offered by lending institutions if the business owner lacks sufficient credit to command those better rates. Business owners should consider the disadvantages of a private investor loan along with the potential benefits, and determine if this means of funding is really in the best interests of the company before making any type of commitment.