Every company requires diverse sources of capital to operate, support growth, and navigate the inevitable challenges of doing business. Among the options available to Canadian companies are corporate business loans, which can be a key part of a company’s capital stack. Yet not every business loan is right for every organization, and there’s much to consider before signing the paperwork. If you’re exploring business loan services, take these five factors into account before choosing a financing partner.
1. Is the lender a good partner for your business?
Reputable banks and financing firms provide a variety of loan options that may be attractive to your business. However, even the best of these organizations may not be a good fit. Ask your loan officer or account manager about the types of financing offered, who will approve your funding, and what the reviewal process will look like. Make sure you can offer them the documents and information needed to successfully process their approval and avoid wasting your time and theirs.
Also, consider if the lender employs representatives with financing experience in your industry. A company or bank that’s familiar with the pharmaceutical industry, for example, might be a better partner in acquiring capital for the development of a new medication than an organization with a great reputation in construction project financing as they understand the industry-specific requirements.
Finally, lean on the experience of your business contacts and industry network. If clients, vendors, and other companies report dedicated customer service, knowledgeable account managers, and ample flexibility, you can expect the same.
2. Are shorter loan terms really better?
With an eye on minimizing interest owed, many businesses assume a shorter-term represents the most cost-effective loan. Yet just as the lowest interest rate isn’t always the best value, the shortest loan term isn’t always the top choice. Instead, a longer path to repayment can offer a greater degree of flexibility in your overall cash flow management strategy.
Consider that even if your overall financial forecast predicts a bright future, roadblocks are sure to arise. When they do, your ability to repay loans may be quickly diminished. Research supports this risk, as a recent survey revealed 20% of businesses queried reported debt payments as a top cause of cash flow problems. In these situations, an extended payment period – and a little more interest – works in your business’ favor, as it reduces the amount of each payment, providing more flexibility.
3. Will the lender take a flexible approach to repayment?
As noted above, an organization’s fortunes can change in an instant. During downturns and hardships, a financial partner who is responsive to your needs and offers flexibility is incredibly valuable. Loan agreements that allow you to pause principal repayment or provide accommodations for fluctuating seasonal revenues can help maintain cash flow and future access to debt capital.
A good lending partner should be willing to have these discussions and understand the financial hardships faced by businesses in your industry and of companies at the same size and stage of development as yours. Always have these conversations upfront to ensure your peace of mind and a clear understanding of available options should problems arise.
4. How much can you borrow?
Corporate business loans come in many sizes, and you should be aware of exactly how much money is available to your business when applying for financing. The amount you can borrow is determined by several factors, such as:
- Existing loans
- Other outstanding debt
- Annual revenues and future profitability
- The loan product you choose
In some cases, a lender may only be willing to finance a portion of your total needs. Your business may need to re-evaluate its capital strategy and search for alternatives or seek funds from a secondary lender as well.
Alternatively, you can look to other sources of funding to meet your capital requirements, such as government grants and tax credits. For example, companies seeking funding for research and development (R&D) can turn to Canada’s Scientific Research & Experimental Development (SR&ED) tax credit and the National Research Council of Canada Industrial Research Assistance Program (NRC IRAP). These programs provide tax credit refunds and grants to help fund R&D work in Canada.
5. What are your obligations as a borrower?
Along with a host of documents provided at the time of your loan application, your business may also need to provide collateral in the form of assets. These assets offer a fail-safe should you default on the loan, allowing the lender to recoup some of their losses. Collateral takes many forms, including:
- Product inventory
- Personal and third-party guarantees
- Property and equipment
- Accounts receivable balances
- And more…
Business loan services prefer repayment to the seizure of collateral in almost every situation, but your assets are still at-risk should you default on the loan’s repayment. Loss of collateral could result in harm to your personal finances or a loss of control over business operations. To minimize the risk of default, balance your capital stack with a variety of sources of capital, from debt and equity to government funding like the tax credits and refunds mentioned above.
Corporate business loans also typically include a covenant or an agreement that defines repayment requirements, the provision of regular financial statements, acceptable projected revenue, and/or an agreement not to pursue the additional debt. Be clear about all requirements associated with your loan, as breaching this agreement may require repayment in full regardless of how much has been paid or how many payments remain.
Explore Business Financing for Canadian Companies
Together, corporate loans and other business financing provide the capital companies need to grow. If you’re actively seeking sources of capital, consider Easly’s SR&ED advances – get started today.
Our Capital-as-a-Service (CaaS) platform helps eliminate delays to provide funds in as little as 72 hours after a successful application.