Category
Business Consulting

Are You Eligible for a Small Business Loan?

A small business that leveraged a small business loan

Small businesses constitute the overwhelming majority of all businesses in Canada. Starting and running a business is no easy task, with a lot to take care of at the start regarding planning and funding. A business owner’s initial funding often comes from personal savings and investments from family and friends. But there comes a time when personal funding is not enough. You will eventually need external funding to expand the business, buy new equipment, or meet the growing working capital requirements.

There are many ways to get external funding, including corporate financing, microloans, and community funding. However, the most common way many small business owners obtain funding is to take out a small business loan. Banks and credit unions are major sources of debt funding, accounting for 83.9% of small business financing, according to the Organization for Economic Development.

Getting a small business loan can be challenging. The best way to prepare is to complete a self-analysis of your business and financial situation. Know your strengths and weakness and compare them with the lender’s eligibility requirements. Working with your accountant can help you assess the type of financing you may qualify for, as well as prepare for your application, to position you for success.

How do banks determine if you are eligible for a small business loan?

Start-up ventures often face the biggest challenge when attempting to secure debt financing. But your chances are improved if your business is at least a year old and has minimum annual revenue of $100,000.

Banks and other lenders will evaluate your personal and business credit history, business profile, and future plans to determine your loan eligibility. Ultimately, they will want to be satisfied that your business will be positioned to service the debt over the long term. The information uncovered during the evaluation process will also determine the loan amount and the terms of the loan, such as interest rates and the repayment structure.

Prepare a comprehensive business plan, or review and update your existing plan.

A detailed business plan can be a significant benefit when applying for funding. If you haven’t yet prepared a plan, this is the time to put pen to paper and write a comprehensive five-to-ten-year plan for your venture. A business plan should include broad details, covering everything from financing needs to operations and marketing, to growth strategies. A business plan will also help you track your progress by highlighting any deviations between planning and implementation.

The business plan will help you determine the optimal time to apply for a small business loan. It will also help explain how you plan to use the funds, as how quickly you will see a return on the investment. These details will help a lender determine what type of loan may best suit your needs.

Your business plan will be a key element when it comes to your eligibility for a small business loan. Most lenders will require a copy of your plan when considering your application. Given the significance, you should work closely with your business consultant and/or accountant to help prepare the plan and ensure your numbers are accurate. In addition to the business plan, you’ll also need to gather supporting documentation with respect to your finances. Your accountant can help you prepare everything, and even provide guidance on what you should reasonably expect in terms of financing.

How do you plan to repay the loan?

When applying for a small business loan, you will need to have a plan for repayment in place. Collateral is often key when it comes to ensuring prompt and full repayment, especially for a newer venture. Collateral is anything with value that the business or business owner owns such as real property, inventory, equipment, stocks, bonds, and accounts receivable. Traditional banks might require specific collateral to conduct a loan-to-value analysis. This will help them determine a loan amount that they can secure with the value of the collateral.

However, newer operations may not have adequate collateral. In such a case, you can use your personal belongings, such as your house or your vehicle as collateral. Here’s a tip; lenders may look favourably at your business loan request if you, as a business owner, invests a significant amount of your personal assets and cash in the business. However, you must keep in mind that any items used to secure a loan will be at risk if you are unable to repay on schedule. Your financial advisor and accountant can help advise on how to proceed with respect to collateral for your loan.

Some lenders won’t require specific collateral but instead will take a general lien on your business. In either case, the lender will need your historic and projected cash flow statements to measure how far you are from achieving your targets. Here’s a tip: keep your cash flow projections realistic.

What impact does your credit history have on your eligibility?

Lenders will generally consider both your business credit history as well as your personal credit history. Even if you have separated yourself by incorporating your business, lenders prefer business owners with a high personal credit score and strong financial health. As part of your application, you may be asked to submit your income tax returns, bank statements, and insurance policies.

You will also need to submit financial data pertaining to the business itself. Ensure you keep your business financial statements and accounts updated for all the years of operation.

Contact Sloan Partners LLP in Toronto for Small Business Consultation and Financing

Remember, the lending community often considers small businesses to be higher-risk borrowers. Hence, it is a challenge for small businesses to get desired funds at attractive terms. Sloan Partners LLP will help you assess your likelihood of success when applying for a small business loan and can help you prepare your financial records and business plan to set you up for a successful outcome.

We offer a team of skilled and exceptionally experienced Chartered Professional Accountants who provide our small and large business clients with a full range of services including consulting and corporate financing. No matter your company’s specific needs, we can help. Let us keep an eye on the details so you can focus on the big picture.

We are conveniently located in North York, close to three major highways. To schedule a consultation with one of our exceptionally knowledgeable accounting professionals, please reach out to us online or call us at 416-665-7735.

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