For every new entrepreneur, the biggest problems are initial startup capital and working capital once the business is up and running. There are multiple ways to get funding and some options are better than others depending on your needs. When starting a new business, entrepreneurs typically either have savings stashed away, borrow from family and friends, or go to a bank for the capital they need.
The quickest way to get your ideas off the ground is by investing your own personal savings. This method allows you to bypass having to wait on third parties, credit checks, and creating a business plan. While using your own savings to start a business is the fastest, it may not always be the right way to start your business. If you use up all the capital you have saved, you may not be able to get other lenders to support your business.
The second option, borrowing from your friends and family, is another common way for entrepreneurs to raise capital quickly. However, this option has a downside as well. Depending on your friends and family, it can be much more stressful when it comes time to pay them back. There have been many family and friends that have parted ways over a dispute about lending money. If you can avoid this option I would highly recommend it.
The last option for financing is to go a lender such as a bank, government lending agency, or corporation lender. This option has many factors that will determine whether you will be approved to get the capital you need. For most lenders, there are three key factors that play a role in the decision-making process:
1) Your personal credit score is the first glimpse of how you will handle a loan or line of credit. If you are late or deficient on payments, it’s highly unlikely a bank or lender is going to give you money for your business. A score of 700 or higher is a solid benchmark to set for any entrepreneur looking for financing. If you have any active collections or legal activities on your credit report, you won’t be approved for a loan.
2) The net worth of the entrepreneur. Really simply put, asset minus liabilities determines your net worth. If you have little or negative net worth, it is difficult for a lender to approve a business loan. If you own a home, your chances of being approved for a loan increase considerably because your net worth increases.
3) The level of experience the entrepreneur has in the sector of business proposed. If the entrepreneur has little or no experience, a strong business plan may help with the approval.
It’s also important to avoid multiple loan applications and instead do proper research and then apply to the lender best suited to you. There are so many loan options available to Canadian businesses, but they all have different approval criteria, and unless you’re an expert in the industry, it’s impossible to figure out where and how much to apply for. Some loans will deny your application if you apply for too much; others will deny you if you don’t have enough of your own money saved up (or liquid assets); some lenders require your net worth to be a certain percentage of the loan amount…and they’ll never tell you what these numbers or percentages need to be! That’s why it’s advantageous to have a company like us (PFG Financial) tell you which loan(s) you’ll be approved for and help guide you through the process.
If you’re under 40 years old and your business is under 1 year old, Futurepreneur Canada has an excellent loan program for start-ups and new businesses. They offer collateral-free loans up to $60k at better interest rates than most banks. You’ll need to submit a business plan and 2-year cash flow projections, so, if you can’t do these things yourself, we can help.
The Government’s Small Business Loan program is also a good option depending on your personal financial situation. This loan also requires a business plan and financial projections for businesses under 2 years old. Net worth plays heavily into the qualification criteria of this loan, so if you don’t own a home, you would need to have a considerable amount of money saved in liquid investments or bank accounts in order to be approved.
There are many options, but your credit score, net worth, type of business, and experience will dictate which loan option you’ll get approved for. There are also situations where, if you’re approved for Loan A, you’ll likely be approved for Loan B. But, you would need to apply for Loan A first, otherwise, you won’t be approved for both loans. So, in addition to all of the other variables, there’s even a correct order to submitting loan applications. It sounds complicated because it is. Welcome to the world of financing! Hit the ‘Easy Button’…speak with a finance consultant who can tell you which loan(s) you have the best chance of being approved for.
Getting financing for your new business can be blinded with optimism, but very entrepreneur should evaluate and plan for proper financing, and consider the pros and cons of every option available.
We’d be glad to pre-qualify you for free – and if there aren’t any government or bank loan that you’re eligible for, we’ll let you know what you need to do in order to qualify and point you in the right direction. Reach out today!
