Types of Business Loans
Whether you are operating as a start-up or want to expand, you need easy access to capital. You can apply for one of a dozen business loans. However, small business loans financing products are featured under 4 distinct categories. The categories also cover:
- Business loans for women
- Start-up business loans
- Government loans for businesses or Government Grants
- Unsecured business loans financing
- Bad credit business loans.
Lines of Credit
A line of credit works like a credit card and therefore represents a money pool – one you can borrow against when you need a specific amount of cash. This product makes it possible for you to access the capital you need when you need it.
Although they often carry high compounded interest rates, they make a difference when you need to accommodate temporary shortfalls in earnings. Lines of credit cover immediate cash demands for businesses. However, business loans offered as lines of credit are not the best choice for large purchases, such as business improvements or expansion.
Short Term Unsecured Business Loans Financing
Small business loans also come in the form of short-term financing. Instead of paying monthly installments for repayment, you simply pay back a lump sum plus fees and interest on a predetermined date.
Business owners choose short-term funding to take care of immediate business needs or emergencies. They are not meant to be paid back over a long term, as they are used to support a company financially that may need the money to make a repair, build an inventory, raise accounts payable funds, or to finish a project that will reap a quick return.
Most short-term loans are funded for under $100,000. You can get these types of start-up business loans through credit unions, banks, and similarly licensed lenders. Short-term business loans are often used by companies whose business needs are seasonal.
Long Term Business Loan
The most popular type of business loans is a long-term loan. They can be a start-up business loan or a small business loan. Commercial lenders offer long-term small business loans and larger-sized business loans so companies can obtain working capital, make major acquisitions, or get secured or unsecured business loan refinancing.
To attain business loans for the long term, you need to have good credit and a well-established business to receive loan products with a good interest rate. If your credit is not that good or your company is new, you need to show a solid business plan for expansion and growth.
Doing so will give you the ability to possibly get a long-term loan at a higher interest rate. You may also have the ability, in some instances, to apply for bad credit business loans and refinance the loan at a lower future interest rate.
Alternative Business Loans and Government Loans for Businesses
Our Government offers business loans and small business loans to cover the start-up costs for and back business loans for women. Therefore, if you meet the criteria for government loans for businesses, you can still get the funding you need. In some cases, you can precisely apply for bad credit business loans if you’ve had come credit difficulties.
Merchant Cash Advances
Some start-up business loans come in the form of merchant cash advances. When you take out a merchant’s cash advance, a lender looks at your credit card sales rather than your credit rating. They also consider the time you have been in business. If you meet a few simple criteria, you can get the money you need in just a few days, directly deposited into your business bank account. Repayment is based on your portion of daily sales.
How Lenders Usually Assess Businesses for a Loan
Especially in terms of long-term funding, lenders consider the following:
- The collateral a business holds
- The current funding of the business
- How much you have already invested in your business
- Your business credit score
- Your cash flow and revenue – cash flow is critical and revealing, allowing a lender to see how much money is coming in and going out of the business
- The age of your company
Keep the above information in mind, as you need to focus on your ability to repay the loan, assuring a lender that you can cover the debt.
Pros and Cons of Getting a Business Loan in Canada
- You can receive a good interest rate for small business financing, provided your credit is good and you can prove you can repay the principal and interest, plus any loan fees.
- You can fund your business, or add capital, immediately – always helpful when getting startup business loans and financing.
- Even when your company is profitable, taking out business loans can help you add business amenities that will enhance your business’s offerings or increase its assets.
- The interest rate can be higher if you take out an online loan or obtain an unsecured loan.
- If you take out a collateralized or secured loan, you stand to lose one or more business assets (real estate, equipment, or furnishings) if you cannot repay the loan amount.
Frequently asked questions
How do I get a small business loan?
To get a small business loan, make sure you meet the criteria first. For traditional loan approval, you need to have a good credit score, sufficient collateral and need the money for an unexpected expense or to back your needs for inventory. If your credit score is lower, create a business plan for the lender so you can show how you plan on securing the funds to repay the loan financing.
When should business loans not be used?
If you don’t have a solid plan to repay the loan or insufficient capital, you need to get your financial house in order first. Don’t take out any business loans unless you can show that you can repay the loan amount and can provide financial proof of repayment.
Can I apply for a small business loan online?
Absolutely. Applying for small business loans or even bad credit business loans can be easily done online, and is more convenient and simple than visiting a traditional financial institution, such as a bank.
How do I get a first-time business loan?
To get a first-time business loan, decide on the type of loan you need. If you need a short-term loan or long-term loan, you need to provide your credit score, your payment history, the reason for the loan, and the amount of collateral for your business.
A line of credit loan can also be secured by providing the same details. You should have a debt-to-income ratio that shows the amount of income you make is notably greater than the debt you currently carry. You can conveniently apply for any business loans online.
What will I need to do and provide when I apply to business loan lenders?
To deal with business loans Canada based lenders, you need to take the following steps.
- Check and Perfect Your Business and Personal Credit Scores
Your personal or business credit score shows our ability to repay your personal and business debts, respectively. Usually, lenders of small business loans will ask for your credit score so they can see how you manage your debt. You can receive 1 free credit report per year from the credit reporting agencies TransUnion and Experian.
To improve your credit score quickly, you should check your credit report and clear any errors or inaccuracies. Make sure you regularly pay your bills on time each month as well.
If you have a more established company, you will need to provide your business credit score. To establish business credit, you need to make sure your public standing is good and establish trade lines. You can prove your creditworthiness in this respect when applying for government loans for businesses or making an application for long-term traditional funding.
- Find Out The Minimum Requirements of the Lender
Before you apply for any start-up business loans or traditional business loans, you need to make sure you can meet the minimum requirements set by the lender. These requirements usually center around credit scores, a company’s yearly revenue, and its years in business. However, lenders will show some degree of flexibility if you are stronger in certain areas even though you may be weaker in others.
When applying for government small business loans, make sure your business meets the criteria for being “small.” Also, make sure you are up-to-date with the payments on any government of Canada business loans and that you have no defaults.
If you wish to take out one of the online small business loans or a traditional business loan, a bank or online lender will require specific documents, such as relevant accounting data. However, an online lender usually is less stringent when it comes to providing bad credit business loans. If you are dealing with a financial institution, such as a bank, you need to have good to excellent credit.
- Gather the Necessary Legal and Financial Documents for Business Loans
Traditional lenders require that you provide the following documents when applying for government small business loans, startup business loans, or business line of credit loans.
- Tax return (both business and personal)
- Balance sheet and income statement
- Bank statements (both business and personal)
- Driver’s license or government-issued I.D.
- Any commercial leases
- Professional business licenses
- Articles of Incorporation
- Resume showing relevant experience
- Business plan, showing financial projections if you are a start-up
Online small business loans Ontario-based lenders may streamline the application process with fewer documents. If your credit is strong and so are your finances, some online lenders offer rates competitive with traditional financial institutions.
- Provide Collateral
To qualify for small business loans Canada funding, you will probably need to provide collateral to back the financing. Business collateral is any business asset, such as inventory, real estate, or equipment that can be seized and sold if the loan is not repaid. A lender can recover its money if your business defaults on the financing.
Some online lenders do not require collateral but do want you to provide a personal guarantee. Other lenders may take out a blanket lien on a company’s assets to recoup their money in case of default. It is essentially the same as providing collateral. Each lender has its own rules regarding this facet of the loan process, so ask questions when applying for business loans Canada based funding.
If you don’t want to take out one of the secured business loans and provide collateral, you can always opt for a small unsecured business loan. Your interest rate will be higher, but the loan is much less risky.
How Do I Create a Business Plan for Funding for Startup Business Loans?
You will need to develop a business plan for getting startup business loans. Doing so will let lenders for small bad credit business loans and regular small business loans see how you plan to use the financing. Your business plan should include the following:
- Description of your business
- Product and service offerings
- Management team (and resumes)
- Industry analysis
- Operations and facilities plans
- Current and projected financials
- Marketing and sales strategy
- SWOT (Strengths, Weaknesses, Opportunities, Threats) analysis
A business plan for small business loans should clearly show that you will have a sufficient cash flow to meet ongoing costs and new loan repayments. Doing so will give a lender more confidence in approving financing, which of course increases your chance of getting your loan approved.
Do you need approval for financing your business? The above information will give you the information needed to excel in your field and provide the best services and products in your industry. Use business loan funding to open up new doors for your business financially.