Loans For Small Business Startup – If you need start-up capital for a small business, you have three main options. First of all, you can use your own money. Secondly, you can ask for investment (thus giving up a share in your business). Thirdly, you can apply for a small business loan. Many business owners prefer using small business loans because it eases the strain on their own funds, but still gives them complete control over their business.
In general terms, a small business loan is simply a loan made to a small business rather than a loan made to an individual or a loan made to a larger business. However, in Canada, the term “small business loan” can also be used to specifically refer to the Canadian Small Business Financing Program which is supported by the Federal Government.
Loans For Small Business Startup
In principle, small business loans work in much the same way as any other type of loan. A lender will look at the amount requested, the purpose for which it is requested and the borrower’s financial situation. They will then decide whether or not they are willing to lend and, if so, at what interest rate.
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However, there is a bit of nuance with small business loans. Small businesses, especially start-ups, are less likely to have a credit history of their own. This fact has three main implications.
If a loan is to buy assets, the lender could use the proceeds from the sale of those assets to recoup their money if the borrower defaults. If the loan is for a different purpose, the lender may be at greater risk if the borrower defaults.
Likewise, if the borrower has assets that could be cashed in in the event of default, the loan is less risky for the lender.
In the case of start-ups, business owners may choose to apply for a small business loan even if they personally have the liquid funds they need to finance their business. This is because using a small business loan allows the business to start building its own credit history, independently of the owner. Effectively, the borrower is choosing to make interest payments to the lender in exchange for reporting their payments to the credit bureaus.
Startup Loans For Small Businesses
There are a variety of loans available for small businesses in Ontario. Here’s a quick guide to the main ones.
In theory, there are plenty of bank business loans available. However, there could be two problems. Firstly, products from mainstream banks may not really be suitable for start-ups and other young/small businesses. Secondly, even if they are, it may be very difficult for the smaller medium-sized business to qualify for them.
The main point to understand about traditional bank loans is that the banks have to make a profit on them. Small sums of money at low interest rates do not generate much profit. Borrowing large sums of money at high interest rates can generate a lot of profit, but it can also generate a lot of risk.
This means that mainstream lenders tend to be set up to lend small amounts of money at higher interest rates or larger amounts of money at lower interest rates. Neither of these options is likely to be suitable for small businesses, especially start-ups.
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The other main barrier is meeting the quality criteria. By definition, startups will not have a credit history. This means that they almost certainly have to rely heavily on collateral and/or personal guarantees. Even then, they may have trouble getting a small business loan for anything other than buying assets that could 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 support program. It is similar to a loan in that the money is repayable over a designated period with interest. It is similar to a government support program because it is backed by the Federal Government so it can be made available to borrowers that the banks might not normally consider.
Credit unions operate on a non-profit basis. This has two implications. Firstly, their interest rates are usually lower than bank rates. Secondly, they may be willing to offer loans in amounts that the banks would reject as unprofitable.
Obviously there will still be a limit to how low they can go as they will still have to cover their costs. However, they do not need to make a profit to satisfy their shareholders as banks do.
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As with bank business loans, however, you still have the question 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 be able to provide collateral and/or personal guarantees. Again, even with these, you may find it difficult to get a credit union business loan for anything other than buying assets that could be easily sold in the event of default.
Online business loans work the same way as regular bank loans. The fact that the lender only works online has potential advantages and disadvantages.
The obvious advantage is that it lowers the lender’s overheads and can therefore lead to lower cost business loans. It may also mean that online lenders are more willing to offer business loans at amounts that banks would consider unprofitable. Finally, but in some cases not least, their application processes can be quite fast.
The potential downside, however, is that it may be much more difficult, if not impossible, to get any meaningful help from the human staff if you need it. How much of a downside there is probably depends on how comfortable you are with business administration.
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If you’re confident you know your way around filling out the necessary paperwork to get a small business loan, you might be great at this. If not, however, you may want to stick with lenders who can provide human assistance if you need it.
Private business loans come in many shapes and forms. It may be possible to borrow directly from private individuals (eg venture capitalists) or privately owned companies. Alternatively, you could look at peer-to-peer lending platforms or crowdfunding platforms.
Depending on your personal status and the history and nature of your business, you may be eligible for non-standard funding, possibly even grants. The requirements for these are highly variable and programs can change, so you must always do your own research at the time.
Banks usually lend to any legal business that can show they can make the required repayments. Some banks may steer clear of businesses in controversial business areas. In general, however, it is the borrower’s (perceived) willingness and ability to repay that really matters.
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Banks are well aware that building (or rebuilding) credit ratings takes time. They may therefore be willing to extend a point on that issue provided that the applicant can compensate in other ways. For start-ups, this may mean having a very strong business plan backed by a personal guarantee.
Business loans are available for anything from a few hundred dollars to several million dollars. The question is whether you will qualify for them or not. You can get a great idea of how much you might be allowed to borrow by calculating your debt service coverage ratio.
Calculate your income minus your pre-tax expenses. This gives you pre-tax profit. That’s the amount of money you have to use to make loan repayments. It’s unlikely to even be worth applying for a loan when the monthly repayments are more than this amount.
The only exception to this is if you can offer really strong evidence that your disposable income is likely to increase, e.g. as a result of obtaining the loan.
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Be aware, however, that your DSCR is a starting point, rather than a hard and fast rule about 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 income is. They will also look at the length of the loan period to determine how exposed they (and you) would be to changing circumstances.
Again, there is no standard answer to this. Firstly, interest rates on business loans depend on the rate prevailing in the market at the time you make your application. Secondly, interest rates depend on the level of perceived risk and this will depend not only on the borrower and the amount requested but also on the length of the loan term 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 buy or lease assets. This is because, in the first case, if the borrower defaults, the assets could be sold to pay back at least part of the capital.
So you will need to check the average interest rates in force when you are trying to apply for a business loan. It is also advisable to check
