1. What type of credit score is needed for a business loan?
While there is no one magic number that enables businesses to receive the financial resources they need, a higher credit score works to the benefit of the borrower. As a general rule, higher credit rating (either the business, or the business owner) will increase the chances of getting approved for a business loan.
2. How important is cash flow to receive business financing?
This depends on the type of loan being obtained. For unsecured (no collateral) loans, cash flow is very important, because that’s how the lender evaluates the business’s ability to repay the loan. Daily and monthly sales numbers, especially through debit and credit cards, are a critical factor for business loan approval. For secured loans, where business assets such as equipment or real estate is used, the cash flow may be slightly less important.
3. What is an SBA loan?
For businesses that have a track record of operations in Ontario and across Canada, the Small Business Administration (SBA) provides funding programs through SBA-approved lenders. While the lender (mainly banks and financial institutions) provides the capital, the SBA guarantees up to 85% of the loan amount, which helps the business owner obtain a lower interest rate.
Depending on each individual business profile, the owner can gain up to $5 MM of SBA-backed financing with loan terms from 5 up to 25 years. However, an emphasis is placed upon credit scores and established histories when evaluating businesses for qualification.
4. Can business loans be used for refinancing other debts?
In a nutshell, yes. However, there are some nuances. When obtaining business financing, lenders generally require the borrower to explain the purposes and rationale for where the funds will be deployed. Therefore, it is important to notify the lender at the outset whether these funds would go for marketing, capital expenditures, technology purposes or debt refinancing.
5. When should business loans NOT be used?
While it is ultimately the owner’s discretion and/or company policy that determines how the capital structure is formed, best practices for debt management include being vigilant with it particularly in cases where the business is in trouble. For example, it is not advised to use a business loan to pay overdue bills and employee salaries when the business is not profitable. Business loans should be used to increase revenue and grow a business, so that the there is a positive return on investment after the funds are used up. A great example of this is purchasing inventory that is expected to sell during a busy season, or investing to open a patio for a restaurant, which will bring in extra revenue.
6. Who is eligible for a small business loan?
Small business loans are relatively easy to obtain as long as a business has been operational for at least a year and generates at least $10,000 in monthly revenue. To apply and receive funding, business owners need simply to complete an application (online or at specialist lenders) and provide access to their business’s registration details and financial statements, as well as credit profile. While size is not a direct consideration, lenders will want to look at a consistent history of revenue generation, so they can feel confident in a business’s ability to repay the loan.
7. Is a personal credit score and business credit profile the same thing?
No, the personal credit score in Canadian provinces and territories is a number between 300 and 900. While there is no equivalent score for a business in Canada, different credit bureaus have adapted a scoring system to rank creditworthiness by evaluating certain behaviours of businesses.
8. Is a business plan necessary?
This depends on the type of loan being obtained. While most small business lending companies will want to see how the small business will deploy the funds, a well-formulated business plan may not be a requirement. In the case that it is necessary though, it is important to answer the following questions:
a) What the small business loan will be used for (additional funding “cushions”, expansion, equipment/technology purchases, working capital, funds for supplier/employee payments, capital expenditures, cash flow purposes etc.)
b) Expected business and economic conditions over the next 2-5 years
c) How they will impact profitability and financial strength
9. I’m considering doing business internationally. What do I need to know?
If you are currently exporting or considering exporting outside of Canada, you need to carefully consider your strategy. Thankfully, there are great resources available to you.
Smarter Loans has teamed up with Export Development Canada to help Canadian businesses navigate global opportunities. Their unique suite of solutions can help you offset the risks of doing business abroad, finance your deal and access the working capital you need.
Want to learn more about how EDC can help? Send your inquiry to an EDC Trade Advisor today
To keep your financial situation secure, consider talking to an Export Development Canada (EDC) Trade Advisor. EDC has solutions that can protect you against the risk of not getting paid when doing business beyond our borders and help you get more cash to grow your exporting business.
Learn more about EDC’s Solutions Here.
10. How to select the best lender?
When looking at different lenders for small business financing, it is important to consider a broad list of items before committing to one lending option. While it is tempting to take the offer with the best rate, a lender should be viewed through the lens of a business partner. In the same way that a great business partner can improve the company, a great lender can provide your business with the resources to take it to the next level. As such, the following should be considered, weighed, and decided upon:
a) Their policy frameworks (application processes, information requirements, and ALL fees)
b) Ancillary services they offer (e.g. transaction banking solutions)
c) Term of the loan (measured in years or months)
d) Variable or fixed rates (possibly adjusted to real rates to account for inflation)
e) Funding amount offered and how it matches with the capital that is needed.
11. Can a business based out of a home qualify for such a loan?
Absolutely. If the business is registered and meets the other qualifications of the lender, the business can be located out of a residential living arrangement.
12. What is a private business loan?
Private business loans in Canada include all loans made to businesses by non-bank lenders. Loans from online lenders, private lending businesses, family members or friends, venture capitalists, or brick-and-mortar financial businesses all count as private loans. Private loans are an option when a business prefers not to deal with a bank, or when a business fails to meet the bank’s strict lending criteria. There are many different types of private lenders, ranging in competitiveness and reputability, so it’s important to find one you trust.
13. Can I apply for a small business loan online?
Applying for small business loans online is extremely common, and thanks to streamlined and convenient online application systems, it takes very little time and effort. Most lenders now have an online application option.