What’s the best time to get a business loan?
By ATB Financial 12 February 2021 5 min read
As a relationship manager with ATB, Chrisuala Pasco helps small business owners grow their businesses by using loans to tap into revenue boosting opportunities.
When one of her clients in the trades industry landed a contract for $25,000, he reached out to Pasco for her expertise. While the contract was an exciting win, he needed expensive new equipment to successfully complete the work. The problem was he didn’t have the cash on hand to cover the cost.
Pasco asked if the contract would provide enough money to cover the cost of the equipment and still leave a worthwhile profit.
“When considering a loan, [your] business opportunity needs to outweigh the debt,” she says. In other words, the money you’ll make by taking the loan will more than cover the loan debt and interest payments. For her client, the math made sense. A two-year loan of $8,000 with approximately $1,000 in interest would leave him with a tidy $16,000 profit on the new contract.
When used at the right time for the right opportunity, a business loan can help owners grow their companies. However, Pasco says to use loans effectively, you need to know the ideal circumstances for loans for your specific company, how to position your company to get the best rate and what to look for in a lender.
When is the right time to get a business loan?
There isn’t an exact right time to get a loan, says Pasco. Instead, when owners are considering a loan, the questions they need to ask themselves are “What is the potential change in revenue that can come from borrowing funds?” and “Can that change in revenue cover the cost of the loan and make more revenue?
If the answer to this last question is no, it’s not the right time for a business loan.
Common scenarios when a loan makes sense include:
- Landing a contract—like what Pasco’s client in the trades industry experienced—and needing to expand production capacity.
- Purchasing new equipment or machinery to make more or new products more efficiently.
- Expanding to another location or moving locations. “Upfront costs for moves or expansions can be significant,” Pasco says.
The key to understanding if a business loan is the right step for your company is to do your homework.
“Really figure out what the true costs are with a lot of planning and research. Go compare the different costs for equipment you might need to complete a job or all the costs of a new location,” Pasco says. She recommends using a revenue forecast along with your balance sheet to see how taking out a loan would affect your bottom line.
“Make sure you’re not underestimating cost and overestimating profits. It’s better to do the opposite—overestimate on cost and underestimate on profit,” she says.
How do I qualify for a business loan in Alberta?
A thorough business plan is necessary to qualify for a business loan in Alberta, says Pasco.
Your business plan should cover your product or service offering, your key management team, the history of your business, your growth goals, the financial position of your company, and its financial projections for three to five years. All of these elements are important for lenders to review when considering a financing request like a loan.
Pasco says that in addition to a business plan, you’ll need to provide the following information to qualify for a loan:
- The company’s most recent financial statements.
- The business owner’s personal net worth and T1 general forms.
- Any pertinent documents related to the financing request. For example, for an equipment loan you’ll need to provide the purchase agreement or any details related to that specific purchase. For commercial property purchases, more documents are needed, such as an appraisal of the property, an environmental report, and a structural and mechanical inspection if applicable.
What kind of credit score do I need to get a business loan?
A business owner’s personal credit score does play a role in business loans, says Pasco.
“This score reflects a shareholder’s or business owner’s repayment history on past and existing credit payments,” she says. “At most financial institutions, they’ll require a minimum score for new customers looking to get a business loan and a lower minimum score for existing customers”
What is a good rate for a business loan?
“Rates are always a difficult question to answer when it comes to business loans,” says Pasco. “The interest rate reflects the financial institution's assessment of the risk that the borrowed funds won’t be paid back.”
This assessment is mostly based on three factors:
- The financial strength of the borrower. Lenders will want to review the most recent financial statements of the company to know its profitability. Why? To see whether the company is capable of paying the loan back. For new clients, the lender will want to understand what the projections are for the company and the basis of those projections.
- Credit worthiness of the company and its owners. Lenders will also consider the company and owners’ history of repaying previous loans. “If a company has existing liabilities, the bank will require that the company has enough cash flow to pay for their existing payments and the new payments of the loan request,” says Pasco.
- Amount of collateral. Collateral can be used against a loan to get a better rate. Collateral is an asset you own that the lender will accept as security for a loan. Examples include buildings, equipment, company cars or invested assets like GICs. Assets that don’t depreciate—like real estate—are preferred to assets that do, like equipment and cars.
What should I look for in a lender?
For business owners looking to get a loan, Pasco recommends finding a relationship manager at a financial institution that shares your values.
“Look for someone that listens to your business goals and supports your financing and business needs,” she says.
In addition, the pricing on a loan is not always the best factor to base your decision on. Be sure to review any value-added services provided by the financial institution that can help you reach business goals at different stages of your business.
Can I do anything to improve the business loan rate?
If you’re looking to get a business loan in the future, Pasco has three tips for you to improve your chances of getting a favourable interest rate:
Take care of personal credit. Make sure your bill and credit payments are made on time, every single time. “When a financial institution is assessing the risk of giving you a loan, you’ll likely be seen as more credit worthy and will get a better rate if you do this,” she says.
Think about collateral. Offering up some kind of collateral — like buildings, equipment or investment assets — can help lower your rate.
Boost profitability. Look for ways to drive more profitability in your business, so the lender sees your company as low risk for a loan because of its financial strength.