Financing

Smart borrowing can help your small business get ahead

Most small businesses will at some point need to obtain financing. Timely borrowing can help your business generate the cash flow it needs to realize profits and meet your business goals. The more you understand your borrowing options, the better you’ll be able to decide on the right solution for your business.

Match your borrowing to your goal
The first step to smarter borrowing is to ensure that the borrowing solution you choose matches your business objective.

For instance, it’s best to use long-term financing, such as a term loans or leases, for purchases of assets that have long useful lives, such as a piece of equipment. Similarly, your credit card and operating line of credit are better suited for shorter-term needs.

Business credit card. A convenient choice for smaller purchases, paying suppliers, or entertaining clients, business credit cards come with a variety of benefits — including cash-back rewards, web-based reporting, and no annual fees.

Use your business credit card to better manage your cash flow — you may have up to a 26 day interest free grace period, provided you pay your balance in full by the due date on your statement.

Your small business advisor can help you decide on the card that’s right for your business.

Line of credit. Another way to improve your cash flow, a line of credit (sometimes called a credit line or operating loan) can be a very useful tool for small businesses.

One of the many benefits of a line of credit is its flexibility. Once you are approved for a maximum amount, you can draw on the money anytime you need it, without having to apply again. You can access funds at a bank branch or electronically. And you pay interest only on the amount you draw on. In addition, rates are competitive compared with other business solutions.

What’s more, having a working line of credit can help your business establish a record of financial responsibility.

Credit tip. Making arrangements for a line of credit before you need it is a much more efficient way to manage your cash flow than trying to take out a loan in a hurry.

Term loans. These loans are typically used to purchase the fixed assets of a business, such as new or used equipment, commercial vehicles, building renovations, or store fixtures.

Term loans are usually repaid monthly, based on the expected lifespan of the asset being purchased. Monthly payments can be fixed or variable to help manage your cash flow.

Tap into your home equity. You may be able to use the equity in your home to lower your overall borrowing costs. This strategy can be suitable for smaller or home-based businesses, and even for business owners who want to borrow personally to invest in their larger enterprises

Leasing solutions. Leasing a piece of equipment or computer system instead of buying it outright or on credit can make good business sense and potentially save you money.

The cash that’s freed up can be used for other business-building efforts, such as marketing or staffing. Your accountant can help you decide if leasing is the best option for your situation.

Preparation is key Whatever the borrowing option you choose, there are strategies you can employ today to help you get the financing the meets your needs at the best possible rate.

Map out business goals. A business plan has many practical uses, such as providing your business with strategic focus, setting out measurable goals, and selling your business vision to backers, management, and employees.

A business plan can also help you anticipate whether and when your business will need to borrow, the amount of financing you'll need, and how to allocate it.

Put overdraft protection in place. Overdraft protection for your business account has many benefits. It can provide you with peace of mind, help you save on unnecessary fees, and protect your business credit rating.

Review your credit history. Contact a credit bureau at least once a year to check that your personal credit history is accurate and up-to-date. A good credit rating will come in handy when you need to borrow cash.

Equifax and TransUnion are the major credit bureaus in Canada.

Your small business advisor can help you take the steps to ensure that you are in the best position to borrow should the need arise.