All small businesses need some source of funds in order to survive. The funds could from the owners, from operations or from external debt or equity providers. Traditionally, banks and credit unions were the go-to place for small business loans. The application process was very involved, and required extensive paper-work and days of not weeks of waiting. Furthermore, larger lending institutions favoured established businesses with solid track records.
In the last 5-7 years, many Canadian startups are changing the way business owners get loans. Not only are they streamlining the process, they are making it more available to a wider spectrum of business owners. By using non-traditional sources of data, versus just a credit-score, they are able to better assess the credit-worthiness of each business owner independently.
Many small business loans require the business owner to have insurance in case something goes wrong. As a result, we help many business owners just as they are going through the loan process. Based on our learnings, we built a simple, 5-point checklist to keep in mind when looking for a small business loan.
1. Look for “cheaper” sources of funds before considering a loan
Explore the many government grants that are available for small business owners. These grants may not meet your entire financing needs, but you may be able to reduce your borrowing needs.
2. Only take as much money as you need
Just because a lender is willing to give you a lot of money, don’t necessarily take it all. Build your business plan, and estimate how much you will need. Add some buffer in case things do not go according to plan, but don’t maximize the loan just because it is available.
3. Understand kinds of loans available to meet your needs
There are many types of loans, depending on your business type and what you plan to do with the money. If you are buying machinery, look for asset financing. If you are exporting, check out Export Development of Canada’s many options. If you have a high receivables balance, try to back your loan against them. Talk to your provider and see what the best product is for you.
4. Dig into the exact terms and conditions, not just the APR
Do not fall into the trap of taking money from the cheapest (as measured by APR) provider. Look at the different terms and conditions, such as set-up fees, early payment fees, renewal fees etc. Quite often, lenders many more money off of fees than the loan itself.
5. Negotiate the insurance terms
You might be handed a very standard set of insurance requirements by your lender. That “insurance requirements” form is the same across all businesses, small or large. So, it may be excessive for a very small business that is just getting going. Speak with us if you want a sanity check, and always feel free to negotiate with the lender.
Zensurance is Canada’s leading online commercial insurance broker. We offer a full range of insurance products to small businesses, with a particular focus on digitizing businesses and technology startups. We understand what it is to work with new technology, and know the most common risks of which you should be aware. Based on that (and a lot of analytics), we recommend the ideal insurance coverage for your business.