While new business ideas can abound, finding the proper financing to bring them to fruition is hard to find. According to Statistics Canada, small and medium sized businesses with one to four employees have the lowest loan approval rate. The challenge is that these businesses traditionally have less of a performance history and limited resources to grow their business, which makes it a riskier proposition for the lender.
Here are 10 tips for obtaining financing for SMBs and what to look for once you find a suitable partner:
1. Maximize personal investment. Any finance partner will look to ensure that you have invested a significant amount personally before they will offer any additional debt financing. Many typically won't finance a startup venture unless they are offering asset based financing.
2. Ensure your personal credit is in order. Because new business ventures are considered riskier, a lot of consideration goes into the principal and whether they can "stand behind" these loans if the business doesn't succeed. Even if you obtained asset financing, you will need to personally guarantee most types of financing. You can pull your own personal credit report for free once per year. Typically, a personal credit score over 600 is a good base for negotiations with finance companies.
3. Be clear about the type of financing you need. With so many different financing models available you must specify what you require. Is it equipment financing? Is it working capital financing that can be used for general purposes? What amount of money do you need and how much time do you have to get the funding you need? These answers will help guide your search.
4. Use specific criteria when searching online. Searching the right keywords will help narrow your search for providers. Looking for small business loan is very broad, so use specific terms like equipment financing.
5. Understand your borrowing capacity. Do you have a specific need or are you looking for a little extra working capital cushion? Finance companies like to see that you are using the capital to grow your business and not refinance debt and that you are clear in how much you can afford to borrow.
6. Find out the cost of capital. Ask potential providers about the cost of capital and compare quotes. Having multiple options will give you leverage in negotiations and will also provide you with a back-up financial partner if another one falls through.
7. Don't choke your cash flow. After you have the cost of capital determined, see what fits your budget and then look for repayment options that fit comfortably within your cash flow abilities.
8. Determine if a fixed micro repayment plan works for you. For some, a business loan that allows you to repay a smaller amount daily, instead of a large monthly payment is easier to manage. However, if your sales are low on certain days, it may be challenging to cover repayment.
9. Consider variable daily repayment plans. Creative new financing solutions such as merchant cash advance, offer variable repayment. This means the funding companies will collect a percentage of your daily sales up to a pre-determined amount, so the more sales you have on a given day, the more the funding company will collect towards repayment. The fewer sales you have on a given day, the less a funding company will collect. This works very well for seasonal businesses that boom in the summer but slow down in the winter.
10. Think long-term. Where possible, look for longer term financing options that keep your repayment costs lower in the short term and give you time and money to invest in your business for the long term.
Remember that when it comes to new business financing, it's not "one size fits all." Many companies will need to have numerous financing options in place. The key is to obtain the right type of financing at the right time and with the right providers.
David Souaid is co-founder of Evolocity Financial Group, an alternative lending company that specializes in small and medium sized business financing solutions.