If you’re a new business, just starting out, access to the right type of financing can do wonders for establishing a solid foundation. Financing can also open up a world of opportunity in terms of investment, in expansion, or fixed assets.
As a business owner in Canada today, you don’t have to go at it alone. There are a plethora of financing options at your disposal. However, the key is to find the right one that will propel your business forward, and not set it back.
Keen to learn more about new small business loans and how they can set you off on the right track? This blog is the guide you need.
Debt vs. Equity Financing: Learning the Lingo
First thing’s first, you need to learn the world of lending lingo as a new business owner. If this is your first rodeo, a clear understanding of lending terms is crucial.
For starters, there are two main types of financing: equity financing and debt financing.
Equity financing involves the money that you personally put into your business. This money can also come from investors, family members, business partners, an angel investor, or crowdfunding.
Then there’s debt financing. This involves the process of borrowing money from a lender, a financial institution (such as a bank), family members, or even friends.
Most of the time, debt financing goes hand-in-hand with equity financing — meaning you must provide some form of equity for borrowing money. This equity depends on how much money you can provide versus how much you can borrow.
In other words, the basic premise is to pay back the money that you borrow. Bear in mind that equity financing also comes with a pre-requisite — you might have to give up a portion of business ownership to investors in exchange for their financial support.
New Small Business Loans: What Are Your Options?
In today’s day and age, there is a common trend among new small businesses. Most of them are self-funded, meaning that business owners rely on their own money or equity financing. However, when it comes to business expansion, this is where small business loans for a startup can come in handy.
So, what are your options?
1. A Small Business Grant
If you’re a new small business owner, don’t make the mistake of assuming that you cannot qualify for a government grant. The reality is that most of the time a small business grant might not be an option for you as a startup, but there are exceptions.
Overall, the Canadian government aims to invest in small businesses via a loan program, assistance program, or some type of relationship that involves shared contributions. This means that many small business grants don’t actually include ”free” money.
To add to this, government grants are also very specific. Essentially, the point of a government grant is to spur on business in a particular sector or part of the country.
With all of this in mind, it’s still possible to apply and qualify for a small business grant — you can learn more about available grants, here.
2. A Small Business Loan
If your business is not self-funded or equity-financed, you’ll need to consider debt financing. And this includes taking out a small business loan. As a new business owner, the option of a business loan might be particularly attractive due to the Canada Small Business Financing Program.
This program makes it easier for small businesses to qualify for a loan from a lender by sharing the risk with lenders. Then there are also your traditional routes, such as banks and credit unions. Some of the best new small business loans include:
- An installment loan
- A business line of credit
- A merchant cash advance
- Invoice factoring
- An equipment lease
- A commercial mortgage
- A business credit card
- A personal loan
If you don’t want to go the traditional route, you could also consider a private lender. But no matter what small business loan you opt for, taking out a loan always comes at a price. You have to carefully weigh your options before you decide.
3. An Angel Investor
This is another viable option for startups and new business owners. And most of the time you’ll find savvy business people, turned investors, looking to invest in small businesses that can offer a solid return.
So, if you believe that your business has true potential, you might want to do some research on angel investors in your region. Not only can they assist with financing your business, but they can also provide priceless business advice and mentorship along the way.
What Are the Pros of Small Business Loans?
If you make the decision to take out a small business loan, here are some of the most basic benefits:
- It’s an easy application process
- New small business loan requirements are a little more lenient, i.e. if you don’t have a great credit score
- In some cases, you don’t need to submit any collateral for the loan, i.e. commercial property or equipment
Some of the more significant and long-term benefits include:
1. You Get To Keep All of Your Business Equity
As mentioned earlier, if you choose equity financing, this comes with the cost of diluting your own business equity. In essence, it means you have to give up some of your business ownership.
But with a small business loan, you can keep all of your own business equity and profits, without having to share anything with an investor.
2. It Allows Your Business To Grow
Sometimes you just need a helping hand, financially, in order to get your business off ground level. Whether it’s financial support for a major marketing campaign, leasing equipment, a product launch, or buying merchandise, a loan can get you from A to B.
If you’re smart about the loan you choose and manage your finances well, you can watch your business grow from strength to strength.
3. You Can Better Manage Your Cash Flow
The faster your business grows, the better you’ll need to be at managing your cash flow. The ironic thing is that when a business experiences positive growth, this is when cash flow is most important. You need appropriate finances in place to assist in paying new customers, ordering stock, raw materials, paying your staff, etc.
If cash flow becomes an issue, this is where small business loans for new entrepreneurs could be extremely helpful to allow you to get on top of things.
What Are the Cons of Small Business Loans?
Now, you can’t avoid facing the drawbacks of taking out a business loan. In fact, it’s almost more important to weigh up the cons before you consider the pros. After all, the last thing you want is for a business loan to cripple your growth, rather than encourage it.
Here are some basic disadvantages to consider:
- You might be limited in terms of your lender options, depending on the type of loan you choose
- You will pay higher interest rates on a fast business loan, but can generally secure a lower interest rate with a more traditional loan
- You may have to pay different sets of fees, based on the lender you choose, such as origination or prepayment fees
- Depending on the type of loan and lender you choose, you might not have access to large borrowing amounts
Not only this, but here are some of the more long-term cons you want to think about:
1. Repayments Can Impact Cash Flow
If you take out a loan that’s just a little too expensive, your business might have a hard time meeting the loan repayments. This could affect your cash flow in a negative way as you start to use this income to supplement your repayment costs.
In order to avoid this, make sure you’re realistic about the amount you borrow and whether your business can actually afford these repayments. Especially over a long-term basis.
2. A Low Credit Score Will Impact Interest Rates
It’s important to note that the interest rate on a loan is often determined by your credit score, i.e. your credit history. If your personal or business credit score is not up to par, you could end up paying a higher-than-usual interest rate on your loan.
A good way to avoid this is to ensure you build a solid business reputation and work on improving your personal and business credit score before applying for a loan.
3. It Could Reduce Your Options for Growth
The reality is that taking out a loan comes with a fair bit of responsibility in itself. There’s no such thing as completely ”free” money in today’s day and age. So, seizing the opportunity to take out a loan today, could have consequences down the line, in the future.
Loan repayments, especially over a longer-term, can have an impact on your available spare cash. This could limit growth opportunities such as moving premises, expanding your team, or buying merchandise.
You need to ensure that you borrow money for the right reasons and that it will not hurt your business growth in the long term.
Looking for Lending and Money Management Advice?
There is a range of new small business loans in Canada that can do wonders for the growth of your business. But they’re not without their faults. That’s why it’s so important to make a well-informed decision when taking out a loan of any kind.
If you’re looking for lending tips, advice on managing your finances, or how to pay off debt, you’re in the right place! Explore the rest of this blog for more.