“Money is the lubricant and the fuel. It makes possible the smooth design, production and marketing of a product and it keeps the administrative functions efficient. Money also moves the company forward by fuelling growth and expansion.” – Victoria Duff, a start-up facilitator who specializes in entrepreneurial subjects.

Small Business Loans: Benefits and Challenges

Below are some of the benefits and challenges that entrepreneurs must assess when thinking about getting a loan.

Advantages

• Retaining Business Ownership – retaining equity ownership and autonomy in running your business should always be the goal, you have worked immensely hard to set it up to give it away or whatever control over it. Unlike equity investors, lenders will not try to influence business owners on the day to day activities of the business.

• Protecting Personal Wealth – going for debt financing instead of using personal resources (e.g. house, emergency life funds) and putting personal stability on the line.

• Lower Interest Rates – lenders tend to offer much more preferable terms for small business loans, especially those with good credit standing.

• Establish Good Credit History – taking small loans and paying it efficiently gives an opportunity to build a good credit standing over time.

• Convenience and Accessibility – with the boom of the SME industry in Canada, loan programs offered by banks, private lenders and the government have also grown and made more accessible.

Challenges

• Loan Eligibility – some small loan programs might have stricter application requirements thus limiting eligibility to specific businesses only.

• Requirement of Personal Guarantee – as most of the small business owners or say start-ups have not yet established a credit history, banks or some private lenders will require a personal guarantee. This might be in a form of credit guarantee from another individual or through personal assets.

• Requirement of Good Credit History – some banks or private lenders might require a good credit history before granting a business loan.

• Lengthy Application Process – depending on the type of the loan and the related requirements, the application process might take a long time to process. With this, thorough research and assessment of the different options is definitely needed.

Small Business Loans: Types and Where to Get Them

Government Financing

Through the Canada Small Business Financing Program, the Government of Canada agrees to share the risks of lending to start-ups and small businesses with a lender, acting as guarantor of the loans made. It’s run through traditional banks, trade unions, and caisses populaires (credit unions in Quebec).

Small businesses or start-ups operating for profit in Canada, with gross annual revenues of $10 million or less might be eligible to apply. Under this program, business owners can use the loan to finance purchases or improvements on real estate, business equipment and leaseholds. Depending on the financial institution, interest rates might be variable or fixed (a plus rate of 3% on top of the base).

Traditional Bank Loans

Several programs and options are being offered by banks on small business loans. List below shows several of these financial institutions and what they are offering.

• Royal Bank of Canada (RBC)
• Bank of Montreal (BMO)
• Canadian Imperial Bank of Commerce (CIBC)
• TD Canada (TD)
• National Bank of Canada (NBC)
• Business Development Bank of Canada (BDC) – the only bank devoted to entrepreneurs, offering financing, venture capital, growth & transition capital and consulting services.
• BDC Start-Up Financing Program – designed to help small businesses in the start-up or early growth phase (the first 12 months of sales) that “can demonstrate realistic market and sales potential.” Such a business may be eligible for a small business loan of up to $100,000, which may be used for working capital, marketing and start-up expenses, fixed assets, or buying a franchise.
• BDC Xpansion Loan – if a business qualifies, long-term financing of up to $100,000.00 can be availed for participation in trade shows, develop e-commerce, obtain certifications and more. Further, BDC can re-advance any repaid portion of the loan starting at a minimum of $10,000.00.

Micro Financing

Smaller institutions (e.g. credit unions, etc.) and government agencies have developed programs that offer microcredit (small business loans of under $20,000) to people who would have difficulty getting a traditional business loan. Hereunder are some of those institutions offering such.

• Vancity – offers loans from $15,000.00 to $75,000.00 with payment terms ranging from 24-84 months.
• Coast Capital – offers a variety of financing options – short-term loans, business loans, lines of credit and letters of credit
• Interior Savings – offers term loans, line of credit, operating loans, letters of credit, project financing and equipment loans
• Envision Financial – offers other business loans, operating lines of credit and letters of credit
• Libro Financial Group – offers different types of commercial and agricultural loans, from business visa card to leasing to operating lines of credit to mortgages
• Alterna Savings – offers a full range of financing solutions – loans, lines of credit, letters of credit and community microfinance program

Community Investment Funds

Community Investment Funds are non-profit organizations dedicated to helping people who can’t get the loans they need to get on their feet from a traditional lending institution (such as a bank or credit union), often because they don’t have the credit history or collateral that a traditional lending institution demands. Some of these Community Loan Funds will also assist people with poor credit histories (although they will likely insist that you go through credit counselling).

Online Loans

The newest generation of lenders focused on giving access to financing as easy as possible. Feedback on loan applications is immediately given, with information on how much you can borrow and the related payment terms. They also tend to offer better interest rates and smaller service fees (if any) than traditional banks because they don’t have the same overhead costs as banks and credit unions with physical branches. Below are some of the lenders offering this type of loan.

• Lending Loop – offers loans from $1,000.00 to $500,000.00 with an annual percentage rate (APR) starting from 4.96%, to help build a business with no early repayment penalties.
• Ferratum – offers loans from $500.00 to $15,000.00 with an annual percentage rate (APR) ranging from 18.9% to 54.9% and payment terms of 6-60 months
• Loans Canada – offers loans from $500.00 to $50,000.00 with an annual percentage rate (APR) ranging from 3.0% to 46.96% and payment terms of 3-60 months. Funds are transferred within 48 hours.
• Loan Connect – offers loans from $500.00 to $50,000.00 with an annual percentage rate (APR) ranging from 4.6% to 46.96% and payment terms of 6-60 months. Funds can be transferred as early as 12 hours after approval.
• Borrowell – offers loans from $1,000.00 to $35,000.00 with an annual percentage rate (APR) ranging from 5.6% to 25% and payment terms of 3 and 5 years. Funds can be transferred from 24-36 hours after approval.