6 Things to Consider Before Entering a Relationship with SME Lenders

Is your business facing cash flow problems? Would you like to get financing to expand your current operations and support the growth? There are many reasons why an entrepreneur may decide to obtain a loan from a small business lender. Obtaining capital from a traditional financial institution might be challenging.  In fact, according to a survey conducted by the Government of Canada presenting 2018 data, 30 percent of SMEs were denied financing from traditional financial institutions. Today, with more lenders and options for financing than ever before, traditional financial institutions are not your only option. It is crucial to choose a suitable lender for your business as being approved easily is one of the most important aspects to be mindful of.


With so many options, the process can get overwhelming. There are several factors that we recommend considering when you are deciding the best lender for your business.


1. Credibility of the Lender


It is important to verify the credibility of the lender when you are deciding to apply for credit. Doing background research online to confirm that the company has a legitimate physical address, website and social media channels will allow you to identify whether it is a trusted lender. Customers’ ratings and reviews are helpful in validating the lender’s integrity, taking time to review testimonials will allow you to understand the company’s reputation and reliability. Examples of questions to answer during your research:


  • Has the company been transparent about terms of repayment?
  • Have customers had any surprises in having to pay fees they have not expected?
  • Is the personal information you provide stored securely?
  • Has the lender had occurrences of a security breach?


Better Business Bureau is an additional source to refer to when conducting your research. Be aware of potential scams. The majority of financial institutions have online applications and do not charge businesses to apply until the application is approved and the loan proceeds are provided to you. Be wary of lenders that require up-front fees for a business loan or application.


2. Limitations on Usage of the Funds


Some lenders might restrict business against using funds outside specific types of expenses or purchases. Limitations might be very strict and include only one or two types of expenses allowed (i.e., only inventory purchases or only digital marketing spend). Are you comfortable accepting these limitations? It might potentially stifle your growth, as you won’t have flexibility to use the funds for arising needs.


3. Conditions of Credit


In addition to making payments in accordance with the credit agreement terms, you need to be mindful of additional requirements a lender might impose on your business in order to remain eligible for the credit. (Examples of requirements might include not being able to borrow from other lenders or having to attain specific financial ratios.) Would the lender provide more favourable credit terms over time as you honour the terms of the contract? Ensure that you enquire about additional requirements to be disclosed and explained to you. 


4. Security Agreement


 A security agreement is a contract that creates or provides for a security interest. When entering a loan contract with a lender, it is important to understand the terms and conditions of the security agreement. To be able to provide lower interest rates, lenders will likely require some form of collateral. The security agreement will provide the lender with interest in specific assets or property but can also include patents or receivables. In the event that the loan is not being repaid according to term, the lender can claim and sell the collateral that was pledged in the agreement. Be sure to know exactly what it is you are putting up as collateral on the loan to keep yourself protected. Traditional financial institutions are likely to provide credit only up to a specific portion of the value of your security and limit the amount of funds your business will be qualified for. The process of estimating the value might be lengthy and impact the time it would take to access capital even if you qualify for it.


5. Application Process


Traditional financial institutions typically require you to provide substantial amounts of documentation. The application process might take several weeks before you are approved and funded, which can slow down your plans. Lenders with quick and easy application processes are available as well. You can inquire with the lender about the process and the extent of documentation that will be required before funding.


6. Cost of Borrowing


Last, but not least. All potential borrowers think about interest rates but frequently overlook that it can be expressed in many ways and, therefore, create an impression that is distant from the reality. Interest rate can be expressed in several ways: EIR (effective interest rate), APR (annual percentage rate) and factor rate. Only EIR will incorporate the entirety of rates and fees associated with taking on debt, however, it is rarely provided by lenders including traditional financial institutions. The following example will help to demonstrate it:


Borrowing $10,000 and planning to repay it bi-weekly within a year with an APR of 36.6% appears like a simple borrowing that resembles credit card terms cost wise. However, if a lender charges you the origination fee of ~$300, the EIR will be ~43.8% that is substantially higher than 36.6%. At the same time a number of lenders will present this offer to you as one costing you 20% represented in a factors rate of 1.20.


With so many options for financing it is important to choose a lender that has your best interests at heart. It is important to know how the application and funding process differs between lenders, as well as some red flags to consider when deciding on the right fit for your business funding needs. By considering these 6 factors you will be able to determine the right borrowing decision for your business.


If you are in need of financing and looking for a reliable lender to partner with, we are here to help. Thinking Capital is dedicated to forming valuable partnerships with SMEs to grow and prosper together. We have funded over 17,000 small and medium sized businesses since 2006 and are constantly evolving to better serve our customers. To find out about the support we can provide your business, please feel free to reach out to us here.  



About the Author


Arina Eremina is the Vice President and Head of Risk Management at Thinking Capital. Arina has a strong track record of facilitating sustainable business growth through designing and implementing innovative enterprise-wide risk management practices for consumer and small/medium enterprise sectors. She combines technical background with a broad understanding of business strategy and operations.