Is a Business Loan the Right Move to Save Your Business During COVID-19?

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Last updated on June 8, 2021

A business loan can be an excellent way to manage cash flow in your company to fund a new opportunity or survive a temporary dip in revenue, like the one many business owners are experiencing as a result of this pandemic. Most businesses borrow money at some point or another, and many maintain an operating line of credit to fund regular expenses or new projects when necessary.

Business loans provide much needed relief exactly where many companies need it most: cash flow. Whether you need to meet short-term obligations during a crisis, or plan to invest in long-term assets for your company, a business loan can help.

Should I Consider a Loan for My Business Right Now?

If you are struggling to meet payroll, buy inventory, or pivot to new lines of manufacturing or distribution, a business loan can help ensure your company’s survival while you take on new challenges.

Here are a few ways to know if a business loan is the right way to go:

Your business is experiencing a temporary decline in revenue and you need to meet short-term obligations

If your regular revenue is temporarily depressed by factors outside of your control, a business loan can help you survive the dip in income without having to lay off staff or shut your doors. A business loan can help you meet short-term expenses, like payroll or rent, during lean months so you can get back to business as usual once things improve.

You need capital to invest in a new revenue stream

If you have been working a brick & mortar store that was forced to close under lockdown measures to cope with COVID19, you may be looking to move your sales online. However, if you didn’t already have an e-commerce website established, you will need to invest in one now. A business loan can provide the capital you need to hire a web developer to create an online shopping experience for your customers.

You are over-extending your personal financial resources to invest in the business

Almost every business owner invests their own money in their company to start or grow their business. However, this is not sustainable forever. It’s always better to keep your personal and business finances as separate as possible! A business loan is a great way to inject the necessary capital into your company to help it grow, without compromising personal savings that are essential to your long-term financial security, like your retirement fund.

You should not get a business loan if…

While it may be tempting to grab any cash or credit your business qualifies for, taking on a business loan does not make sense if you will not be able to pay it back, or it will not help your business thrive. Likewise, if your business will close no matter what, and a loan will simply delay the inevitable, it’s not worth incurring the additional debt on your balance sheet before your company collapse.

If your company is failing to meet its short-term obligations without accumulating debt, a business loan will only delay the inevitable. If your business is generating $20,000 per month in gross revenue, but you are spending $22,000 per month on expenses, you might be tempted to take out a business loan to make ends meet. If you borrow $20,000 and your revenue and expenses remain constant, you’ll be able to pay your bills for 10 months… and then end up in the same situation you were before, except now with an additional $20,000 of debt you can’t pay!

A business loan has to be temporary! It’s not a permanent solution to running your business. A good business can sustain itself.

How to Make a Plan to Pay Back Your Business Loan

Make a Plan to Pay Back Your Business Loan

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The terms of your business loan will dictate how often you make payments and the total cost of borrowing. Similar to many personal loans, business loans often have a fixed interest rate and a regular monthly payment.

It’s important to recognize that while a business loan gives you a useful influx of capital when it’s dispersed, it becomes a big expense when you have to start paying it back. Before you take out a business loan or line of credit, you need to know how long it will take you to pay back, how much each payment will be, and how much interest you will pay over the lifetime of the loan.

How Quickly Do You Expect to Pay Back the Loan?

Most business loans have terms of 2 to 5 years, but some may be up to 10 years depending on the amount and purpose of the money. It’s important to understand that the term of the loan is how many months or years it will be an expense for your company. The faster you can get out of debt, the sooner revenue from your company can stop paying back the balance and it will become more profit for you.

How Much Can You Afford to Pay Back Each Year?

While a $50,000 influx of capital might sound great right now, a $600 per month expense for the next 5 years might seem less palatable. When determining whether or not to take out a business loan, or how much to borrow, it’s important to understand how the loan payments will fit with your other business expenses. Loans are not “free money”, they are a financial obligation for your business that you must pay.

What Is Your Total Cost of Borrowing?

Your business loan will be lent to you at either a fixed or variable interest rate, which means there will be a cost to borrowing the funds from your lender. Interest rates will vary depending on your company’s age, industry, and even your personal credit score.

Where can I find a business loan?

The best place to look for a business loan is the financial institution where you keep your business bank accounts. They can offer your loans, lines of credit, credit cards, commercial mortgages, and more to help fund your business. If you do not qualify for funding from your bank, your next best bet is an online lender.

Online lenders like Loans Canada provide business loans for companies who may not yet qualify for financing from their bank. In order to secure a loan, you must have been in business for at least 9 months, have an active commercial lease, and have monthly sales over $10,000. You can use your business loan from Loans Canada to cover expenses, grow or expand your business, or finance new inventory purchases. Another option is a peer-to-peer lending platform like Lending Loop, which connects small businesses looking for loans with hundreds of investors looking to fund your business. The interest rates are competitive with other Canadian lenders and Lending Loop is a regulated company, so the process is safe and secure.

Recommended Read: Best Business Loans in Canada

Is a Business Loan a Smart Idea During COVID-19?

Businesses across the globe are feeling the impacts of economic slowdown due to COVID19. Many are experiencing depressed revenues, squeezed supply chains, and labor challenges as lockdown orders around the world keep both workers and employees at home. Many business owners are looking for temporary relief to simply make it through current social distancing measures in places, but know things will improve as soon as stay-at-home orders are lifted.

In Canada, over half of all businesses have seen a decline of 20% or more in revenue in the wake of COVID19. In order to help the Canadian economy survive this crisis, the Government of Canada is providing significant financial relief to businesses across Canada, including providing business loans. In fact, the 2021 federal budget proposed new funding for programs that aim to help small and medium businesses grow.

Business loans are an excellent tool to manage unpredictable or a loss in revenue while still keeping your company afloat. A business loan can provide you with capital to meet short term obligations, hire essential staff, and invest in building new income opportunities.

If you qualify for any of the Government relief programs, including loans, for your business, you should apply for them. At best, the loan can help you weather the economic challenges of COVID-19. At worst, it’s money you won’t need to use and can return when the loan comes due.

COVID-19 Support for Small Businesses

The Government of Canada has rolled out a comprehensive economic response plan to help Canadians in the wake of the COVID-19 crisis. Here are the current financial supports available:

Emergency Commercial Rent Assistance

 

For small businesses paying less than $50,000 in rent per month and who have temporarily ceased operations, or have experienced at least a 70% decrease in pre-COVID revenues, agreements were recently reached with all Canadian provinces to lower rent by 75%.

This program will provide forgivable loans  to commercial property owners to cover 50% of 3 monthly rent payments for eligible small business owners that are unable to make payments during April, May and June (if the mortgaged property owner agrees to reduce the rent by at least 75%).

The small business owner will be responsible to cover the remaining 255 of the rent, and in addition, the tenant cannot be evicted for the duration this program is in place.

The Canada Emergency Business Account (CEBA) Business Loan

The Canada Emergency Business Account (CEBA) provides up to $40,000 in interest free loans to small businesses and not-for-profits to help cover operating costs where revenues have been temporarily negatively impacted due to COVID-19. If paid in full on or before December 31, 2022, up to 25% or $10,000 of the loan will be forgiven. If the loan is not paid back by December 31, 2022, the balance owing will begin accruing interest.

To qualify for CEBA the borrower must be a Canadian operating business with a federal tax registration and total employment income paid in 2019 between $20,000 and $1.5 million dollars. To apply for CEBA, contact the primary financial institution for your business where you have a registered chequing account. If your application is approved, you will receive up to $40,000 in CEBA deposited directly in your business chequing account within 5 business days.

You may use your CEBA funds to pay any non-deferrable operating expenses including payroll, rent, utilities, insurance, property tax, and regularly scheduled debt service. You cannot use CEBA for prepayment or refinancing of any existing debt, to pay dividends, or increase management compensation.

The Canada Emergency Wage Subsidy (CEWS)

The Government of Canada will provide up to 75% in payroll support to a maximum of $847 per week per employee for businesses who have suffered a drop of at least 15% in revenues in March 2020 and 30% for April and May 2020. Employers that qualify will be reimbursed the qualifying amount for payroll expenses already paid March and April 2020.

Applications to CEWS open on April 27, 2020. Find more application information here.

Business Income Taxes – Deferred to August 31, 2020

Businesses may defer any income tax payments owing on or after March 18, 2020 until August 31, 2020. There will be no interest or penalties that accrue on balances owing during this time.

Alternatives to a Business Loan

If you don’t qualify for a business loan, there are other options to help manage cash flow or grow your company.

A Business Line of Credit

A business line of credit is a form of revolving credit that you can borrow from and repay at your leisure. These often have lower interest rates than business credit cards and are available from most financial institutions.

Business Credit Card

A business credit card can offer another solution to manage monthly expenses, as well as earn you cash back, travel perks, and rewards points. Regardless of your business size, a business credit card is a must-have to manage regular expenses and build a credit history for your company!

Closing Your Business

It may not be the news you want to hear, but sometimes loans or lines of credit are not enough to save your business. If the burden of additional debt and its associated payments will do more damage than good to your company, it might be time to shutter the doors and move on to a new, more profitable idea.

Final Word

No matter what your financial situation, a business loan, line of credit, or credit card can help you manage cash flow, even when facing economic uncertainty. Check your options and make sure you will be able to make your payments, on a monthly basis, and that your interest rate on the loan is competitive enough.

Recommended Read: Do I Need Small Business Insurance?

Author Bio

Bridget Casey
Bridget Casey is the award-winning entrepreneur behind Money After Graduation, a Canadian financial literacy website aimed at 20 and 30-somethings. She holds a BSc. from the University of Alberta, and an MBA in Finance from the University of Calgary. She has been featured as a millennial financial expert by Yahoo! Finance, TIME Magazine, Business Insider, CBC and BNN. Bridget was recognized as one of Alberta's Top Young Innovators in 2016.

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