One of the major issues facing small businesses in Canada over the last few decades, directly from their mouths, is their ability to access capital when and where they want it or need it.
But, getting a business loan in Canada these days is not an easy task – in fact, since the financial crisis, it has been harder then ever and while our economy continues to struggle there still remains no true light at the end of the tunnel.
But, that does not mean that you cannot get the money your small company needs to grow and prosper.
Clearly, the rules have changed and simply enough, you have to change to meet them.
The following outline 5 of the top things your small business will need to qualify for a small business loan (at a minimum) and 5 places that you should be looking to secure that loan:
Qualifying For A Business Loan in Canada
Your personal credit matters – plain and simple. While lenders may or may not pull your business credit report, they ALL will pull your personal credit history – every time. Not only will your credit effect your interest rate and other terms on your loan but lenders use this easily accessible measure to determine if they want to work with you or move on and not waste anymore of their time. If your personal credit score is not 720 plus FICO – then get it fixed by any means necessary before applying for your business loan.
There use to be a big distinction between traditional business loans and asset based loans. However, in today’s lending environment, all lenders lend against collateral only. This collateral could be fixed or capital assets like property and equipment or against financial assets like accounts receivables, purchase orders or the business’s ability to generate sustained revenue month after month (all assets to the business). Thus, you must bring something of substance to the table when requesting a business loan and those assets must at least equal and in most cases be double the value of the loan you are seeking. No assets, no loan.
3. Cash Flow.
Banks and other small business lenders want to get repaid and thus know that they will only get repaid if your business can (by past results) demonstrate continued positive cash flow. Positive cash flow means profits – or left over revenue or income after ALL ongoing business expenses are paid. The potential of what you think your business can do in the future means nothing. Lenders look back to see if, they gave you that loan in the past, could your business have generated enough positive income to make those loan payments. If you can meet that criterion, then the lender will assume that your business can do so again moving forward – getting your business one step closer to that approval. If you can’t, then no loan. Therefore, if your business loan request would result in a monthly payment of say $1,000 per month, then your business must, from past results, show that it cash flows $1,000 per month in positive revenue (profits).
4. Know Your Need.
Most lenders are financial people by nature and thus are very near to and aware of numbers. So, know your numbers. Much better to ask for a specific loan amount and be able to back that number up, then to be generic or vague in your request. If you need $53,287 for a new piece of equipment, then ask for that amount – not $50,000 or $60,000 - and have an invoice or some research showing that that equipment actually costs that amount. Or, if you have multiple needs, have each need outlined in very specific bullet points – e.g. $15,500 for marketing, $25,200 for working capital and inventory and $18,436 for equipment – then have your research backing up those numbers.
5. Find The Right Lender.
Not all lenders fund all businesses, industries or specific requests. Some lenders avoid certain types of industries while others just may not fund certain types of businesses (mostly those that are highly singular in nature). Also, some lenders just may not have the right loan product for your needs. Your business may need working capital to purchase raw materials or inventory and that lender just does not provide those kinds of business loans. This has nothing to do with you or your business but everything to do with what the lender feels comfortable lending against. Example: Many accounts receivable factors will not lend against construction invoices. Some won’t but some will. Thus, it behooves you, if you truly want that business loan, to find the right lender for your business and, more importantly, your needs.
6. Start Local.
Local and regional banks and lenders have several advantages for small businesses over national or international lenders. 1) They can provide better access – allowing you more face time to sell your business and loan request to them, 2) Are more willing to work with your business to make the deal happen, 3) Better understand your local market and might have even already heard about your business and 4) Be more willing to customize or modify their programs and policies to meet your needs. Start local and then expand outwards.
7. Based On Your Need.
You would not go to a fast food restaurant if you are in the mood for a gourmet meal and you would not go to a high-end restaurant if you want to get your food to go in under five minutes. Thus, you should not go to an equipment lender if you are looking for working capital. And you should not go to an alternative lender that based their decisions on your bank statements if you are seeking a commercial real estate loan. If you want to improve your chances of success in landing the capital your small business needs, then find the right lender, with the right product for your specific needs. This also means that should your business have several funding needs – like working capital, equipment purchase and inventory – then you might just have to find three difference lenders that provide each of those loan products.
8. Leverage Your Community.
Many communities have tremendous small business loan programs – designed for local small businesses and funded by local organizations. Thus, always look to leverage your local community or local government resources to secure your loan. One great example is the Pittsburgh’s Banking on Business program where local member financial institutions have come together to fund a $825,000 small business loan program to help those local small businesses that are unbankable. Or, the SBA’s 504 loan program where community development corporations and local banks, along with the SBA, all come together to fund local businesses. Or, whatever community programs your local area or state may offer. Start by asking your chamber of commerce what programs they are aware of.
9. The SBA and Micro Loans.
The SBA has many great programs – guarantee programs – that are designed to help those small businesses that are right on the bubble for a bank or traditional business loan get over the obstacles that are holding them back. These guarantee loans programs include loans for equipment, property and even working capital – not to mention loans for export businesses to expand their offerings overseas. Further, for those smaller businesses with smaller loan needs, the SBA backs and qualifies a plethora of non-profit micro lenders across the nation – those that are willing to provide up to $35,000 for new businesses and up to $50,000 for existing businesses.
10. When All Else Fails.
When all else fails, it is then time to turn to alternative methods of small business financing. This can include alternative lenders that focus on a business’s ability to convert current assets into cash in the very near future or bootstrapping avenues which can include using personal assets to secure needed cash, using retirement funds or tapping friends and family members for loans or investment – all to get you to that next point in your growth so that you do start to qualify for those other, more traditional business loans.
Bottom Line: When seeking capital for your small business, it always helps to know what is required to get approved and where to begin your search.
Not all small businesses will get the financing they need – not in today’s market. But, that should not stop you from trying and if you go about it the right way – knowing what is needed from you and providing it as well as knowing where to look – your chances of success will increase exponentially.
And, as one last tip: You will hear NO more times then you will hear YES. But, you only need to hear YES one time. This means that if one lender says NO – it does not mean that all lenders will say NO. So, find out the reasons for the decline, fix those issues and simply try and try again. There is a YES out there and these 10 business loan secrets can help get to that YES that much faster.