Why It’s Difficult for Startups to Qualify for a Business Loan
Small businesses are the backbone of the Canadian economy. According to the latest government statistics, 97.9% of employer businesses are small businesses. Despite being the country’s economic engine, the vast majority of startup businesses in Canada find it difficult to secure financing. In fact, the smaller a startup is, the tougher it’s going to be to get a business loan from a traditional lender.
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Why is it so difficult for startups to get a business loan? For starters, there’s a lot of paperwork. If you’re looking for a small business loan, the banks will want to see personal financial statements, personal background/history, one-year projection of income, loan application, personal income tax returns for the past three years, a business license, and business plans. It will also take the bank a long time to go through the paperwork, sometimes months. This laborious process is a hurdle and deterrent for many small business startups.
In addition to the loan process, banks could turn down a business loan because of a low credit score, little or no collateral, inconsistent income, and even a history of being late with payments.
This might explain why only a small percentage of small business startups actually have business loans.
A Home Equity Loan for Startup Businesses
If startup businesses aren’t getting their business loans from the bank where are they getting the money? For those who own property, the easiest and quickest way to secure financing for your startup is to refinance your property with a home equity loan.
A home equity loan, often called a second mortgage, is an additional loan taken out on a property you already have a mortgage on. Like a first mortgage, you make monthly payments on the home equity loan.
With a home equity loan, you receive a one-time, lump sum payment. You are charged interest on the total amount as soon as you receive the money, and the home equity loan gets paid off over a predetermined period of time.
Home Equity Loan vs. Business Loan
There are a few reasons why startups should consider a home equity loans over a business loan.
Easily to Get
The fact of the matter is, business loans are difficult to get. There’s the mountain of paperwork, business projections, etc. Home equity loans, because they are secured against the property you already have a mortgage on, are easy to secure. Where traditional lenders want you to fill out a massive pile of paperwork, alternative home equity loan lenders aren’t interested in your business plan or long-term projections, instead, they look at your assets and resources.
Low Interest Rate
Moreover, the interest rates charged on home equity loans are usually much lower than those of business loans.
Home equity loans provide startups with a lot more flexibility. Money provided for a business loan from a traditional lender, like a bank or trust company, can come with a large number of conditions, including what the money can be used for. The money you secure with a home equity loan can be used for anything.
FAQ about Startup Business Financing
Do banks give loans to start a business?
Traditional lenders all provide business loans for startups. They just aren’t easy to get. There’s paperwork to fill out, financial statements, projections etc. You also need a high credit score, steady income stream, and collateral.
Some banks will also only provide a business loan to startups that have been in business for at least a year and generate monthly revenue of $20,000+. The interest rate on business loans can also be very high and there are restrictions on what you can use the money from the business loan on.
Startups are, by the very definition, in the early stages of operation, and most small business owners do not have the time or money to jump through all of the hoops that banks make them do.
Can I get a business loan without collateral?
Banks and other traditional lenders insist that startups have collateral. Over the last number of years, big banks have become risk averse and implemented a number of strict lending policies. If the collateral isn’t enough, the bank will turn your business loan application down.
Alternative lenders on the other hand use the collateral you’ve built up in your home to secure a business loan. The more collateral you’ve built up, the bigger the loan will be. Because you already own the home and were approved for the first mortgage, the chances of being turned down for a home equity loan are remote.
Can I use a home equity loan to buy a business?
Yes. One of the biggest benefits of a startup business owner taking out a home equity loan, is that it is s a personal loan, there are no restrictions. The money can be used for anything and everything: business or pleasure.
That can’t be said for a business loan. There are many drawbacks to using a bank to take out a business loan. One of them, is the restrictions associated with the loan. Namely, the money from a business loan can only be used to run the business.
If, for some reason, you are hit with an unexpected personal expense that keeps you away from your business, you cannot use the business loan. And your business could suffer.
Banks dictate how you can use their business loan. With a home equity loan, the money is yours to do with as you please.
Canadalend.com, Helping Canadians Secure Home Equity Loans
If you’re a small business owner or are looking to start or buy a business, the licensed mortgage experts at Canadalend.com can show you the benefits of home equity financing.
The mortgage professionals at Canadalend.com are independent, which means they have access to hundreds of different lenders. Many of whom specialize in helping entrepreneurs refinance their homes to start a business. There are also lenders who are dedicated to helping those with bad credit, no credit, and unreliable income secure a home equity loan.