When to Get a Small Business Loan?
Small business owners often turn to a small business loan or a line of credit when they look for borrowed capital to fuel growth or other business purpose. According to the Government of Canada, as of December 2015, there were 1.17 million employer businesses in Canada and 97.9 percent of these were small businesses. The majority of these small businesses look to obtain financing through small business loans. Sourcing financing through small business loans is an attractive prospect when dealing with cash flow issues or planned projects.
Small business loans can be used to finance the following:
New premises or expansion
One of the popular ways that business owners utilize a business loan is putting the funds towards relocating or expanding the existing premises
Research and development
Special projects allow for new business ideas and company growth
Marketing and advertising costs
Marketing and advertising initiatives are imperative in attracting new customers and to retain your existing base
Your staff are one of the most important elements to your business. Extra funding can help source wages or take on extra personnel when needed
Equipment and supplies
A small business loan can help with purchases of necessary large expensive equipment or seasonal supplies
In order to take advantage of a small business loan and use it to its full potential you must first consider the following:
- What do you need a loan for?
- How much do you need?
- Is there a specific type of business loan needed?
- Which lender has terms and conditions that you can work with?
- What is your current cash flow situation?
- Do you have the ability to pay back the loan?
- Can you provide collateral or a guarantee if needed?
There are many different institutions that offer small business loans. These institutions include: Commercial banks, community banks, private lenders, credit unions and online lenders like fintech companies. No matter which lender you use there will be certain requirements for each that have to be met before fund approval is granted. Usually, banks in particular have strict qualification criteria making it difficult for a small business to get approved for a loan. This is because they view lending to small businesses as a greater risk than lending to larger, more established businesses.
According to a recent survey by OnDeck, of over 10,000 business loan applicants in the U.S. 82% were denied financing by their bank. Those that are approved by banks are often considered to be riskier borrowers than big businesses, and that may result in higher interest rates. Because online lenders look at small business lending with a different paradigm and don’t rely exclusively on the business owner’s personal credit score, provided you show the necessary evidence and data to demonstrate you have a healthy business along with your ability to pay back the loan, even a business owner with a less-than-perfect personal credit score can still qualify for a business loan.
Once you have found an appropriate lender it is important to understand and determine the most suitable business loan for your business objectives. This is to ensure that your business is able to utilize the funds received in the best way possible. We have identified some types of small business loans that you can consider for your business, they are as follows:
- Business line of credit
- Term loans
- Working Capital loans
- Equipment loans
Once you have identified the type of business loan needed and what the business will be using it for, it is important to research the key terms and conditions against competitive lenders to ensure that you are getting the right loan to meet your loan purpose. Some things to ask yourself are: what are the costs associated with the loan (interest rate and fees), what is the frequency of the periodic payment (daily, weekly, monthly), what is the total cost of the loan (the total accumulated costs over the life of the loa). You should also research what kind of collateral (if any) is needed and what happens if there is default on a loan.
Small business loans are available from many different lenders who offer numerous loan choices. Identifying the best way to use your loan you will yield the most out of your funding and will likely improve the financial situation of your business. You can increase your chances of obtaining a loan to improve your business’s financial situation by anticipating what these lenders will review and require.