QUESTION | What are some of the most important considerations I need to make before taking out a loan for my business?
CHRIS CATLIFF | President and CEO, BlueShore Financial
Building a financial strategy can be stressful and sometimes confusing for business owners. Oftentimes it can appear that taking out a loan is the quick and easy answer to ensure enough capital is available to see a business through to longevity and success. However, every business is different which means the needs and solutions for each will vary. Before signing on the dotted line, keep the following in mind:
1. Debt gives you leverage which greatly amplifies either your profit or losses. Use it wisely. Ensure you have a good grasp on the key ratios for your business and keep an eye on them. It’s important to be able to share these with your business adviser when discussing your potential loan needs.
2. Match the loan type to the need. Different types of loans will help achieve different objectives. For example, fixed-term loans are better suited for equipment purchases of five to 10 years, longer amortizing loans are generally recommended for mortgages, floating rate operating loans are ideal for cash flow.
3. If you are a private company operating without a board of directors, in essence, your business adviser becomes your board. They can help to oversee the activities of your business as it relates to your finances. Ensure you have chosen a financial institution with the necessary expertise, tools and flexibility to help you with your individual financial needs. You want your financial adviser to lead you down the best possible path towards the ongoing health of your business.
4. Be honest and open with yourself and your business adviser about the realities of your business; don’t be afraid to paint the full picture. This will help to determine what the next best steps are for your business and the kind of capital you need to move ahead.
KATIE DUNSWORTH-REIACH | Co-founder, Smart Cookies Money Mentoring
If your business is looking for financing there are more options than ever before. Banks are making a concerted effort to target small business. Government funded initiatives like Community Futures offer financing products for small business starting at $10,000. There are also new alternative lending options like the recent news that one of the world's largest online lenders is now offering small business loans in Canada.
The first thing you should take in to account when applying for financing is whether you have a tangible business case to repay the loan. From there, get clear on how quickly the money is needed – If you are taking advantage of a time sensitive discount something like inventory, keep in mind that traditional lenders typically take weeks, sometimes even months, to review paperwork and approve a loan.
Express exactly what you’re looking for and what you want to achieve with your lender. This means clearly understanding the implications of borrowed capital and how they will improve your bottom line to allow you to reach desired earnings objectives. The more this is supported by financial projections the better.
Honesty is also an essential part of your conversations with any lender – if your business is going through a difficult time, your lender will know. Be proactive and transparent about your situation. If you are borrowing money to get things back on track, make sure you have a detailed plan and pro forma for how this borrowed capital will be utilized to accomplish this. Finally understand how your personal credit relates to your lender — when you are a small business, most banks will pull your personal credit history to make their business lending decision. If you've maxed personal credit cards or missed payments on your mortgage or vehicle, it will be difficult to appeal to traditional lending sources.
ROB YOUNG | Senior vice-president of international, OnDeck
Getting a small business loan can be a challenge. Understanding the process before you start looking can make all the difference, and may improve your chances of success. Here are some tips to consider before you apply for a loan:
1. Know your options: Understand your credit, research your options, and be realistic. Don’t rely solely on your bank; it’s not the only place you can go to get a loan. There are great resources available to guide you in the right direction. Websites like BusinessLoans.com provide information on lending options available to small businesses in all financial situations.
2. Read the fine print: Funding from banks or other lenders may have hidden or additional fees. It’s not just about the interest rate or APR; look very carefully at the total cost of your loan, and the terms and conditions. Consider how other aspects of the loan (i.e. security, collateral, and guarantees) might affect the growth of or place other constraints on your business. Maintain open communication with your lender, whether it involves rescheduling or setting up automatic repayments. If you know what to ask for, you may even be able to negotiate flexibility in your payment terms. Conversations with your lender are always worthwhile and help you plan for more than the upside.3. Plan for the future: Will this lender deliver a long-term relationship? Can they provide you with help in the future? You need to establish your return on investment and think about the projects you are looking to fund moving forward. Matching your loan’s timeline with the project you are trying to fund will allow you to keep yourself accountable and well managed.