Bank Loans for Small Business

While most banks will not lend to new ventures, some are wiling to lend money to small businesses to finance fixed assets, inventories, and accounts receivable where substantial collateral is available. Some banks even have venture capital subsidiaries that operate in essentially the same manner as private venture capital firms.

Bankers are a pretty conservative bunch who tend not to sway from the rules governing them. But they are reasonable when a solid proposal is put together. The way to a banker's heart is to speak their language. Here at StartCan Business Consulting we can put together a proposal for you that speaks to the banker’s language.

The following are the basic categories that bankers use to classify loans, grouped according to the expected duration of the loan

Short-term Loans

Business runs on short-term loans. Technically, a short-term loan means less than a year, but in practice often expands to two or three years. Small companies usually seek short-term loans to finance receivables or inventory, especially in seasonal or perishable lines.

Short-term loans can be turned to many other purposes, from taking advantage of an inventory bargain to taking care of an emergency. Short-term loans come in many forms:

Line of Credit

A line of credit consists of a specific sum marked off for a company to draw on, as needed over a prescribed period. The period may run only 30 days, or may stretch to two years. Since repayment is tied to anticipated receipt, interest is computed only on the amount actually drawn, but a commitment fee of one percent or more of the total credit line is typically imposed to pay the bank for reserving funds that may not be used. Some banks waive the fee in favor of a compensating balance or sum that must be kept on deposit. Other banks may work out a combination of compensating balances and commitment fees Lines of credit are popular because of their simplicity, but banks have developed several credit line arrangements that fit different borrowing needs. The cheapest is the non-binding line of credit, and may be your best buy if you're wiling to risk the lines drying up. With no guarantees, your credit may be curtailed if your company's financial position deteriorates, or even if your industry seems headed for hard times. For general information about Line of Credit and to learn more about other types of line of credit and its pros and cons visit https://www.canada.ca/en/financial-consumer-agency/services/loans/loans-lines-credit.html

Inventory Loans

When a small company with seasonal borrowing needs comes in for a loan of $25,000 to $200,000, some banks shy away from the formal line of credit, preferring to write what they call short-tem loans to carry inventory. This is where the collateral is the inventory itself.

Floor planning is a term for an arrangement used by bit ticket retailers where loans are collateralized by specific inventory items. The usual inventory loan runs six to nine months and requires the same 30-day annual clean-up as a line of credit, if you want an extension.

Commercial Loans

Some big banks funnel much of their short-term lending into commercial. or Time loans, which minimize bookkeeping for both the lender and the borrower. Requiring no installments, a commercial loan is simply repaid in a lump sum at the end of the term, typically three to six months.

Accounts Receivable Financing

Small companies in almost every industry today find that receivables are tying up inordinate amounts of working capital, so they're turning to their banks for loans that will convert unpaid accounts into cash for working capital. One limitation on receivables financing that doesn't apply to where short-term loans is that most banks set minimums based on the cost of monitoring such loans.

Factoring

One of the oldest methods of commercial lending is factoring, a variation of accounts receivable financing in which the bank buys receivables outright. There are some limits to factoring. The bank

subject’s receivables to rigid scrutiny before making any purchases, to screen out the poorest risks.

Medium-term Loans

Medium-term loans are typically one-to-five year loans and may he used for financing machinery and equipment, including furniture and fixtures, plant alteration, and expansion. However, many times banks will ask for additional collateral on medium-term loans.

There are two kinds of medium-term loans: the term loan and the monthly payment business loan.

• Term loan

Most term loans providing 80 percent to 90 percent of the total costs are written either for five years, with a refinancing clause, or for the useful life of the asset. The typical repayment schedule calls for quarterly installment of principal plus interest.

Principal payments will remain constant, but the interest computed on the outstanding amount declines over the term of the loan.

• Monthly payment business loan

A business loan with quarterly installments is a variation of the term loan. The payments are set up as equal monthly payments throughout the loan period.

Long-term Loans

Long-term loans are loans of five or more years and are the hardest to get approved for. They are often used for major expansions or the purchase of real property and fall into several categories.

• Commercial and industrial mortgages

Commercial and industrial mortgages may be written in a variety of ways, depending on the value of the building, your compare long-range profit projections, and the banks lending policies. This can be similar to a standard 25-year home loan.

• Real estate loans

For companies that already own property, real estate loans offer a way to pay less interest and to refinance their real estate in order to obtain working or inventory capital.

• Personal loans

Many bankers believe an owner's personal assets should provide much of the financing for working capital, so you may have to consider a secured personal loan in your long-term financing plans.

Any property in your own name can be used as collateral.

• Asset-based loans

Typically used by large corporations, this type of loan is appropriate for leveraged buy-outs, in which the target company's own as sets are used to finance the takeover. Assets can include raw materials, inventory, machinery, and equipment.

• Start-up loans

When funds are raised by personal loans, you may additionally be able to gain start-up loans that can help your business get off the ground. You can then have a peace of mind investing in the market, building up your company website and pay for business consulting services. To be eligible, your business should be Canadian-based and operating for at least 12 consecutive months and generating revenue. You should also be able to show realistic business goals and market potentials in your loan proposal.

The Loan Proposal

Every banker wants to hear how their loan will improve your company. The loan proposal should speak to this question. It should offer insight into your business venture and detail your knowledge of the industry. Bankers need to trust your knowledge and skills within the industry. Bankers need to trust your knowledge and skills within the industry. That’s where StartCan Business Consulting can jump in. A loan proposal is in many ways similar to a business plan. Some banks will ask for your business plan, but others will want to see a specific loan proposal. StartCan BC experts can help you with both the business plan and the business proposal. There are some common parts of a loan proposal, but we always make sure your business proposal is fully tailored to meet your loan needs:

• Summary: Typically, the general information on the first page. It consists of your Company name and address, the nature of your business, the amount sought, the purpose of the loan, and the source of repayment.
• Top management profiles: Typically, a paragraph or two on the key players within your organization. This may also include consultants and other support organizations. It’s important to remember that bankers see security in an experienced management leading a company.
• Business description: A detailed description of what your business does and why it is successful in the industry. Describe any inventory, equipment, or other assets. Bankers tend to favor established markets and conventional merchandise.

• Projections: Your predicted share of the market and your growth opportunities. Bankers like to see account receivables with less than 60-day payments and that are spread out among a large customer base. It is advisable to talk about one-to five-year projections for market share.

• Financial statements: If possible, we ask for balance sheets and income statements for the last three years. Remember that past and current statements must be exact. These statements will most likely be audited. Bankers will typically match your financial projects with general industry standards, so make your goals reasonable.

• Purpose: Details of your proposed use of the loan. StartCan Business Consulting experts make this as detailed as possible and we will be sure to account for working capital during this time if the loan is not for working capital.

• Amount: The specific amount and the reason you need it. It’s Important to use your past experience of past figures to help explain where this amount comes from. The amount needs to be clear and reasonable. Loan proposals are typically not a back and forth negotiation.

Repayment plan: The most important part to any banker; details about how you expect to repay the loan. If the loan is for an asset such as equipment, the loan must be paid back during the useful life of the equipment.