Bank Financing for New Businesses

| January 7, 2016 | Financial Wisdom

Without cash flow, your entrepreneurial venture may not survive its first year. You’ll need to carefully weigh the best financing option while keeping in mind it’s easier to obtain financing as an individual than it is for a business venture.

Read on for the top three bank financing options for businesses to learn how to best approach a lending institution.

Option 1: Term loan

Typically, term loans are used by businesses to pay for a major investment – operating equipment, for example. A business loan allows you to borrow a specific amount at a fixed interest rate to be repaid on a set schedule. Intermediate term loans are typically paid down over three years or less. Long term loans can extend up to 20 years and require collateral.

Term loans are often the best option for established businesses that can prove profitability and demonstrate a good credit history. However, this can be an affordable lending option for a new business as well if your financial statements are solid.

Talk openly with your business banker about your needs, how you will use the money, and how you will repay it. Most business bankers want to help you to get the deal you want.

Option 2: Line of credit

A business line of credit is perfect for managing the financial ebb and flow of running a business. It allows you to borrow money up to a pre-approved amount and pay only the interest on your outstanding balance. Once you have extra cash you can pay down the principal.

For these reasons a line of credit offers the most flexible and affordable borrowing option. Interest rates are attractive and you can repay and re-borrow at any time. To apply you’ll need to prove you’re a good risk based via financial statements, credit references, your bank account balances and recent tax returns.

Be sure to research your credit score before your apply for a line of credit. If there are errors, correct them – and if your credit rating could use some help, take action to improve it well before you approach a lender. A good rule of thumb is to establish good credit for at least 18 months before applying for a line of credit.

Option 3: Credit card

A business credit card is a popular choice for small businesses that want to separate business from personal expenses to simplify accounting. And many cards offer some attractive perks.

You can charge expenses up to an approved limit for your card. You can repay your balance within the payment grace period to avoid interest costs. If you don’t want to pay the balance in full, simply make the minimal monthly payment in order to keep your account in good standing.

Credit cards are very handy if you make online purchases for your business. You can also use your business credit card to pay suppliers and any other regular monthly bills.

Recommendations

  • Check out your personal or business credit rating with a credit reporting agency such as Equifax, TransUnion or Dun & Bradstreet.
  • Get a MasterCard BusinessCard® to help manage your everyday business expenses.
  • Look into the Canada Small Business Financing program about loans to start up or expand your business.