Canada is among the best places in the world to start a business. According to Statistics Canada Company register, 97.9% of businesses in Canada are small businesses.
However, the lack of funds might be the only reason why you haven’t kick-started your business or project.
Credit cards get you some money, but let’s face it, it’s barely enough to start a small business.
Right now, small business loans might be your only option. You’ve got to be careful not mess this up.
Why is getting a business loan so hard?
Securing a business loan can indeed be exhausting.
Lenders are quick to disapprove of your business loan application at the first sight of a mistake. This is because unlike personal loans, small business loans come with higher risks to the lender. With up to 70% of small businesses failing annually, it’s not hard to see the reason why.
The main small business loan requirements
We took the time to list some of the main documents and details required when applying for a business loan:
- Credit reports (Both your personal and business reports)
- Business plan
- Revenue statement
- Balance sheet
- Personal and Business Tax Returns
- Evidence of Collateral
How can I use a lender’s business loan requirements to my advantage?
First, you need to be aware of the 5 main factors that lenders pay attention to. These factors will determine whether or not your business will get the funding it so desperately needs.
- Credit score and Amount of debt
- Age of Business
- Collateral
- Business Industry
- Income/Annual revenue
It’s important to note that these factors weigh differently in the eyes of different lenders. Some value good credit scores above everything else, and there are others who see collateral as the holy grail and are even willing to overlook slightly below-average credit scores.
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What are your business strengths and weakness?
The next step is to analyze your current business standing against these 5 factors to know what are your strengths and weaknesses.
Do you have an incredibly good credit score?
Has your business been operating for years now with an almost perfect track record?
Do you have valuable assets at your disposal that can be used as collateral?
Is your business an all-year or a seasonal one? Is it currently in trend? Are there industry-specific lenders around you?
Are you proud of your annual revenue? What is your annual profit margin?
Now, identify your strengths.
Perfect scores are not a must, but you should at least have an average or a slightly below average score in each of these categories.
The next step is to scout for lenders that prioritize your strengths. Not only will this save you a lot of time usually wasted hopping from one office to the other with no success, but you’ll also have higher chances of securing loan approvals.
1. Credit Score and Amount of Debt
Many lenders indeed value a high credit score and it carries some significant weight when it comes to determining who gets a loan approval. This goes for both your personal and business credit scores.
You should aim for a high credit score because it not only boosts your chances of approval but it also significantly lowers the interest rates.
Your credit score shows how trustworthy you are when it comes to repaying loans and debts.
A credit score of about 660 is considered average in Canada. Supplement it with another strong point, and you should be able to get a business loan.
We’d advise you to keep track of your credit score by subscribing to regular credit reports from trusted credit bureaus like TransUnion, Equifax, and Experian.
The amount of debt refers to your monthly income-to-debt-ratio.
Are you committed to other debts?
How much are you left with at the end of every month after paying off your monthly debt installments?
You might have a problem if you end up using more than 50% of your income or monthly revenue in paying off debts. Use a balance sheet to get a clear picture of your assets, liabilities, and equity.
However, it’s important to note that different debts also weigh differently in the eyes of different lenders.
Also, if you’ve backed your existing debts with collateral, some lenders can overlook them and approve your loan.
2. Age of Your Business
How long has your company been in business? How long have the business’ bank accounts been open?
This is a weak point for start-ups since they don’t have a proven track record to back them up.
It will be difficult for start-ups to get loans from traditional lenders like banks, however, there are plenty of online lenders who might be willing to overlook this weakness if you have another strong point like a high personal credit score or a promising venture (elaborate business plan).
For existing businesses, the majority of lenders feel confident with businesses that are 2 years and older. The lowest business loan requirement age is 6 months.
3. Collateral
Collateral refers to tangible assets that can be used as security should you fail to repay the loan. This refers to both business and personal assets. It could be anything valuable from equipment, furniture, motor vehicles, or invoices.
Collateral can be a very powerful ace up your sleeve when applying for business loans. Be careful though, you’re advised to only attach collateral to loans borrowed with the intention of generating more income.
4. Business Industry
Do more research and look for industry-specific lenders. They’re likely to understand your current business situation and will give you a loan with favorable terms when compared to traditional “general” lenders.
This can be a strong point for those with businesses in seasonal industries like ice-creams stores and vans or tourism-related businesses.
5. Income/Annual revenue
This is sometimes referred to as cash flow.
How much money are you making on a monthly or yearly basis?
Is the income steady and dependable?
How profitable is your business when your income is subjected to expenses?
A steady income communicates to the lender that you’re well capable of repaying loans. It’s even better if your income is at least 25% more than your expenses.
The minimum business loan requirement revenue is $7,000 monthly and $80,000 annually.
Now that you’ve known how to use a lender’s business loan requirements to your advantage, it should way be easier to hunt and secure business loans.