Applying for a Loan
Whether you’re looking to make major changes to your business, or you just want coverage for any surprise expenses that may pop up, you’ll likely want or need to apply for a loan at some point in your entrepreneurial career. The process can seem intimidating, and the sheer amount of choice can look daunting, but business loans exist to make the lives of entrepreneurs easier.
The Five C’s of Business Lending
First and foremost, you should know what a loan officer is looking for in a good loan applicant. While personal values may differ from creditor to creditor, you should know that any creditor will generally judge your application based on the Five C’s of Business Lending:
- Character – One key criterion that lenders examine is that of your character as a business owner. Basically, your character covers topics like your experience in running a business, your management skills, and your reputation within your industry. If you seem like a trustworthy, experienced person, lenders will be more likely to approve your loan requests.
- Credit – A less abstract criterion than the concept of “character,” your credit score is a number ranging from 300 to 900 that is calculated by your overall financial history. While the actual determinants of your credit score are intentionally vague, your score is essentially calculated by looking at your credit history – whether you’ve repaid any debts/loans you’ve had or not. Many lenders won’t provide loans to applicants with scores below 650, as they deem those people untrustworthy.
- Capacity – Looking at your capacity will help lenders determine whether or not you’ll physically be able to repay your loan, all other things being equal. This is because your capacity has to do with your business’s overall cash flow. Will you be able to make the required payments, given the amount of money you are bringing in with your business?
- Capital – To define “capital” is to open up a particularly large can of worms. While economists disagree with the technicalities of this definition, lenders see capital as the amount of your own money that you are willing to invest into your venture. An example of this would be providing a down payment for a mortgage. If creditors see that you are serious about your application – and have the funds to back up your claim – they may be more likely to accept your request for additional funding.
- Collateral – Lenders look for collateral when assessing loan applications because they want to know that they’ll be able to get their money back, in the form of physical assets, if the applicant can no longer make their required payments. Collateral takes the form of things like cars or houses because they are liquid; they can be sold easily for cash if necessary. Lenders feel better about applicants who have collateral to offer if they can no longer make their loan payments.
By understanding the criteria used by most lenders, you’ll be able to make changes to your loan application that you know will boost your chances of receiving a loan. You’ll know how your business compares to the ideal candidate, and you’ll know what creditors are looking for before you pitch your application.
Types of Loans
One of the most common ways to receive funding for your business is to apply for a bank loan. These loans come in different forms, but the main idea is that they provide you with the financial means to undertake necessary projects for your business, with the expectation that your debt will be repaid in the future. Below is a list of some of the different forms that these bank loans can take:
- Term Loan – A lump sum loan that gets repaid over a set amount of time. When most people think about loans, this is what they have in mind. These loans are handy if you are looking to make a major purchase for your business.
- Line of Credit – A “take as you need” loan, where the bank leaves a sum of money for you to use as you need it. This type of loan is great for handling short-term expenses as they arise.
- Invoice Financing – This sort of loan protects you from the consequences brought on by unpaid invoices. Basically, banks will provide temporary cash for invoices that don’t get paid on time by clients. This sort of loan is handy for businesses that depend on their sales revenues to stay afloat, as it keeps cash flow steady.
Now, this is not to say that banks are your only option for financing. Other options do exist, and they compete with traditional banks in their own ways. Many non-profits, for example, offer microloans capping at around $45,000 for small, less experienced businesses. Some online lenders also offer loans to new businesses, providing an option for those who need cash quickly and easily. A more in-depth look at these loan options can be found within the Starting a Business section of our business resources page, as they pertain more to businesses still trying to get off the ground.
You should treat looking for a loan like buying a car; you should figure out which type of loan you want, and then compare two or three different relevant options extensively. Out of the loans you qualify for, you’ll want to look for the one that offers the lowest APR, or annual percentage rate. Basically, a low APR means that the loan is less expensive, as you won’t be paying a lot of interest on the money you’ve borrowed.
Requesting your Credit Report
You should have a strong understanding of your full credit report before you apply for funding. You can apply to receive a free credit report each year from Equifax and TransUnion, the two major credit reporting bureaus in Canada. Your free report will be sent to you by mail. If you wish to view your credit report online, you will be charged a set fee. For more information on how to apply for your free credit report, click here.
There are many unverified websites on the internet that claim to offer free credit reports of their own. It is highly recommended that you avoid these sites, as they may be scams set up to steal your credit card information.