Debt sources of financing for small businesses
- Published
- in Small Business Tips and Advice
Need some financing to help you start or grow your small business? Start here. Some novice entrepreneurs assume that their good credit rating, great relationship with their bank or banker, or previous car or mortgage loans means getting a loan for a new business should be simple. However, it’s not quite that easy.
New businesses don’t have a track record of success, most new businesses fail, and banks don’t like to take risks. This means getting a business loan is a lot tougher than you might think.
That said, with the right preparation and planning you might qualify for debt financing, depending on your personal equity and that of your business. There are four common lending methods that small business owners can pursue through chartered and commercial banks and credit unions.
- Line of credit: A convenient type of loan used by you only when you need it, and usually secured by an asset.
- Term loans: Loans repayable over several different time periods. Demand Loans are payable upon demand; Instalment Loans are payable in equal monthly instalments; and Time Loans are payable at some time to be determined in the future, or at maturity.
- Mortgages: Loans given with your personal property or real estate as collateral until repayment.
- Corporate credit cards
To help your chances when pursuing a loan, it’s important to understand the lender’s perspective. Generally, loans are given based on a review of your five Cs of credit:
- Your character
- Your capacity to repay the loan
- The capital being invested by you in your business
- The amount of collateral available to secure your loan
- The conditions of the industry and economy
Obviously with a new small business owner, the first two — character and capacity — become the most important evaluation elements. This is because your new business’ financial estimates are based on forecasts, so the lender will likely consider your personal financial history very closely.