What you need to know about business loans for small businesses

Does your business — or idea for a business — need a boost? Business loans for small business can be tricky to navigate. Here's a guide to get you started.

Looking for startup financing? You're in luck! Canada really likes small businesses — so much so, in fact, that there were 1.15 million in operation in the country as of December 2017.

Still, for newcomers the world of business loans can be daunting. Here's a look at the basics.

Business loans for small business

Small businesses are a key piece of the economy, driving growth and prompting innovation. Everyone wants them to succeed, meaning business owners have a wide variety of options when shopping for the best loan for a given project.

Private sector loans

Banks are the first place you might think to look for startup financing, since they have an established history with loans to help fund and grow small businesses. Other sources of funding from the private sector include:

Government loans

The federal and provincial levels of government provide different kinds of financing to entrepreneurs. Some of them, such as grants and contributions, usually don't have to be repaid, while more traditional business loans generally do. Some funding is specific to certain industries and demographics. The list of governmental grants and loans is too long to run through here, but know that there are a variety of options available.

Non-government organizations

Neither government-funded nor private, these organizations often focus on one specific regional or demographic group, and they can provide some funding, or at least connect you with people or organizations who can offer resources. Again, the list of groups is long, but you can check it out here

Other types of business loans for small businesses

If you're looking for non-traditional options, here are two more options: family loans and microloans. Family loans are commonly used by entrepreneurs just starting out, in part because at their core, these loans are extremely simple: it's up to you and your family to set the terms. Microloans are loans of less than $5,000 made by smaller financial institutions or groups of people. The advantage of microloans is that it's sometimes possible to bypass credit requirements.

Applying for a small business loan

Now that you know the types of business loans for small business out there, are you ready to apply? Not so fast. Think through these questions first.

When to apply

Of course, anyone can start a small business or apply for loans whenever they want, but waiting for the right time (or the right reason) to ask for funds can be key to taking your business to the next level. Consider applying for a small business loan if you need to:

  • Buy more inventory for your business
  • Purchase more or updated equipment
  • Buy retail locations
  • Hire more people to help you run the business
  • Build credit for bigger future loans

What's common to all of these situations? Your business is at a moment of growth, but it needs some help reaching its potential. Whether lenders will want to help you capitalize on that momentum depends on your loan application.

How to apply

While different loans have their own criteria regarding regions, sector, demographics, and so on, most applications will ask for the same things from you. Expect to hand over:

  • A detailed business plan: this gives lenders an outline of your company's plan and objectives
  • Financial statements: this indicates the health of your business and tell lenders whether you have the cash flow and assets to pay back debt.
  • Your credit profile: this determines whether you qualify to borrow money and helps determine your interest rate.
  • Collateral: this can make your application more attractive to lenders.
  • Professional references: these aren't always required, but some lenders may want to see them.

It's best to have your package ready before you begin applying for loans. That'll shorten the time between you applying and the lender making a decision. When you start the application process, make sure to read all the fine print at least once before applying and once before signing anything.

What else to know

When you get a small business loan, you usually receive it in the form of a lump sum that has to be repaid. However, the terms of repayment vary depending on the type of business loan. More traditional loans tend to lay out an agreed-upon monthly payment over a period of months or years. This payment is a blend of the principal and the interest. Lenders may also offer a fixed daily payment, which works better with companies that have good cash flow management, or a lump sum at the end of the term, as with microloans.

Small businesses get talked up a lot, and the praise is entirely earned. Business owners, communities, and the nation as a whole, thrive when small businesses succeed. If your idea for the next big thing has been scribbled on a piece of paper and stuffed in a drawer for years, now might be the right time to bring it out and start practising your elevator pitch. The funding is out there.