The Fundamentals of Business Borrowing  

May 29, 2024

Business loans can be tricky to understand. Where to start? How much do I need? What do I need to provide? What options are best for my business?

When a lender reviews a business loan application, we take many things into consideration, but here are the top three:

Character – Who you are, what you do, how long you have you been in the industry, what does your personal credit history say about you.

Capacity – Can you realistically afford to pay back the loan. We review business financial statements, personal tax returns and any additional income to support the loan. Using the information, we calculate your total debt to income ratio to ensure you can afford the loan.

Collateral – Lenders look for sufficient collateral to secure the loan to help mitigate risk, in the event that the borrower is not able to pay back the loan. There are many different types of security that can be used, and depending on which type, it may result in a lower, or higher rate. For example, a loan that has no security is unsecured, and is a higher interest rate. A General Security Agreement grants a security interest over personal property or assets. A Specific Security Agreement takes a specific asset (i. e. vehicle, equipment) as security. Mortgage Security is secured against a property and Cash Security is pledging deposits or investments against the loan. These last two security types are always your best interest rate. If your business is a corporation, most times a personal guarantee by any or all shareholders is required. It is important to understand what your lender requires.

Ask lots of questions, and review documents carefully, including fine print.

Summarized below are some common borrowing options available to businesses in Canada.

Business Borrowing Options 

Features and Benefits 

Credit Card

A business credit card is an efficient way for a business to manage cash flow and expenses. Credit cards offer purchasing convenience, cost savings and detailed reporting. 

Overdraft Protection

Sometimes business expenses happen unexpectedly. Business overdraft protection offers peace of mind knowing funds are available to cover expenses in those unforeseen moments.  

Operating Line of Credit 

An operating line of credit gives a business access to funds that help cover operating expenses and meet cash flow requirements. Use funds whenever needed and interest is only charged on the amount borrowed.  

Term Loan

A term loan can help you achieve your big business goals. Whether that is purchasing new equipment, opening a new location or refinancing existing debt. Term loans offer flexible repayment options, terms from one to ten years, fixed and variable interest rates. 

Commercial Mortgage 

Purchasing land, a building or building renovations can help unlock the full potential of your business. Various fixed-term rates available from 1 to 10 years. Multi-advance disbursement options may be available along with pre-payment opportunities 

Leasing 

For large equipment, sometimes leasing makes sense, with a lower initial investment often required and flexible terms (i.e. up to five years) and payment structures (monthly, quarterly, semi-annually and annually). 

Libro Coaches are business lending experts and are happy to discuss borrowing alternatives for your situation. Check out Libro’s borrowing options for more information.

Contact a Coach about borrowing for your business.

By Hillary Desmond

Small Business Specialist