For the uninitiated, business loans can be confusing. Bankers frequently have specific criteria they use to judge your application and may use unfamiliar terminology. The following Q & A is a general overview on what most lenders will want to know about you and your business when applying for a loan.
Your application will be evaluated on:
Collateral accepted by a lender
The lender will accept the following as collateral:
Restrictions imposed on the borrower
Security for term loans
The following will serve as security for term loans:
The lender will require the following information:
To develop a good bank relationship:
Bankers are impressed only by your standards of management excellence. Experience counts heavily in planning, organizing, supervision, directing, control, development and demonstrated success.
The most common source of financing for small business is the charted bank. To provide working capital, banks can provide short term loans, long term mortgage loans and loans against inventory or accounts receivable,etc.
Banks also offer a full range of banking services, including:personal and business deposit and loan accounts, buying and selling of foreign exchange, purchase and sale (or safekeeping) of securities and other valuables, letters of credit and the provision of market and credit information in Canada and other countries.
Equity capital represents the net value of the business since all other financing amounts to some form of borrowing which must ultimately be repaid. Also, business profits can be reinvested as additional financing once your business has started.
Leasing may also be considered as a source of funds. The interest rates are relatively high, but payments are deductible from income tax. Leasing arrangements are usually used for machinery, vehicles and office equipment, where it is desirable to avoid heavy capital cost outlays.
Your involvement with the banking world begins even before you start your business. Develop a good working relationship with the bank of your choice from the very beginning. Faster and better services are supplied when a bank is familiar with its customers and their business. In that environment, suggestions for keeping a business financially healthy are more readily given, crisis borrowing can be avoided and good loan planning can be developed.
Unless you are independently wealthy and insist on using your own money, you will require financial aid from the bank in the form of a term loan for any of the following purposes:
Long term financing is used to buy fixed assets such as buildings, machinery and fixtures and is paid back in equal monthly instalments. Short term financing is used to pay for current assets such as inventory, accounts receivable and other working capital requirements. This loan is usually covered by a demand note at the bank, and fluctuating weekly or monthly depending on the need.
Note: It is easier to borrow money by pledging fixed assets, so don't pull all your equity into machinery or buildings; save it for needed working capital!
Typically, most lenders will want to know and ensure that:
Cash flow forecasting is your most useful tool to help ensure financial solvency. With this forecast you try to predict all the funds that you will receive and disburse, and the resulting surplus or deficit. You take into account not only the operating and capital budgets, but also the ratio of cash sales to credit sales and the paying habits of your customers. To estimate cash outflow you must also consider the promptness with which you intend to pay for your materials and merchandise. By making a cash flow analysis you can estimate:
This information can assist you in timing your capital expenditures more appropriately, accelerate collection of accounts receivable, ward off a cash shortage, plan short term borrowing well in advance and perhaps invest a temporary surplus.
It is essential to know what the initial costs of land, building, fixture, machinery, supplies, vehicles, pre-opening expenses and opening inventory and daily operating costs, rising inventories, payroll, rent, taxes, advertising, accounts receivable, etc. will add up to.
You must prepare a cash flow forecast, which will give you a reasonable estimate of your cash requirements for the first 12 months. Some instructions and sample forms on preparing cash flow forecasts are available as part of this series of fact sheets. If you cannot do a cash flow forecast yourself, it would be best to hire someone to do it for you.
The money required to operate your business can come from several sources, including: your own savings or loans from friends, relatives, investors, charted banks, credit unions, or the Development Bank of Canada. Other financial assistance may include lines of credit from your various suppliers.
As a Greater Trail entity with local business knowledge, Community Futures can be more flexible than financial institutions in business lending activities. Common business loans include: