As a small business owner, when you are starting a new venture or planning for expansion, you need to access capital in order to fund your business. Loans certainly play a key role in the lifeblood of small businesses in Canada. In this article, we will explore how a small business loan works and how you can avail of it to fund your venture.
Definition and Purpose of Small Business Loan
A business loan is a form of debt incurred by small businesses. Financial institutions, government, or some kind of corporation usually act as a lender and advance a sum to the borrower. The money is given to the borrower under some terms, finance charges, interest, repayment terms, and other conditions.
Purpose of Small Business Loan
To support their operations or expansions financially and to purchase fixed assets, most small businesses need to apply for a loan. This could include anything from supplier payments, tax payments, staffing, marketing, renovations, inventory, upgrading equipment, cash flow, vehicles, etc.
Different Types of Small Business Loans
Based on the need for collateral, loans are divided into Secured Loans and Unsecured Loans.
Secured Loans- A loan that is secured with collateral or an asset is called a secured loan. A borrower could use property, stocks, or bonds for collateral. A secured loan offers a higher borrowing amount with low-interest rates and longer repayment duration.
Unsecured Loans- Unsecured loans do not require the borrower to have collateral for security. However, they will need you to have a good credit score to avail of the loan. Some examples of unsecured loans are education loans, credit card purchases, and personal loans.
What are the costs of a small business loan?
Generally, the cost of the loan is determined by the amount the lender will charge.
Qualifying for a small business loan in Canada
The borrower will need to submit various documents to verify for an Icapital Small Business Loans.
Business Plan- If you are applying for a small business loan, then you will need to provide a detailed plan on how you intend to use the proceeds by providing the lender with a copy of your business plan. It will help you gain the lender’s trust.
Income Statement- Your income statement shows your expense patterns and your revenue in general.
Bank Statements- It helps the lender understand the cash flow of your business.
Balance Sheet- With the help of your balance sheet, your lender can evaluate your total assets and liabilities.
Tax Returns- Your tax returns work as proof that your claimed income is the same as reported with the CRA. In case any discrepancies are found, you may risk your application approval.
Personal Financial Documents- To understand your financial health, some lenders may want to see your credit report.
Other documents such as information about the assets to be purchased, a copy of your sales contraction agreement, your resume, etc.
Where Can You Get a Small Business Loan in Canada?
Credit Unions– Credit Unions are a type of non-profit financial institution controlled by their members and the people who deposit their money in them. It often offers better rates on loans than a traditional bank.
Traditional Banks- The private and government banks serve as a common source of capital for small businesses.
Community Loan Funds- Community loan funds are offered by non-profit organizations to support local initiatives and foster entrepreneurship in the community.
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