What to consider before choosing a small business loan
A simple online search for small business loans will yield many options. How do you know which one is a good fit? What other factors should you consider before you apply for a small business loan? We’ve broken things down for you here:
Understand the purpose of the loan
Not all small business loans are created equal. In fact, some loans for a small business may have restrictions on what you can and cannot use the funding for. This is why it’s important to establish exactly what you need the funding for.
Is it to get your business off the ground or is to expand what you have already built? Is it for marketing or is it for product development?
Regardless of the type of business you operate, make sure you are clear on you will use the loan for. This way you’ll be more apt to be approved for the right loan for your needs.
Be mindful of your cash flow situation
Before applying for funding, evaluate your cash flow situation. You can do this by answering these questions:
- How much money do you have coming in and going out each month?
- How much money do you have in reserves for your business?
- How much revenue are you generating?
- What are your current and anticipated future expenses?
Looking at your finances with a fine tooth comb can help you understand how much funding you may need to support your business – both now and in the future. Keep in mind that cash flow can be a big issue for small businesses. For this reason, a small business loan may offer you the financial support you need.
How much debt do you have?
If you’re looking for a small business loan, it’s important to consider your current debt situation. Lenders, for example, may consider your debt-to-income ratio when assessing your risk and creditworthiness.
On top of that, if you’re already in debt and applying for another loan, it’s important that you can make your new payments each month. Otherwise, you’ll find yourself mired in yet more debt.
Consider the interest rate
The interest rate is essentially the amount you will pay for taking out a loan. So, before you apply for a small business loan, make sure you understand the prospective interest rates on the various loans you’re looking at. The bottom line: ask yourself how much the interest will cost you in the long-run. From there, look for lenders that offer the most competitive rates.
Look for a manageable repayment schedule
You’re not going to pay back your loan overnight, so you will want to find a loan that has a reasonable repayment schedule. To this end, find out how many years it will take you to pay back the loan. Your repayment schedule will make your loan repayment manageable or not, so consider this point carefully.
Will you need collateral?
Some lenders may require that you have collateral to back your loan. This can help mitigate risk for a lender, but it’s also less convenient for borrowers. So, weigh the pros and cons of using collateral to back a loan and determine what the best fit is for you.
Are there other fees?
Be sure to read the fine print on the small business loans that you’re comparing. Some may have application fees, service fees, or more. Make sure you understand any extra fees that you may be responsible for.
Decide on the amount of funding to apply for
It’s imperative that you are crystal clear on how much funding you need to support your small business. With this said, some lenders may have minimum and maximum amounts that you can borrow.
Options for small business loans
Now that you understand what goes into applying for a small business loan, it’s time to decide what type of loan is best for you.
The Canada Small Business Financing Program
As a first thought, you may want to look into a loan supported by the Canadian government. In fact, many financial institutions offer small business loans in partnership with Canada under the Canada Small Business Financing Program. Under this program, you can apply for a large small business loan up to one million dollars. This loan is specifically to purchase land, equipment, vehicles or technology.
Here’s another option: through the Business Development Bank of Canada, you can apply for the BDC Xpansion Loan, which is geared toward businesses ready for growth. This specific loan can be used for investing in technology and resources, education or licenses, trademarks, patents, or creating new products.
Aside from this loan, the BDC also offers startup financing to be used for capital, marketing, and more.
Community Forward Fund
If you have a social enterprise, you may want to consider funding from the Community Forward Fund. Or, perhaps a microloan can help you get your business off the ground.
Small Business Loans Through Online Lenders
Perhaps the most viable option for a small business loan is through an online lender. At LendingArch, we have done the hard work for you and can compare a variety of small business loans in Canada – getting you the capital you need almost immediately.
LendingArch offers an easy online application process with no collateral required. When it comes to repayment, there are a variety of flexible options available. Better yet, you can get the money straight into your bank account to help fund your business right away.
There are many small business loans on the market but not all of them are going to be a good fit for your business. You also won’t be eligible for every type of small business loan.
For these reasons, it’s important to understand what types of funding you need for your business. Write down how much money you need to get started. Once you’ve done this, use this guide to make a list of your options. Then, apply for small business loans that fit your needs.
While you’re at it, remember this: a small business loan can help you invest in your business, but you are still borrowing funds that you will need to pay back. Make sure you can indeed pay back your loan over time as this will help position your small business for success. Need help finding small business loans? Check out our offerings on LendingArch!