Private Lending: An Alternative Funding Source
Where do entrepreneurs go when the bank says "No"?
It happens every day. Well-prepared entrepreneurs are walking into the banks with brilliant business ideas and well-developed business plans — and are walking out empty-handed. Many of these professionals are ultimately able to obtain financing from a private lender, like Tom McKenzie through business capital brokers.
For individuals who do not want to give up a certain percentage ownership in the business as is often required by venture capitalist and deal with the angel investors who may demand a board position or significant day-to-day control, the private lender may be an alternative worth considering.
On the whole private lenders are looking for the same information and will conduct a similar due diligence as the banks to make a positive funding decision. They are looking for great business ideas, at the right time, with an airtight business plan, that includes contingency scenarios and realistic forecasts, backed by experienced and professional people with some financial stake in the business. However, most private lenders are “specialists” who engage in higher risk ventures because they clearly understand both the opportunity and risk associated with selected business types or market segments. Private lenders will not only fund projects the banks rejects, they will creatively structure loan repayment and sometimes be a helpful resource.
For example, Mr. McKenzie has a background in the automotive market; accordingly, he has funded projects such as automobile dealerships, transportation and trucking businesses, and manufacturing for the automobile sector.
While he does not have a professional background in medicine, he has also developed an interest in providing capital to medical practices because of the doctor shortage and because doctors, on the whole, are responsible debtors. Additionally, businesses like wineries are attractive because they are high asset based and offer more security.
He will also provide funding in emergency and rescue situations.
When asked how he makes the decision to fund a project, Mr. McKenzie laughs and said, “you do the best due diligence you can and then it’s just like gambling at a slot machine. You put your money in and take the risk and hope for the best. Knowing that statistically some of the businesses will do well and others will fail. You learn the most from failures.” After twenty years of investing in both winners and losers, he has developed an evaluation methodology to help him select the businesses with the highest probability to be profitable and succeed long-term.
Given the relatively low profile of most private lenders, Mr. McKenzie says that a significant number of the best projects come to his attention via business capital brokers. “The brokers screen the projects, giving me a wider selection of projects that match my specific parameters”. Business capital brokers will normally develop relationships with hundreds or thousands of lenders and investors, so the key is to sell the broker on your business plan and get him or her sufficiently excited about your project to recommend it to the right lenders or investors.