Get Start Up Business Loan – If you need start-up capital for a small business, you have three main options. First, you can use your own money. Secondly, you can ask for investment (thus contributing to your business). Third, you can apply for a small business loan. Many business owners prefer to use small business loans because it reduces the strain on their own funds, but still gives them full control of their business.
In general terms, a small business loan is simply a loan to a small business as distinct from a loan to an individual or a large corporation. In Canada, however, the term “small business loan” can also be used specifically to refer to a Canadian small business financing program supported by the federal government.
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In principle, small business loans work just like any other type of loan. The lender will look at the amount requested, the purpose for which it is requested and the financial status of the borrower. They will then decide whether they are willing to lend and, if so, at what interest rate.
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However, there is a bit of significance with small business loans. Small businesses, especially startups, are highly unlikely to have their own credit history. This fact has three important implications.
If the loan is to purchase assets, the lender can potentially use the proceeds from the sale of those assets to repay their money if the borrower defaults. If the loan is for another purpose, the lender potentially has more risk if the borrower defaults.
Likewise, if the borrower has assets that can be monetized in the event of default, the loan is less risky for the lender.
As with startups, business owners can choose to apply for a small business loan even if they personally have liquid funds to finance their business. This is because using a small business loan allows the business to start building its credit history independently of the owner. Effectively, the lender is choosing to pay the borrower interest in exchange for their payments being reported to the credit bureaus.
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There are different types of loans available for small businesses in Ontario. Here’s a quick guide to the important ones.
In theory, there are many bank business loans available. However, there are two potential problems with them. Firstly, the products of mainstream banks may not really be suitable for startups and other young/small businesses. Second, even if they are, it can be very difficult for the average small business to qualify for them.
The important thing to understand about conventional bank loans is that banks need to make a profit on them. Lending small amounts at low interest rates does not yield high returns. Lending large amounts at high interest rates can be very profitable, but it can also create a lot of risk.
This means that mainstream lenders are set up to lend small amounts at high interest rates or large amounts at low interest rates. None of these options are ideal for small businesses, especially startups.
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Another major hurdle is meeting the eligibility criteria. Startups, by definition, don’t have a credit history. This means they will almost certainly need to rely heavily on collateral and/or personal guarantees. Even so, they may struggle to get a small business loan for anything other than the purchase of assets that can be easily sold in the event of default.
The Canada Small Business Financing Program is a cross between a regular small business loan and a government assistance program. It is like a loan in which the amount is repayable over a fixed period with interest. It is similar to a government support program because it is backed by the federal government and therefore can be made available to borrowers that banks would not normally consider.
Credit unions operate on a non-profit basis. This has two implications. First, their interest rate is lower than the bank rate. Second, they may be willing to make loans for amounts that banks would reject as unprofitable.
Obviously there will still be a limit to how low they can go as they will still need to cover their costs. However, they do not need to make a profit to satisfy their shareholders like banks do.
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As with bank business loans, however, you still have the issue of qualifying for a credit union business loan. Again, if you don’t have a credit history, which startups won’t, you’ll likely need to provide collateral and/or personal guarantees. Again, even with these, you may struggle to get a credit union business loan for anything other than buying assets that can be easily sold in the event of default.
Online business loans work just like regular bank loans. The fact that the lender operates purely online has both advantages and potential disadvantages.
The obvious benefit is that it reduces the lender’s overheads and can result in lower cost business loans. It may also mean that online lenders are more willing to offer business loans for amounts that banks would consider unprofitable. Last, but certainly not least in some cases, their application processes can be relatively quick.
However, the potential downside is that you may find it very difficult, if not impossible, to get any meaningful help from human staff if you need it. How bad it is depends on how comfortable you are with business administration.
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If you are confident that you know how to fill out the necessary paperwork to get a small business loan, you may be fine with it. However, if you are not, you may want to stick with lenders who can provide you with human support when you need it.
Private business loans come in many shapes and forms. It is possible to obtain loans directly from private individuals (such as venture capitalists) or privately owned companies. Alternatively, you can look into peer-to-peer lending platforms or crowdfunding platforms.
Depending on your personal circumstances and history and the nature of your business, you may be eligible for non-standard funding, possibly even grants. The requirements for these are very variable and programs can change, so you always need to do your own research at this point.
Banks generally lend to any legitimate business that can show itself able to make the necessary payments. Some banks may stay away from business in disputed business areas. However, in general, it is the borrower’s (perceived) willingness and ability to pay that really matters.
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Banks are well aware that building (or rebuilding) credit ratings takes time. So they may be willing to raise a point on this issue provided the applicant can compensate in other ways. In the case of startups, this may mean having a very strong business plan backed by a personal guarantee.
Business loans range from a few hundred dollars to several million dollars. The question is whether you will qualify for them or not. You can get a ballpark idea of how much you might be allowed to borrow by calculating the debt service coverage ratio.
Calculate your income minus your pre-tax expenses. This gives your pre-tax profit. This is how much money you have to use to pay off the loan. You are also unlikely to be able to apply for a loan where the monthly payment exceeds this amount.
The only exception to this is if you can provide really compelling evidence that your disposable income is likely to increase, such as as a result of getting a loan.
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However, be aware that your DSCR is a starting point, rather than how much you can borrow. The lender will also consider other factors. For example, they will look at how long you have been trading to see how reliable your earnings are. They will also look at the length of the loan term to determine how exposed they (and you) will be to changing conditions.
Again, there is no standard answer to this. First, the interest rate on business loans depends on the market rate at the time you apply. Secondly, the interest rate depends on the perceived level of risk and will depend not only on the borrower and the amount requested, but also on the length of the loan tenure and the purpose of the loan.
For example, the same customer requesting the same amount may pay a different interest rate depending on whether the loan was to purchase assets or to lease them. This is because, in the former case, if the borrower defaults, the assets can be sold to repay at least part of the capital.
So when you want to apply for a business loan you will need to check the average interest rate. It is also advisable to check