When & How to Obtain Financing

Whether you have an idea or already started a company, you may find yourself seeking external financing to achieve certain goals within your business. Banks recognize businesses with potential and will be more likely to provide you with an opportunity. It is important to prepare a solid business plan that details your target market, operations, strategy, and marketing plan, in order to gain positive recognition from banks and other financing institutions.

Types of financing

Financing is essential to starting up a business and keeping it running. Financing is either long term or short term, depending on the kind of business you have. When you co-sign a loan or make an investment in return for shares, that can be construed to be long term financing. When you sell something on credit, it can be attributed as short-term financing.

A bank loan or other external sources are normally referred to as external financing while internal financing can be done by the owners or founders of the business as equity financing – in return for shares or stock ownership. Some financial institutions will provide you with commercial loans depending on your credit score and profitability expectations. Only a small number of companies will take time to explain this in detail, so it pays to do the necessary research.

Questions to ask before obtaining financing

The first step when considering borrowing money is to ask the questions that will help you define your needs. Then you can determine which lender is right for your business, and how much to borrow. You must be able to show that you have a good business plan and are able to repay the loan in order for the lender to agree with the terms of the loan.

Start by deciding on the purpose of the loan, then focus on getting the right answers to financing questions. Whether your small business needs equipment financing or real estate to launch a new store, there are lenders that can help.

When should you apply for a loan? It depends on your situation and details but generally, if you need a loan for a major investment, such as a new product, expansion, equipment, or business property and the value of your business is high then it is usually better to get financing. The alternative would be to depend on your own wealth, savings and capital, which could prove to be crippling if not managed correctly.

Evaluating your current cash flow situation, comparing the terms and conditions offered by various lenders, and considering the possibility of securing collateral or a guarantee from a family member are all important factors in determining how much money you can borrow. In Canada, interest rates in March 2020 had fallen to 3.29 percent. The interest rate has continued to fall, and it was 2.82 percent at the beginning of August 2021, which makes borrowing more attractive for businesses. [1]

Conclusion

Obtaining financing for your business in Canada can be a multi-step process but finding the perfect financing option is usually worth the effort. There are numerous options available to you and your business and understanding the many options for business capital can be somewhat overwhelming, but with careful planning and research, you will find the best funding sources for your venture.

References

[1] Monthly interest rate for new and existing business loans in Canada from July 2016 to August 2021, F. Norrestad, Nov 2, 2021 https://www.statista.com/statistics/1084004/monthly-interest-rate-business-loans-canada/