5 Things to Consider Before Applying for Business Financing

As an entrepreneur, you’ve probably considered financing at some point for your business. Whether it’s money to help start your business or grow your business, working capital is essential for business owners. At Alberta Women Entrepreneurs (AWE) we provide loans from $30,000 to $150,000 to help entrepreneurs start, build and grow their businesses. While many entrepreneurs are eager to apply for financing, many do not qualify. What is the reason for this?

Many entrepreneurs apply for financing, yet only a small percentage of them are actually ready for financing. How do you know that you are ready to apply for financing for your business? We’ve highlighted five important things to consider before applying for your business loan.

1. Business Plan

A business plan is essential to your loan application, regardless of if you are just starting or looking for money to expand. A business plan shows lenders that you have truly thought this through and have a clear, actionable strategy for growth. A good business plan should include:

  • An executive summary;
  • Extensive market research proving the rationale behind your company;
  • Marketing plan displaying how you plan to gain traction and earn sales;
  • Operations plan showcasing the management team, your administrative practices and more; and
  • Financial summaries, including projected cashflow for the next two years.

Writing a business plan can be an extensive task. AWE offers regular business plan workshops in addition, we highly recommend utilizing Futurpreneur’s Business Plan Writer. This templated system allows you to fill in the blanks for your own business plan.

A good business plan should be 20-100 pages. The more detailed you are in your plan, the more clearly a lender can evaluate the business and it’s projected success.

2. Security

All lenders require some form of security for loans. At AWE we require a minimum of 30% security on our loans. Sometimes, we may ask for up to 100% security. This means that we ask applicants to pledge some form of assets as collateral for the loan, whether it is your property, vehicle or other form of asset.

We work closely with our loan clients to ensure the health and viability of the business. In the case that you cannot make your loan payments, we do have the right to take possession of the asset used as collateral to regain some, or all, of the amount originally loaned.

3. Owner Equity

Almost all business lenders require some form of owner equity for their loans. With the AWE loan program, we require that applicants have contributed a minimum of 25% owner equity on the total project costs. Here’s what we mean:

If you are asking for a loan for $100,000, we require that you, the business owner show that you will be putting in $25,000 or have already put money into your business worth this amount. Why? By contributing the 25% you are showing your lender that you are willing to invest and take on some of the risk as well. 

4. Credit Score

Your credit score is a record of your past ability to make your payments as required and manage your credit. Each lender has a different score they look for when it comes to loans. At AWE, our business owners must have a minimum credit score of 650.

We recommend requesting your credit score via Equifax prior to applying for lending in any form.

5. Business Activities That Cannot Be Financed

While each lender is different, there are a few commonalities on what banks will and will not finance when it comes to business loans. A few items that AWE will not finance include:

  • Owners salary;
  • Re-financing existing debt;
  • Commission-based businesses, independent agents or commissioned salespersons;
  • Pyramid-based businesses, including multi-level marketing programs;
  • Franchise Fees;
  • Speculative ventures; 
  • Intangible goodwill (i.e. business name or reputation);
  • Research and development; and
  • Purchase of stocks, shares and other non-productive investments.

If you have questions about financing for your business, we would highly encourage you to connect with an AWE Business Advisor or your financial institution to learn more about the requirements and how to ensure your loan application is successful.