Small Business Loans 

Small business loans work the same way any traditional loan works. A lender extends money to the business and the borrower then becomes responsible for paying back both principal and interest over a specified period of time.

Small Business Loan Guide


Small businesses are a wonderful part of the business world because they often give their work a special touch that larger companies fail to deliver. A downfall of small business ownership is financial struggle at times due to their lack of resources. Small businesses don’t emerge from nothing, they often need financing to start up, become more established or grow. Securing a small business loan can help small businesses achieve their goals and is likely a requirement at some point in the business’s lifetime.


If you own a small business and are considering obtaining financing to achieve your objectives, you’ve come to the right place! In this guide, you will find information on small business loans, their affiliated advantages and disadvantages, and tips for getting approved.


What is a Small Business Loan?


A small business loan is exactly what it sounds like, financing for small businesses. Small businesses have rather unique needs in the world of personal finance when compared to other business structures. The purpose of a small business loan is to cater to the special needs of small businesses.


How Do Small Business Loans Work?


Small business loans work the same way any traditional loan works. A lender extends money to the business and the borrower then becomes responsible for paying back both principal and interest over a specified period of time. The exact terms of how the principal and interest is repaid can vary a lot from loan to loan and lender to lender. All of the particulars will be determined during the application and approval process.


Types of Small Business Loans


All businesses have different financing needs at different times, even small companies. For this reason, there are many varying small business loan products on the market. While ample choice is great, it can also be challenging to navigate through all of the financing products out there. To help you work through the selection process, below are all the main types of small business loans along with their advantages and disadvantages.


Term Loan


This type of loan is typically used for a one time expense and are the most commonly used form of small business financing. Its main characteristics include a fixed lump sum amount, a fixed term and a fixed payment - essentially everything is fixed!


  • Advantages: potential for a larger loan amount; upfront cash that can be used for virtually anything; and rapid funding through an online lender.
  • Disadvantages: personal guarantee or collateral might be required; not ideal for brand new businesses; and significant differences in interest rates between lenders.


Short Term Loan


As the name implies, this type of loan has a shorter repayment period compared to regular term loans. Otherwise, a short term loan is exactly the same as a regular term loan. The repayment period of this type of loan is commonly between six and eighteen months.


  • Advantages: quick cash for an unexpected expense; fast processing time; and little credit score requirements.
  • Disadvantages: higher monthly payment; limited loan amounts; and higher interest.


Equipment Loan


Many small businesses require equipment to operate their company day to day. An equipment loan helps small businesses purchase the assets they need, no matter how specialized or unique those assets are. The purchased equipment is often used as collateral to secure the loan.


  • Advantages: competitive interest rates with strong credit and finances; and equipment is owned by the small business.
  • Disadvantages: down payment might be a requirement; and negative equity is a possibility with the financed equipment.


Line of Credit


Unlike a loan, a line of credit is revolving which means the balance is carried from month to month. Typically, a line of credit is used as the business needs it, up to the maximum threshold, and the balance isn’t due right away. The only thing you’re responsible for on a regular basis is interest payments.


  • Advantages: no collateral or personal guarantee requirements; and flexible way to borrow.
  • Disadvantages: high revenue and credit required; and additional costs, such as maintenance fees or draw fees.


Invoice Financing or Factoring


This type of financing enables businesses to leverage the cost of outstanding invoices. In simpler words, the business will obtain financing in the amount of a received invoice and have that cash available to them until the invoice is actually due. Essentially, this type of financing helps businesses manage and optimize their cash flow.


  • Advantages: quick cash; and easy approval.
  • Disadvantages: can run into debt issues; and costly form of financing.


Small Business Association Loans


Some non-profit organization in Canada helps small businesses achieve their unique goals. These loans tend to have custom terms and conditions that suit the borrower’s needs comfortably.


  • Advantages: one of the cheapest forms of financing on the market; long repayment terms; and potential for a larger loan amount.
  • Disadvantages: lengthy application processes; and challenging to qualify.


Small Business Loan Requirements


Each lender differs in what they consider with regards to a loan applicant and they will have varying requirements. Before applying, reach out to the potential lender to see what their requirements are. Knowing the requirements ahead of time will help you prepare for the application process and better your odds of approval. Not only that, you won’t waste your time applying for a loan only to find out that you don’t meet the minimum requirements. Below are common factors that small business loan lenders will consider:


  • Business and personal credit scores
  • Age of the business
  • Financial statements, more specifically annual revenue and net income
  • Assets that could be used as collateral
  • Loan purpose


How to Get Approved for a Small Business Loan


Getting approved for a small business loan is actually easier than you might think. The key is to spend some time researching and preparing before actually applying. As the old saying goes, prepare for the worst and hope for the best! Below are several tips and tricks that you can use to better your chances of approval.


  • Improve personal and business credit scores. Your lender will likely look at both of these so you should too. Furthermore, doing what you can to improve both credit scores before applying will better your odds of approval.
  • Create a business plan. Lenders like to know what they’re investing in precisely. Not only will providing a business plan to your lender increase your chances of approval, it will also help you be better prepared for your planned business operations.
  • Prepare financial and legal documentation. Lenders won’t merely take your word for whatever picture you’re painting of your business. They will want to see documentation proving ownership of the business and corresponding assets, financial statements, personal information, articles of incorporation among other documentation. Coming prepared with these documents will show that you’re diligent and are able to plan ahead.
  • Not all forms of small business financing will require collateral, but it can certainly help to have it ready as a bargaining chip to seal the deal.
  • It may seem odd to provide a personal resume when applying for a business loan, but it can certainly help your case, especially if yours is impressive. A business is only as good as the people operating it. If you can show that you’re a legitimate business owner with extensive experience, a lender will have more confidence in you as a loan candidate.


Using Financing to Grow Your Small Business


Every business starts somewhere, but to get somewhere else financing is usually a requirement. Whatever it is you want to change about your business is possible with the help of financing. Before proceeding with just any form of financing, take the time to write down your business goals and needs. When researching and shopping for financing, always refer back to your goals and needs to ensure you make the best decision possible for your business. Good luck on your small business loan search!

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Author Bio

Mohamed Konate

Mohamed Konate is a personal finance expert, blogger, and marketing consultant based in Toronto. He is a former financial services professional who worked at major Canadian financial institutions for many years. He managed the marketing strategy around various financial products ranging from credit cards to lines of credit. Mohamed is passionate about personal finance and holds a Bachelor's in Business Administration from the University of Quebec (Montreal) and a Master's in International Business from the University of Sherbrooke (Quebec). He is also the author of the Canadian Credit Card Guidebook.