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Banks eager to lend you money

Written by : Anna Piekarski
`Fiercely competitive' market for commercial loans means "it's a great time to be a small-business owner," one banker says.

There is good news for business owners looking for financing - banks are competing with each other to give you money. As more and more people opt to join the ranks of the self-employed, many financial institutions are clamouring to lend them money.

"Financing for small businesses has never been more available than it is right now," said Kyle McNamara, head of customer segments and small business at Scotiabank.

McNamara, who described the current lending climate at the country's banks as "fiercely competitive," added: "It's a great time to be a small-business owner."

But don't let the lure of an easy loan and good interest rate sidetrack you from taking a good look at the facts before you get drawn into small-business ownership. Before you decide to take the plunge, McNamara offered some sage advice for newcomers.

First of all, said McNamara, different types of people open businesses for a wide variety of reasons.

He has seen more and more women starting their own businesses because of the flexibility it allows, while seniors who opted for retirement over the past several years are now re-entering the workforce as their own bosses.

But whether you're a novice or a seasoned entrepreneur, McNamara encourages everyone to create a business plan, because it remains the best way of assessing the status of operations.

Indeed, no matter how passionate a prospective small-business owner is toward their company, businesses are not built on passion alone, said Paul Clark, TD Canada Trust's senior vice-president of small-business banking.

Fortunately, many potential small-business owners have done their homework and come prepared with the necessary paperwork to get financing, Clark added.Many have already created a business plan, the key item banks look to when deciding what type of financing to offer.

For those who aren't sure where to start, many of the banks have sample business plans and instructions on their websites. Once the initial paperwork and assessments are completed, there are many financing options.

Which option is best for the business will depend on the nature of the operation. For example, restaurants and small retail shops are frequently being opened, while in Eastern Canada service-related businesses are growing, Clark said.

Some businesses are easier to provide financing for, said Don Wither, director of business banking at the Bank of Montreal. A group of researchers at BMO has been studying a wide range of industries, such as insurance, real estate, funeral services and franchise operations to determine the specific needs for these businesses.

"We can do a lot of non-traditional type lending to them, because we understand the value of the industry," Wither said.

Besides the banks, there are other programs that provide a variety of options for lenders. The Canadian Small Business Financial Loan Program, for instance, allows the bank and the federal government to work together to provide financing of up to 90 per cent.

The program allows banks to help businesses early in their creation when they have no equity, Clark said.

More businesses are taking advantage of the program. From 2002 to 2006 at TD Canada Trust alone, the number of approved loans under the program increased by 63 per cent, while loan volumes under the program increased by 148 per cent.

Not everyone needs a lot of money. Some just need minor financing to help with a project.

Someone with a lot of equipment needs, for example, might want a term loan. Or the loan might help to establish a line of credit, which is a good way to keep cash available. It also makes good sense because the business pays only the interest on money used, rather than paying interest on all funds through a lump-sum loan.

If there is property involved, a mortgage may be an option. Most banks have programs that allow business owners, usually sole proprietors, to use the equity in their home to offset borrowing costs. Determining how much money a person can afford to borrow is important, as banks don't want to lend owners more money than they can afford.

"We don't make money out of repossessing someone's home. We want to make sure we don't overextend them," BMO's Wither explained.

Banks know that every business will have problems – from seasonal slumps to a lack of equity – but entrepreneurs shouldn't wait until the situation gets desperate before they look for financial help.

"Keep us in the loop if you're having financial difficulties. We really encourage them to come into the bank and talk to us, upfront. When you've got time, it's easier to come up with a plan," Clark said.

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