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Business Loans

How Do Business Loan Work in Canada?

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A business loan can help you start a new business or take an established business to new heights of growth and profitability. But before you can access the funds to grow your business, you need to convince your bank to lend you money.

First, ask yourself why you need debt. Then find the right loan for your needs. And finally, a solid loan application with proper documentation and preparation. “Once you know why you need a loan, you know what kind of loan you’re taking, how much you’re charging, and the best terms for your business,” says Mittra.

“All of this will increase your chances of success when applying for a loan and help you build long-term relationships with your financial partners.”

1. Why do I need a business loan?

The first step is to clarify why you need a business loan. Bankers offer different types of loans to businesses. Which one is right for you depends on your specific needs.

A variety of loans are available for starting a new business, scaling a technology company, investing in equipment, technology, or buildings, to acquiring another business.

By prioritizing your needs, you can decide which type of credit is most appropriate and how to pursue a case with your bank.

How much loan should I ask for?

It’s also important to clarify your needs so that you know how much funding you need to ask for. While it’s important not to borrow more than you can afford, it’s also important not to underestimate your financing needs or overborrow. It can be a money crisis when you can’t afford it most.

Review or update cash flow forecasts to calculate required amounts. This allows you to forecast your working capital gap over the next 12 months. This is true even during times of high cash outflows from planned investments. Plan your loan requests so that you have sufficient cash available throughout the year.

2. Which type of business loan best suits my needs?

The next step is to decide which type of loan is best for your business.

New company

Businesses with at least 12 months of sales can apply for start-up finance. This type of loan can be used for:

  • buy property
  • pay the entrance fee
  • buy a franchise
  • create a website
  • hire a professional advisor
  • replenish working capital

A company with less than 12 months of revenue history may be eligible for funding from its BDC partners such as: for example. :

  • Futureplaner Canada
  • Canadian Community Futures Network

Technology companies

Whether you’re an earlier-stage scale-up or an established business, tech firms can secure financing tailored to the technology industry. Projects can include:

  • developing new products
  • hiring more staff
  • investing in customer acquisition
  • acquiring another business
  • expanding into new markets

Smaller loans

Established companies seeking smaller amounts can apply for a small business loan. Such financing is often available quickly via an online application and can be used to:

  • buy equipment, software, or hardware
  • upgrade a website
  • purchase inventory
  • pay suppliers or employees

Commercial real estate

A commercial real estate loan can allow you to:

  • buy land or buildings
  • pay for the construction of a new facility
  • expand or renovate existing premises
  • replenish working capital depleted by real estate costs

Working capital

A working capital loan allows companies to make investments without putting everyday cash at risk. Projects can include:

  • complementing your line of credit
  • launching growth projects
  • improving profitability

Business acquisition

Business purchase or transfer financing is available to:

  • secure funds for a business acquisition, management buyout, family succession or vendor take-back
    acquire land or other assets of an existing business

Equipment investment

Equipment purchase financing can help you:

  • increase your capacity with new machinery or equipment
  • improve efficiency by modernizing operations
  • complement your line of credit if working capital is depleted by equipment costs

Purchase orders

Purchase order financing lets you fulfill large orders and take on new business opportunities. This allows you to:

  • accept larger contracts and purchase required inventory
  • expand into new markets
  • pay suppliers upfront

Technology purchase

Technology financing is for all types of companies and not just technology companies. Your business can:

  • buy hardware or software
  • invest in digital marketing
  • Hire a professional consultant to help with your IT planning or online sales

Growth capital and transition capital

Fast-growing, profitable companies may be looking for funding for growth and migration. These solutions allow businesses to raise capital when they don’t have enough tangible assets to pledge as collateral and don’t want to dilute their ownership. This type of financing provides specialized loans that support growth without diluting the owner’s equity. Options are:

  • mezzanine financing
  • cash flow finance
  • Quasi-equity financing
  • intellectual property

Companies wishing to commercialize and expand their IP can seek IP-backed funding. This can take the form of classic loans, quasi-equity, or equity loans. clean tech

Cleantech companies looking to scale can seek cleantech-specific financing.

Entrepreneur

Women entrepreneurs can seek funding through a variety of partners and programs that specialize in providing loans and other support to women-owned businesses.
local entrepreneur

Local entrepreneurs can apply for special loans that can be used for:

  • get rich
  • cover the initial cost
  • Start an export project
  • Rebuilding working capital

Black entrepreneur

Black entrepreneurs can get credit from programs suitable for startups and existing businesses.

Which credit terms are best for my company?

Credit terms vary greatly depending on the bank and the type of loan.

“It’s common to focus on interest rates, but other factors can be just as important,” says Mitra. “You should hunt around for the appropriate terms and conditions.”

Please review these Terms of Use.

Interest rate

This will determine your monthly repayment amount. Interest rates are of course very important, but other factors should also be taken into consideration as they can reduce your business in the event of financial problems.

Repayment period

Credit terms are very important. A longer-term means higher borrowing costs in the long run, but also lower monthly installments. This can reduce the strain on cash flow.

Lender Flexibility

Ask your banker what happens if you miss your scheduled loan repayments. For example, will banks allow a temporary suspension of principal repayments?

Percentage of project costs funded

This will affect how much personal investment you need to make and whether it makes sense to work with a second bank.

obligation

A covenant is a promise that the borrower makes to the lender as part of the loan agreement. Technically, if the borrower breaches the contract, the loan may default because the terms are not met. In such circumstances, the bank may demand repayment of the entire loan.

Collateral and Other Guarantee Obligations

Most lenders in the market lend based on assets. For example, they review potential building purchases, assess their value, and rent out a percentage of the appraised value. Other lenders such as BDC also lend money based on cash flow.

They look at your income and expenses and offer loans without the need for collateral, based on your profits. This allows you to borrow extra money to grow your business. financial reporting requirements.

Most loan terms include financial reporting requirements that require you to file accounts and reports with your bank on an annual basis. Smaller loans typically have less stringent reporting requirements.

You can also ask business people about their experiences with different banks.

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