Quick Summary
This article discusses how to apply for a small business loan successfully. Important points include having a clear growth plan, understanding your business’s financial situation, and knowing how much money you need before you meet with potential lenders. It is helpful to remember that traditional banks may not always be the best option for a small business loan, and other lenders are available. Finally, be persistent if you are not approved at first.
Which Business Loan Do You Need
There are various types of business loans that companies in Canada can access to help keep businesses running smoothly and additionally fund their growth strategies. These include short-term and operating loans, loans for equipment purchases, working capital or commercial real estate. These loans can either be secured or unsecured. Secured loans are loans that require some sort of collateral, often in the form of an asset (home, car or other valuable item) that the lender can seize in the event the loan isn't repaid. An unsecured loan, however, is different in that collateral isn't required, but the lender would typically assess whether the borrower is worthy of receiving the loan. In both cases, the lender would go through a risk assessment process to identify whether the borrower is worthy of credit.
Documents for a Loan Application and Lender Interview
There are various steps to go through in the process of securing a small business loan and getting business documents together is certainly a big part of it. The following documents are very commonly required as part of a small business loan application and interview process: financial statements, financial projections, tax returns, business plans, competitor assessments and company history documents. The lender will typically go through a know your customer (KYC) process, which might also involve a credit check or asking for a credit report. It's important to start the loan application process very thoroughly and diligently, making sure you have all the paperwork and documentation you need to start the process with the lender. Having your documents in order will also help you when it comes time for the lender interview, as you will have any information they may ask for at your fingertips. Some small businesses may choose to work with a controller or external business advisor to help them collect the documentation they need for the loan application process.
How to Secure a Small Business Loan
Ensuring your small business has enough money to sustain itself is one of the biggest struggles in small business ownership. Whether you need money for property or equipment upgrades or are looking for capital to fund your startup, sourcing cash in the early stages of business ownership can be challenging.
At Enkel, we’ve helped small businesses prepare for securing their first loan and learned a lot along the way. A main lesson is that having solid answers to the following questions will significantly help as you meet with prospective lenders.
How do you plan to grow your business? What is your business's current financial situation? How will you repay your loan? This article reviews what you’ll need to prepare when meeting potential lenders.
Have a Plan for Growth
Nobody will lend you money if you don’t have a clearly outlined plan for growth. Lenders want to see how you’ll use your loan to grow your business. While having more money is always nice, it is common for business owners to make the mistake of assuming that a loan on its own will improve their current business operations. Additional money does not make your business more efficient. However, investing in new equipment, services, or upgrades to equipment and property to reduce costs will.
If you’re not sure where you’ll be investing the money, what your return will be, or how you’ll repay your loan, you must design a more robust growth plan before you apply for a loan. Lenders want to see how the loan will help grow your business. The more detailed your plan, the better.
Know Your Current Financial Situation - Inside and Out
Whether or not you’re a financial person, you must understand your current financial statements when meeting with a lender. Maintaining your bookkeeping to ensure your financial records are entirely accurate and current is an essential first step. We recommend meeting with your bookkeeper, accountant, or any financial advisors before you apply for your loan so they can walk you through the basics of your business' financial situation. Have your bookkeeper review and explain any financial weak spots in your business. Be prepared to explain how you intend to improve financial weak spots once you meet prospective lenders.
This means understanding your expenses and whether there is room for more efficiency, where your revenues come from, and other financials such as taxes and obligations such as credit card debt and loans. Lenders do not feel assured when borrowers do not have a firm grasp of their financial picture.
Know Your Ask
Know why you need to borrow this money, but also know how much you will need. Asking for too much makes you look risky and out of touch with reality, but asking for too little is also a red flag. Potential lenders will notice this and dismiss your application. Lenders want borrowers with a firm grip on the dollar value of their needs and plans. It's very important not to take on too much debt (that you will eventually have to repay, of course) but asking for too little could put you in a tough position down the road when you're facing a cash crunch. We recommend meeting with your bookkeeper, accountant or any financial advisors before you request your loan. They can help you review your cash flow projections and have visibility to the working capital you will need to get through the year and achieve your goals.
Plan How You’ll Repay Your Loan
Accurate financial data is vital to prove to a lender that you are a desirable borrower and to show how you’ll be able to pay it back. You should take the time to work with your bookkeeper or accountant to develop a credible, detailed plan to repay the loan.
An accurate and detailed review of your current expenses ensures that your loan application is attractive. Don’t forget to pay careful attention to fees. When considering how you’ll repay, you’ll have to account for interest rates and potential administrative costs. Please note that unsecured loans have higher interest rates—lenders charge higher interest rates to compensate for this risk.
Administrative Concerns
Find Your Ideal Lender
There are pros and cons associated with different types of small business loans. A loan from a banking institution is probably your first choice because it’s a trusted establishment with whom you likely already have a history. However, traditional bank lending can be difficult for small business owners. Banks don’t have much appetite for lending to small businesses because of the lack of security in their investment.
You may have the option of putting up a personal asset, such as your home, as collateral, but this approach can create risks for small business owners. Business owners often view their personal assets as their safety net and want to keep them out of the business.
It often makes sense to seek other lending solutions, such as online lenders or FinTech Startups. With fast, easy application processes and transparent interest rate structures, online lenders make it easy for small business owners to secure the capital they need to get their projects moving. They’ll base their decision to approve your loan on your financial statements and your growth story. Best of all, they’re fast. With approvals and loans granted quickly, there’s no waiting around to see where you stand
Consider Loan Terms and Conditions
As the old saying goes, "make sure to read the fine print". The terms and conditions of your business loan are no different! These are very important aspects to understand before you move forward and commit to the lender. As mentioned above, there are various types of small business loans and they can come from different lenders. Loan terms and conditions vary significantly depending on the type of loan and whether it's from a banking institution or a private lender. Many borrowers focus on the interest rate (and that is certainly a significant factor), but other aspects of the loan conditions are just as important. The amortization period, for example, is a big one. Longer repayment terms mean lower monthly payments (which can help with your cash flow), but come with higher borrowing costs in the long term. It's also important to understand how flexible the lender would be in the event you're not able to make your loan payments. Additionally, consider if the lender requires collateral (a high-value asset such as your home) or if the loan is unsecured. Some loans come with financial reporting requirements, which typically involve presenting financial statements and reports on an annual basis.
Approved? Congratulations!
When you are approved for your first small business loan, the excitement is palpable. With an influx of money, it’s easy—and tempting—to spend money freely! It's important to have the right technology in place to carefully monitor the funds that are coming and going. We love working with QuickBooks Online accounting software because it allows us to help clients track where their funds are going and stick to their initial financial plan.
Not Approved? No Worries! Be Persistent.
Not all lenders will be your perfect match, and not all small businesses will be approved for loans on their first time up to bat. Most importantly, continue to work with your bookkeeping and accounting team to solidify your financial statements and improve your business plans. Growth takes time, hard work and persistence. You can consider other opportunities for financial growth or tax incentives, such as grants, Scientific Research Experimental Development Tax Incentives (SRED) or Industrial Research Assistance Programs (IRAP). Most importantly, continue to work with your bookkeeping and accounting team to solidify your financial statements and improve your business plans. Growth takes time, hard work and persistence.
If you’re looking to prepare your financial statements to meet with financial lenders such as your bank or online lenders, Enkel can help you prepare. Contact our team to discuss how we can help you provide simple, accurate financial data to prepare you for securing your small business loan.
How We Select and Evaluate Our Recommended Software
We thoroughly research and test the apps we include in our regular workflow for Client bookkeeping services. After deciding on criteria for evaluating the software and then researching the app itself, we tested the app, noting its strengths and weaknesses. We then work with the app for at least a few weeks before deciding whether to recommend it to our readers. We use the software as it was designed for its intended tasks. For a detailed walk-through of how we select and evaluate software, please see the details of our process.
