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How to Obtain a Small Business Loan: Tips and Advice

Many people dream of becoming small business owners. They typically like the personal freedom that comes along with it and the idea of building something they could potentially pass down to their offspring.

Of course, it’s not always so easy to launch your own small business. In fact, 30 percent of businesses fail within their first two years of operation, and 50 percent of them within the first five years. Only 30 percent of small businesses ever witness a ten-year anniversary.

A lack of adequate financing is the primary reason why so many of these businesses fail. This is why it’s often so crucial for start-ups to secure a commercial loan in order to finance inventory or lease equipment.

Qualifying for a Small Business Loan in Canada

  1. Have a Detailed Business Plan

Every lender will ask to see a prospective borrower’s business loan. The plan should outline your goals, objectives and how the funds will be used. The lender may ask to see your references.

  1. List Your Business Assets

Many lenders require that you provide collateral in order to secure the loan. Collateral is something of value that can be legally seized if you are unable to repay the loan. However, even when collateral isn’t required, you’ll still likely need to list your assets.

  1. Cash Flow Projections

Your lender will probably ask for a copy of your financial statements and cash flow projections to better assess your ability to repay the loan. The lender will probably ask you to provide them with your past and projected cash flow statements along with your recent tax returns and insurance policies.

  1. Personal and Business Credit Score

You will need to review your credit report before you apply for a small business loan. If you don’t have a copy of your credit report, you can request a copy of it from Equifax or another credit bureau.

Your personal and business credit scores are important. The lenders will use this to assess your ability to pay back your loan. When your credit score is above 700, lenders recognize there’s very low risk of you’re not being able to honour your debt to them.

There are several ways you can improve your credit score. For starters, you need to pay all your bills by their due date. A good payment history will add several points to your credit score. You should also try to pay off any outstanding debts.

Once you’ve submitted your application and all the required supporting documents, you’ll next need to wait for a reply from the lender. The time it takes to hear back from a lender can vary. You may get an answer from them within a week, or it could take 90 days before you hear anything more about the status of your application.

The Government of Canada states that in 2015 the approval rate for businesses seeking financing was 88 percent. Depending on the circumstances it can be very challenging for a small business to get funded. However, if you’ve been in business for at least one year and can show a minimum $100,000 in account receivables, your loan will likely be approved.

What If You Are Denied a Small Business Loan?

Should your loan not be approved you will need to find out why your application was denied. A lack of collateral, bad or no credit, a low capacity to repay your debt, and even just the perception of potentially having a poor character are among the reasons why applications are denied.

You’ll need to fix the issues that caused your application to be denied and then re-apply. You would be wise to wait at least six months before applying with another lender, however, it could easily take half a year or longer to address the issue(s) that saw your initial application denied.

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