What Is The Interest Rate On A Business Loan? Is There An Average Small Business Loan Interest Rate
Clients at 7 Park Avenue Financial who come to discuss their CANADIAN BUSINESS FINANCING needs are looking to compare business loans / rates and understand the rationale and qualifications around achieving best business loan rates. Small business loan rates in Canada and financing costs are certainly one key factor in understanding your financing costs to run your business, whether you are a small business or a larger corporation, and yes, even a start-up for new business financing.
Qualifications vary for different types of financing and there are numerous other key factors in the business loan decision. There also can be miscellaneous costs associated with any one type of business finance solution, and those must be considered also. Some entrepreneurs and commercial borrowers look to alternative sources of private financing such as friends and family, angel investor networks that offer rates vastly different from banks and commercial financing companies -although many of these types of borrowings tend to be ' equity ' related.
ADDITIONAL POINTS TO CONSIDER IN THE BUSINESS LOAN / INTEREST RATE DECISION
In certain types of financing the issues of down payment come into focus. Those down payment scenarios are common in several types of business finance including equipment financing, acquiring rolling stock, and of course, commercial mortgages that require owner equity. One other factor to consider, and it's always a big one in discussion with our clients is the necessity of personal guarantees on business loan transactions.
Those ' PG's ' not only affect the approval of the small business loan but can alter the interest rate as well depending on the personal credit history and net worth of the guarantor. Canadian chartered banks place a large reliance on personal guarantors. In certain cases both approval and rate might also be determined via the personal guarantee of another related or non-related party. One other key factor in the rate determination of the bank or non-bank commercial lender is the term of the loan, which might be a multi-year amortization, or, at the other end of the spectrum a short term bridge loan.
Fundamentally it's all about your risk profile but don't forget also there are a variety of both traditional and alternative lenders in Canada- all of whom have different lending guidelines and structures. Companies who qualify for bank financing in Canada (Spoiler alert - not everyone does!); Bank loans for small business tend to focus on amortized life of loans and the fixed/variable conundrum. The current low rate environment is a boon for those who qualify for bank financing.
Covenants, ratios and documentation required should always be a part of any commercial borrower’s consideration. Whether it's a bank or a commercial finance company we've certainly observed that the majority of borrowers tend to prefer to deal with a lender with a local presence. Is size everything? Quite frankly when it comes to the interest rate for a small business loan in Canada or cash flow finance solutions ' size ' does play an important role in both rate and approval.
Interest rate pricing will vary based on credit facility/loan size as well as the amount and type of debt you have on your balance sheet. It's important to understand that different types of financing in Canada support different goals - that might be one of the combinations of growth, working capital, expansion, and even acquisition.
In many cases firms opt for a complete refinancing of existing facilities. What then are different types of small business loan financing that support your firm’s goals? Note also they all have different rates and structures that will determine rates for small business loans.
SME COMMERCIAL FINANCE
The small to medium-size enterprise makes up the largest part of the overall economy in Canada, with well over a million businesses participating in the business landscape. At 7 Park Avenue Financial we deal with many firms who are in start-up or early phases of their growth - it's this segment that is the most challenged when it comes to finding the right finance solution as well as costs around the financing. Whether its day to day operation funding or exploration of growth opportunities cash remains .. king!
Canadian banks of course offer unlimited financing solutions coupled with the lowest costs. Unfortunately, when it comes to bank loans for small businesses thousands of firms find themselves unable to meet the requirements of a traditional lender - those requirements being clean balance sheets, profits, cash flow generation, and quality personal guarantees and external collateral. For that reason the rise of alternative finance Canada has been somewhat meteoric!
BUSINESS FINANCING SOLUTIONS
SR&ED Tax credit financing
Non-bank asset based lines of credit
Bank credit lines/term loans
Unsecured Cash flow loans
KEY POINT :Institutions such as banks and other commercial finance companies will calculate financing around variable rates based on the prime rate - these rates are of course set around the general market and economic conditions - companies with good commercial credit history and financials will have a smaller markup to those benchmark rates.
It is very safe to say that overall business financial history, quality of the personal guarantee, and the type of collateral held are the key determinants in business financing.
GOVERNMENT OF CANADA SMALL BUSINESS LOAN - The FEDERAL BUSINESS LOAN
Borrowers in the SME COMMERCIAL FINANCE sector might well find that the most accessible traditional bank type financing that comes with a low cost of funds are government-guaranteed loans with the facility offered by INDUSTRY CANADA, an arm of the federal government. This is a loan support program that is used by close to ten thousand businesses every year for firms that are primarily starting up or in earlier stages of growth.
Statistics from the government available for recent years show almost 1 Billion dollars of loan financing generated annually under the program. The program is a solid way to reduce long term capital investments with financing that matches the useful economic life of assets required by the business.
KEY FACTORS TO CONSIDER IN THE CANADA SMALL BUSINESS LOAN GOVERNMENT GUARANTEED FINANCING PROGRAM
Numerous attributes of the loan include the fact that the majority of the loan is guaranteed to the banks by the federal government. Typically any assets you have purchased within the last 6 months, as well as of course new assets can be refinanced or financed if new. Rates are based on a floating rate over prime and monthly payments are made on a blended basis of principal and interest. Term of the loan can be anywhere from 2-7 years - at 7 Park Avenue Financial the majority of our clients opt for a 5-year term.
Confusion around the program can sometimes revolve around the fact that only assets, leaseholds, and real estate qualify for financing under the program. Here it is important to know that Canada's non-bricks and mortar entrepreneur bank can offer cash flow and working capital loans. When you are considering either of the two government-based loan programs experts advise that you should work with a qualified Canadian business financing advisor who can assist you with your government loan needs and who has experience in the area.
The ability to submit a quality loan package utilizing the experience of an advisor helps in guaranteeing loan approval and rates commensurate with the two government offerings.
SHORT TERM WORKING CAPITAL LOANS
Cash flow/working capital financing loans are currently extremely popular in Canada. They are easily accessible, often require little or no collateral guarantee, and are usually repaid over a 1 or 2 year period. While the annual percentage rates are high on these loans thousands of small business owners have found these types of loans as cash flow lifesavers. Firms that have any sort of reasonable credit and sales history can easily qualify for these loans, on which loan amount is typically based around a maximum of 15-20% of your annual sales.
In some circles, these loans are commonly known as business merchant advance loans, and came up to Canada via a business model originating in the U.S. Your company’s track record and financials will play a key role in obtaining any commercial financing Note also that you firm might have a ' Senior lender ' - typically a bank or commercial finance company, as well as utilizing the financing services of other ' niche ' based lenders, some of whom are profiled above in our list.
While some may view alternative finance solutions as ' expensive' remember also that they will always be cheaper than surrendering equity ownership? Alternative financing solutions can help firms who are challenged or on the verge of distress, which obviously is a key factor in higher rates It's always about the ' risk ' undertaken by our traditional or alternative lender.
Our bottom line is that there is no one single interest rate on any type of business loan, but diligent borrowers, combined with advice from qualified advisors can help you achieve the most reasonable rate from any traditional or alternative lender.
SUMMARY OF KEY ISSUES AROUND THE BUSINESS LOAN INTEREST RATE
1.Rates on business loans will vary from very low bank rates to higher rates offered by non-bank commercial lenders.
2. In general, each financing rate will be competitive within the loan type and lender in Canada.
3. A number of key factors will ultimately determine overall loan cost around a debt finance solution
4. There is no one 'average loan rate ' due to competing traditional and alternative lending solutions
5. The way in which a lender expresses/calculates the rate can be confusing to the commercial borrower
6. Understanding loan type and lender type will help the business owner and financial management to assess rate
7. Traditional rates by banks and insurance companies, etc will almost always be lower than alternative financing
8.When it comes to ' alternative financing access to capital and speed of funding increases as well as does the rate
If you want to better understand the not so secret truth about a Canadian small business loan and business finance interest rates, seek out and speak to a trusted, credible and experienced Canadian business financing advisor who can assist you with the best loans and finance solutions that match your firm’s needs.
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Stan Prokop 7 Park Avenue Financial/Copyright/2020