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Small business loan terms – what’s negotiable?

By Samantha Garner | September 28, 2013

small_business_cashflowWhen it comes to small business loan terms, almost everything is negotiable. With over 700 chartered, commercial and credit union lenders in Canada, you’ll be able to find the lender that’s right for you. Shop around and be prepared to negotiate the terms of your loan. Here are some of the terms and conditions you can negotiate:

• Interest rate — Your interest rate will usually be quoted as prime plus, meaning the prime rate that banks charge their most creditworthy customers, plus additional interest. If you are quoted prime plus three, this means you’ll be charged the prime rate of interest plus three percent.

The prime rate is published daily in business newspapers. Your loan’s interest rate can be fixed or variable just like a mortgage — so make sure you feel comfortable with where interest rates are headed before you commit one way or the other.

Loan maturity date — The term of the loan should depend on the useful life, in years, of the assets that the loan is secured with. Term loans are usually used to finance equipment, where the term of the loan is matched to the useful life of the asset. Short-term needs should have short term loans, and long-term needs should have longer term loans.

Repayment terms — Typically, the repayment schedule is monthly or annually. Paying monthly will lower the total amount of interest paid on the loan because interest won’t have as much time to grow.

Loan covenants — Remember that lenders are not in the habit of giving money away. They may impose other restrictions on you or your business activities, particularly if you are a novice entrepreneur.

The bank may ask for regular updates on your financial situation such as cash flow, income statements and balance sheets or input on your salary. This might restrict you from taking too much cash out of the business until your loan has been repaid, or it may require you to keep your day job while you run your business at night.

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