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Small businesses have always been an important part of any country’s economy. However, these businesses are faced with a bigger challenge when trying to secure financial assistance. Most small business owners are in need, at some point in the development of the business, of capital to finance their growth. Actually applying for, then getting approved for, a small business loan can be an extremely long, difficult, and sometimes discouraging process. Banks and other more traditional lending institutions aren’t always willing to lend to start-ups and smaller independent companies. This is why, as a small business owner you need to be prepared to face your potential lender.

What Lenders Look For In A Small Business Loan Applicant

By taking the appropriate steps to prepare in advance, small business owners can greatly increase their chances of securing the small business loan they need. If it is clear that you are in need of a loan, then you need to determine your eligibility for one. Most lenders look for the following:

Collateral

More traditional lending institutions usually put great value on collateral. A secured business loan can provide you with the capital you need, typically it’s slightly easier to get a loan that’s back up by some type of collateral. Start-up or small businesses aren’t typically rich in assets hence you may need to use personal collateral like your house or vehicle to secure the loan you want.

Commitment

This is the amount you are committing to your business. The more you inject, the more favourably potential lenders will look upon the loan request. Prospective lenders will look to ensure that you have invested a significant amount before they offer any additional financing.

Credit History

Your business should have its own credit score and credit history, this will provide potential lenders with information on how well you can handle your company’s finances. If your company is still young and you haven’t had time to develop its own credit history potential lenders may want to look at your personal credit history and score.

Age Of Business

One of the biggest factors lenders use when assessing your eligibility for a loan is your time in business. The longer you’ve been operating the more stable and attractive you’ll be as an applicant.  In general, private or alternative lenders look for businesses that have been operating for at least a year, while traditional banks look for two years or more. If you’re a start-up with 3 months of business or more, you could qualify for a start-up loan. 

Cash Flow

Your cash flow will be measured using the forecast created in your business plan. Additionally, you need to be clear about the type of financing you need; whether it is equipment financing or working capital financing. You will also need to show exactly how you intend to use the requested funds and how much it is you need to achieve your targets. To increase your chances of securing a loan for small businesses you have to make a good impression to prospective lenders. This you can achieve by:

  • Having a solid management team
  • Demonstrating potential for steady business growth.
  • Showing proof of profitability. It is important for you as a business owner to illustrate how your business intends to be profitable in the near future so as to facilitate the repayment of your business loan.
  • Think long-term. It’s beneficial for you to go for long-term financing that will enable you to repay at lower costs in the short term while giving you time and money to invest for the long term.

Annual Revenue

When you apply for a business loan, lenders will usually have a base annual revenue you must meet. In general, lenders require an annual revenue of $80,000 to $100,000 or a monthly revenue of $5,000 to 7,000 in card sales. 

Where Can You Get A Small Business Loan

Traditional banks aren’t the only places to get small business loans. Some of the other small business loan sources where you can get the funding you need include:

  • Credit unions. These are privately owned by customers in a non-profit status. For you to qualify for a loan from them you will, however, need to become a member, have a good credit score, collateral, and a business plan. Their bar is set a bit lower than that of traditional banks.
  • Microloans. These are offered by financial institutions to business owners who find it hard to get a traditional business loan.
  • Community loan funds. These are non-profit organizations dedicated to helping people who can’t access loans from banks. They are more likely to appreciate how your small business works in the local business environment.
  • Friends and family. Friends and family are great potential sources for a small business loan
  • Online lenders. As a small business owner, you should ways be looking for different and improved ways of financing your company. Online lenders are a great option as they are typically able to approve your application quickly.

The good thing about these other sources is that their qualification process is not as rigorous as that of traditional banks, and they are flexible in terms and schedule of repayment.

Small businesses are considered higher risk borrowers, this may mean you’ll need to work a little harder to get the funding you need. Always make sure your business plan is in order and look for alternative lending options are those lenders are usually for willing to work with smaller businesses.

Make sure you avoid these common business loan application mistakes.

Best Small Business Loans

AmountAPRTerm (months)
SharpShooter Funding1k-300kFee-Based: Starting at 9%12- 60 Learn more
OnDeck5k-300k8% – 29% 6-18Learn more
Lending Loop1k-500k+5.9%3-60Learn more
Thinking CapitalUp to 300k8%-22%6-12 Learn more
Merchant Growth5k-500k-6-18Learn more
BDC100K +6.05% +60Learn more
IOU Financial5K-100k15%+12-18Learn more

What Do You Need To Apply For A Small Business Loan? 

When applying for a business loan you’ll need to provide certain information about your business and yourself. If you apply with a bank, you’ll likely be required to set an in-person appointment to fill out the application, however, if you apply with an alternative lender, you’ll likely be able to fill out the application online. 

  • Your personal information (full name, contact information, SIN number etc)
  • Your personal financial information (income, bank account details)
  • Your business details (business name, industry, time in business, address, phone number and email address)
  • Your funding needs (how much you need, and why you need it)

The 3 main financial statements all business owners should understand.

Documents You May Need To Provide During Or After Application

In order to verify the information you provide in your application, some lenders will require you to provide certain documents. 

  • Business Plan – Whether you are a new or old company, having a business plan that can prove why you need a loan and how you intend to use them, can go a long way in earning your lender’s trust and showing your commitment. 
  • Financial Documents
  • Bank statements – Lenders will typically want to see the flow of cash in and our of your business bank account. 
  • Balance Sheet – These are typically required so that your lender can evaluate your total assets and liabilities.
  • Income statement – Your income statement will let your lender see what your expenses are, how much your costs of goods sold are and what your net income is. 
  • Tax Returns – Your lender will use this to confirm whether the income you claimed is the same as what you reported with the CRA. Any discrepancies can jeopardize your application approval. 
  • Personal Financial Documents – Some lenders may want to see your credit report to understand your financial health. The better you look the more creditworthy you’ll seem. 

Bottom Line

Whether you own a start-up or an established business, there are business funding options for everyone. The first step, and arguably the most important, is to make sure you are prepared for the application process. Next, find a lender that meets your needs. This is where Loans Canada can help, we can match you with the right business lender in your area. 

Caitlin Wood avatar on Loans Canada
Caitlin Wood

Caitlin Wood is the Editor-in-Chief at Loans Canada and specializes in personal finance. She is a graduate of Dawson College and Concordia University and has been working in the personal finance industry for over eight years. Caitlin has covered various subjects such as debt, credit, and loans. Her work has been published on Zoocasa, GoDaddy, and deBanked. She believes that education and knowledge are the two most important factors in the creation of healthy financial habits. She also believes that openly discussing money and credit, and the responsibilities that come with them can lead to better decisions and a greater sense of financial security.

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