Getting the right loan for your business

Small business owners have many more ways to access credit than ever before — but it can get overwhelming if you’re not sure how to compare the options and find your solution. For small businesses, getting the right loan and sufficient financing might not feel like a small undertaking.

With this greater choice comes greater confusion. Which type of loan is right for developing a new product line? Or to buy more supplies and inventory? Or for replacing broken machinery? Or for helping you make payroll every month? Different needs require different solutions and getting it wrong can affect your business’s success.

No matter the situation you face, there are common funding options available that can help you get to the next level. But there are also a variety of lenders to choose from – and it’s important to find the right match for your business needs.

The fast and easy loan – if you qualify

Some commercial lenders make credit decisions based purely on the business owner’s credit score and assets. For these types of loans, little emphasis is placed on your business plan and company’s track record.

If you have a high beacon score — your business credit score — and sufficient assets to act as security for the loan, you’re likely to have a successful application. The main advantage in this case is getting a quick decision, along with the ability to spend the money on pretty much anything.

However, this approach is designed to make the process more efficient for the lender, not the borrower. One downside is that many entrepreneurs are rejected because of their personal credit scores or low assets, even if their business has a good chance of being successful. And since this lending decision isn’t based on the financial feasibility of your business, it also won’t flag any potential issues that should be addressed before taking out a loan.

Related: What small businesses should expect from their financial institution

Getting the right loan: The robust commercial loan

Other lenders dig much deeper into your business. They’ll want to see your business plan, financial statements, cash flow and other proof of the viability of your business. Their credit decisions are based on the likelihood of your business being successful.

The main advantage of this kind of borrowing is that it gives your business the scrutiny of a second set of eyes. This scrutiny may uncover fundamental issues that need to be resolved before undertaking a debt, which can prevent costly mistakes from being made. Applications from successful businesses are also more likely to be successful.

Local borrowing advantages

Some financial institutions make their lending decisions locally, either in-branch or in the same city. This can benefit your business since local decision-makers will typically consider the local economy and other business challenges that may only be appreciated close to home.

On the flipside, other lenders, including some of the big banks, make their decisions centrally. This can often be in another city or even another province, and they may not take into consideration some of the same factors that you’d expect.

Local lenders may therefore be more likely to approve loans and give favourable decisions informed by local realities affecting your business. In either case, it’s important to prepare your financial statements and potentially even an updated business plan when applying for funding.

Read: Follow these ‘5 Cs’ when applying for a business loan

Different loan options for different needs

Some entrepreneurs believe that certain loans, such as a line of credit, will work for them no matter why they need the loan. However, each loan is only suitable for certain reasons. Some types of loans are not designed to build assets, while other loans are not suited to short-term needs.

These are the most popular loan types along with what they are best suited for:

• Term loans: A loan with a fixed term of repayment that reduces your liabilities over a set period of time. This loan is ideal for large purchases or expenses that grow your assets, such as buying equipment or paying for building renovations.
• Commercial mortgages: Similar to term loans, mortgages are ideal for buying your commercial property because interest and principal are paid off regularly — often offered on longer repayment periods (amortization) and with a lower interest rate than a term loan. With a commercial mortgage, your asset is constantly growing while your liabilities are reduced.
• Lines of credit: These are designed to provide short-term financial boosts to your company’s cash flow. They are suited to paying for daily operating costs or covering payroll until your receivables come in. Ideally, this loan is reduced to zero every month, so that you minimize the amount of interest you pay.

Did you know ACU offers business credit cards? Check out the details and special offers here!

ACU’s Community Financial Centre: Getting help to secure the right loan for your business

A financial institution that is dedicated to your business’s success should be committed to providing you with the right kind of financing.

ACU’s Community Financial Centre helps small businesses, including business start-ups, by providing lending decisions that are made locally, based on the specific purpose of the loan and the viability of your company.

For more information on how ACU can help you start or expand your small business,  please contact Nigel Mohammed, Director of CFC, at nmohammed@acu.ca.

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Interested in commercial financing? Our Business Financial Centre (BFC) goes beyond lending to help small to medium-sized businesses and public institutions, including schools and municipalities. Get additional financial counselling to take the next step in your business strategy.

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