topl

The Lendified Blog

 

Best Borrowing Practices for Small Business Owners

There is plenty of information online about how to get a small business loan in Canada, or why to get a loan in the first place - and with the recent emergence of financial technology and online lenders like Lendified, there are plenty of great options. But while borrowing is a necessary and strategic step for many Canadian small businesses, it can sometimes be difficult to find advice and resources to guide you through the process. When it comes to borrowing, while one size solutions do not fit all, there are certainly some universal best practices and tips that small business owners should take into consideration.

  1. Consider Online Loans vs. Traditional Banks

While a traditional bank loan might be the option you are most familiar with, it is not necessarily the most efficient or suitable for your business. In recent years with advancements in financial technology Canada and markets around the world have seen a number of alternative financial companies emerge, offering secure, simple and extremely fast access to capital at rates that are fair and affordable. If you have a busy schedule or need access to business capital quickly, an online small business loan is an ideal option to consider. While being sure to avoid predatory lenders (e.g. “payday loans”), choose a reputable option that offers flexible terms and specializes in Canadian small business.

  1. Have a clear, specific purpose for your small business loan

While a specific event - an opportunity or crisis - typically prompts a small business to seek out a loan, many borrowers will seek out capital without clearly identifying the purpose of the loan, and the amount required for that purpose and objectives tied to that investment. This should always be your starting point - after all, taking out a loan is a major financial decision and not to be taken lightly. In almost all cases, it will be easier for you to obtain a loan, borrow the right amount and repay your loan with minimal expense if you are clear on the loan purpose from the get-go. At this stage, it should be absolutely clear how the loan would support the sustainment or growth of your business and ultimately result in making more money.

  1. Borrow the right amount for your small business

With a clear, specific loan purpose in mind, you should be able to calculate close to exactly how much is required to meet that objective. It is important that you borrow as close to this number as possible, and not too little or too much. Ball-parking and calculating the amount “in your head” are not good borrowing practices. When borrowing money from traditional lenders, you are likely asked to submit a formal proposal that highlights the amount you are looking to borrow and actions you plan to take with the amount borrowed, alongside the financial standing and history of yourself and the business. While borrowing online may be easier, borrowing too much can result in unnecessary financial debt added to your business and borrowing too little can lead you unable to achieve the result you would hoped to have with the small business loan. Needing to seek out additional or multiple loans can delay your plans. Whether borrowing too much or too little, both can result in increased costs or losses.

  1. Make financial and borrowing decisions based on data

As a small business owner, you likely carry your business in your heart - and no one knows the business better than yourself. While there are moments in your career where making decisions and judgements based on your instincts can be the best strategy, when it comes to financial decisions, we suggest you trust analytics and metrics you can calculate and project. Small business owners should regularly conduct cash flow analysis and revenue projections to better understand their financial standings before making borrowing decisions - or any financial decisions, for that matter. With advances in fintech, it’s also possible now for borrowers to opt for online lenders who, like Lendified, utilize cutting edge data models to determine if a small business is creditworthy.

  1. Implement a detailed business loan repayment plan

Repayment of your small business loan is key to a successful borrowing experience - but without a plan or strategy in place, the repayment process can become a burden or impact your success as it relates to your original loan purpose and the objectives tied to it. If utilized correctly, the loan should result in an increase of funds. Break even analysis, cash flow projections and debt coverage ratio are examples of some calculations that can be done by you, your finance team or your bookkeepers to determine what repayment terms are realistic and attainable. This analysis should be completed before starting a small business loan application process.

  1. Seek out good financial advice

Small business owners wear many hats and the financial hat doesn’t always fit best. In other words, if the calculations, projections and analysis associated with accurately determining the correct loan amount, loan terms and business debt repayment strategies, it is best to seek the help of someone with expertise in these areas. Whether looking to partners, employees or accountants, be sure to seek out multiple opinions and don’t be afraid to ask many questions so that you are equipped with the information you need to make smart financial decisions for your small business.

About the Author: Michelle Pinchev