How to Get a Canada Small Business Loan - By Stan Prokop - 7 Park Avenue Financial
The Canada Small Business loan program is an ongoing major initiative by the Canadian Federal government to provide capital financing to new and existing businesses that meet the criteria of the program.
The program is very popular in Canada, primarily because it a business loan that the business owner may not have been able to achieve elsewhere.
Many business owners and financial mangers either aren't aware of the program, or, as is more often the case, don't understand the requirements of the program and how to ensure a proper approval in a timely manner. Naturally, rightfully or wrongfully so, there exists a perception that any government type funding program is extremely paperwork and administratively burdening to the business.
There are several key basics that allow a business to ensure that they are in fact qualified to pursue the program. Those basics are as follows:
1. The company must be a private corporation - public firms are not eligible
2. The company must be under 5 Million dollars in revenue
3. The loan must ' flow through' a registered administrator of the program - In Canada this is typically a chartered bank - this is one of the key perceptions of the program, in that the banks ' administer ' the program, but they don't own it
4. Only three major asset classes are covered under financing in the program - they are as follows: Equipment, Leaseholds, and Real Estate
The government, as we have shown, doesn't lend the funds, but it guarantees the funds to the bank
Almost every type of business in Canada can qualify for the loan program.
The challenge of course, as always, is ' How does my firm get approved?!'
If a business owner or manager feels they are not capable of providing a proper submission to the bank it is highly recommended that they used the services of a trusted financing advisor or intermediary.
We cannot overemphasis that the key to dealing with the government and the bank is that it is critically important to have all the necessary paperwork in a properly submitted and, hopefully, professional package.
What does that ' paperwork ' include? Companies should ensure the package reflects the current financial position of the company, a proper business plan and or executive summary, and miscellaneous personal data surrounding the bank and government requirements - i.e. statement of net worth, proof of no tax arrears, etc.
Most importantly is the need to position a proper purpose of the loan re dollars, timing, use of funds, etc
On occasion it might be appropriate to offer up other guarantors or additional collateral, but in general this is not required.
Most business owners don't realize the true benefit of doing everything once, the right way! In lending and loan approval that is important. You can re- submit and renegotiate, but that is not an optimal strategy for business financing success.
In summary, the bottom line is ' do it once, right '. If you feel that can't be done internally engage the services of a trusted financing advisor with credentials in this area.
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Does My Firm's Cash Flow Support Additional Borrowing?
When business owners and financial managers contemplate additional borrowing for their firm they must think it terms of whether the business does, or will have, enough cash flow to make the debt repayments. We can further assure business owners that the bank or lending institution is thinking the same way!
When businesses enter into bank loans or other institutional loans the payments are, 99% of the time fixed and specified. The business owner and financial manager must ensure those payments can be made. If the company has over relied on debt it is viewed as highly leverage by the lender.
So how can a business owner determine if the company has the cash flow to support the debt? More importantly how does the lender do that calculation?
The calculation that banks and other term lenders focus on is called 'Times Interest Earned '. The business owner (and the banker) can calculate that formula very simply.
The Times Interest formula is calculated as follows:
Net profit before taxes, plus interest expense / divided by interest expense
The calculation becomes an absolute number. If the number is in fact '1 'that means that the company has in act made just enough to pay the exact interest expense for the year. We would point out that this calculation is always usually done on an annual basis.
So is '1' the magic number? The answer is no, and the answer should be intuitive to the business owner. That is because a times interest of 1 means there is absolutely no cushion for anything going wrong, and all business owners no about Murphy's Law!
So if earning decline or if the company takes on additional debt our ' times interest earned ' number become unsatisfactory - that is to say that we have determined there is not sufficient cash flow to service the debt.
We have determined '1' is not a great number then, well what is? The answer, as in many facets of business, is of course 'that depends '. Many industries differ and there is not really any specific number that is viewed as the Holy Grail by lenders. What we have found though that higher is better than lower. When the number is hovering around 1 both the business owner and the lender, should and will, respectively, have some concern.
We point out also that income, as a key component in our calculation varies between companies in final calculation re tax rate and other accounting adjustments. Some lenders and business owners also add deprecation to the profit because it is not a real cash expense.
Another quick calculation business people can perform is to calculate the cash flow number as a per cent age of debt. This calculation is often done by lenders to ensure long term debt is not being miss-used. If a company has a high percentage of total debt to cash flow it should be a strong indicator to the company owners that growth will be constrained, as all cash is going to debt, not growth. Therefore new equipment, inventory, receivables, etc will suffer in terms of growth.
In summary, business owners, by doing actual current calculations, as well as projections, can easily calculate their 'times interest earned' and cash flow as % of debt. This will allow the business to position loan repayments positively with their lenders, at the same time providing them with insights into how the bank or other lender will view payment capability.
Your business isn’t just like everyone else’s, so why settle for a cookie-cutter financial solution?
We know that your business has its own needs and unique challenges, and we’re not willing to simply throw a standardized solution at you and call it a day. 7 Park Avenue Financial thrives on offering personalized customer service and uniquely developed solutions for your business.
As we work with you to source your optimal Brampton Ontario business loan, we want our customer service to truly make the difference. Unique needs mean unique solutions, and we’re not willing to sacrifice quality for mass-produced service.
We hold real solutions to your financing challenges!
If you would like to learn more about us and hear more about how 7 Park Avenue Financial can secure the financing you need to help your business grow, why not give us a call today?
