4 factors that could affect financing your start-up

Consider the following factors to better prepare your financing application and increase your chances of getting a loan

3-minute read

It’s in your best interest to make it easy for a bank to lend you money. For many new businesses, access to start-up financing is essential. Unfortunately, passion alone won’t get you your loan. You need to know the right steps to get it.

“The first thing we want to see is your experience and how prepared you are for your venture,” says Catherine Leteinturier-Guissé, BDC Business Centre Manager.

It’s important to take the time to properly prepare your business loan application. Commercial lenders will typically look at these four aspects of your business.

1. Your professional profile

Bankers need to understand your project and know that you’re a good risk. You need to establish your credibility and show that you have done your due diligence. You’ll also need to show you have thoroughly researched your project.

Is your work experience related to your new business? How did you come up with the idea and what’s your industry experience? You need to prepare your case because your answers will be evaluated by your lender.

2. Your project’s viability

You will need to submit a concrete business plan. How does the loan you are asking for fit into your company’s overall strategic plan?

Here are some of the questions you will need to answer about your business plan. Your answers will need to be precise.

Where are you going to find your clients?
How did you choose your location?
Where are you going to find your suppliers?
How many customers do you expect in a day?

3. Your financial strength

A banker will want a detailed breakdown of your financial projections for at least the first year of your operations and possibly for up to two years. For example, if you say you’re going to have 100 clients a day and they’re going to spend $10 each, then you will have $1,000 in daily revenues. How much do you expect to make in your first year?

Your personal credit score is extremely important because it’s often the only major factor that a bank can assess for a start-up business. A poor credit score is a red flag for a bank and could make it a lot harder for you to get a business loan.

4. Your guarantee

For a start-up business, the bank will typically ask you to sign a personal guarantee, which makes you responsible for the loan.

How much money can you invest?

The bank will also look at how much money you will be investing. This makes your personal net worth important, because the bank needs to see that if you aren’t going to take a salary for six months, you can afford to do so.

Can you meet your personal obligations, such as rent or mortgage payments, without drawing on revenues from your business?

Most of the time the reason why people don’t get financing is because of the lack of personal funds. We want to make sure that you can re-invest in your business if something doesn’t go as planned.

Common mistakes when applying for a loan

A banker reading through your documentation is likely to get tripped up by the following types of mistakes in your application:

underestimating expenses
underestimating how long it will take to make a profit
underestimating how much you will spend on marketing your new business
no financial cushion

Don’t forget that you need to market your new business

Leteinturier-Guissé says marketing is extremely important because new business owners often believe that their idea is so great that customers will automatically flock to their business.

“Entrepreneurs often underestimate how much they have to spend on marketing, but that's one place where people should overestimate. Once the business is open you need to spend money to let people know where you are,” she says.

Learn from your experience

A positive answer is never guaranteed, but solid preparation will help you improve your odds of getting a loan for your start-up business.

Even if the answer is negative, you can learn from the experience. That should help you make improvements and increase your chances the next time. Your job is to make it easy for a banker to lend you money.

Next step

Learn more about start-up financing and other aspects of starting a business in Canada with our free course for business owners: How to start a business.