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Andrew Zakharia, seen here during a panel discussion at the Globe and Mail Small Business Summit in 2017, warns small business owners: 'The easier it is to borrow, the higher the cost of borrowing,'

JENNIFER ROBERTS/The Globe and Mail

This article is part of The Globe and Mail’s Small Business Borrowing Guide series, which will run weekly on The Globe’s Entrepreneurship page until November.

For business owners seeking financing from banks and online lenders, borrowing can be a complicated process. We talked to accountants and entrepreneurs who have done it successfully to glean their top tips.

Getting started

Apply for financing before you desperately need it, advises Angela Richardson, an accountant and partner at Richardson Miller LLP, who works with many small businesses and chairs the board of Alberta Women Entrepreneurs. “Be proactive. Don’t wait until it’s painful.”

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The time it takes to apply for, be approved for and receive the money varies by the lender but ranges from about a week to a month.

Andrew Zakharia, founder of the Toronto-based AZ Accounting Firm, which specializes in small businesses, says once you’ve decided you want to borrow money, the first step is to compile and prepare your company financial statements. Lenders tend to look at financials for the past two years, Mr. Zakharia says, and may also accept year-to-date figures. (If your business is growing and the financials are more favourable in the current period, it may be a good idea to provide year-to-date figures.)

Mr. Zakharia estimates it takes about one to two months to have financials prepared by an accountant, although it could take longer if your company is several years behind.

Next, explore your options. While it’s tempting to go to the lender promising the easiest process for getting money, Mr. Zakharia advises caution. “The easier it is to borrow, the higher the cost of borrowing, 100 per cent of the time,” he says.

For the lowest rates, he recommends that business owners start by applying to the big banks, then the Business Development Bank of Canada (BDC), then look at alternative lenders.

Most traditional banks are asset-based lenders, meaning small businesses and newer businesses without collateral can face difficulties. Products do exist where loan criteria are based on cash flow, including HSBC’s eCredit and BDC’s Small Business Loan.

The Canadian Federation of Independent Business surveys members to rate Canada’s financial institutions. The most recent report, from 2016, gives credit unions high marks. “Credit unions are often a really good source of lending for small firms, and I think a lot of people forget about them,” says Dan Kelly, president of CFIB.

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Determine your needs

Make sure the financing you’re pursuing makes sense for your business, needs and situation, Ms. Richardson advises. She has seen business owners stuck on thinking they need a specific product, when a different offering might make a lot more sense for them.

“What’s helpful for people to figure out their financing is a second set of eyes to say ‘let’s looks at this, let’s look at that, what options make sense here?’ ” Ms. Richardson says.

Jaza Energy Inc. is a four-year-old Canadian company that builds renewable energy hubs for rural communities in Africa. Getting a loan from a bank was initially a challenge because of the company's international operations and novel business model.

Jaza Energy

Jeff Schnurr is chief executive and co-founder of Jaza Energy Inc., a four-year-old Canadian company that builds renewable energy hubs for rural communities in Africa. Customers can use battery packs that are charged at the hubs to power cellphones and lights, rather than kerosene.

Jaza has a small team based in Halifax and employs about 140 people in Tanzania. Getting a loan from a bank was initially a challenge for Jaza, because of its international operations and novel business model.

Mr. Schnurr says Jaza has grown through “an interesting mix of capital,” including a loan from the Atlantic Canada Opportunities Agency, a commercial loan, venture capital and individual equity investments.

Based on his experiences, Mr. Schnurr recommends businesses have a long-term plan and then fit the right type of capital into that plan. “The wrong type of money can change the trajectory of your entire business,” he says.

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Be proactive

While banks are introducing quick, online applications for their products, you should understand that those easy applications may not lead to the best offerings. Online loans from banks can come with higher rates than traditional bank loans, because of different lending criteria.

“Online products are often meant to get you money quickly, and therefore [their criteria are] less stringent,” Mr. Zakharia says. “They’re higher risk for the bank, and higher risk means higher interest rates.”

In one instance, Mr. Zakharia says, he filled out an online loan application and was told he was eligible for a product with better terms. Be proactive and ask about options.

The interest rate for financing can be negotiable. He has seen both banks and online lenders lower a rate from their initial offer after he asked if they could. Ms. Richardson says that some products come with application fees, which may also be negotiable.

As well, be aware that accountants may receive referral fees for placing a client in a certain product. Mr. Zakharia says accountants face disclosure rules around referral fees.

Common barriers to borrowing

A business owner’s personal credit score, as well as a business that is too young, are common barriers Mr. Zakharia sees. “Usually it’s at least one year, but preferably two years of history before you can borrow,” he says.

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Another common issue involves accounts receivable. “A lot of issues usually stem from cash flow,” Ms. Richardson says.

Some institutions lend based on accounts receivable, so a business without a good system for tracking and collecting money owed will face challenges.

“People may need to borrow because they need to pay their contractors. But they can’t borrow because they haven’t got their money from their customers, and they’re not good at tracking that. So it’s an endless circle of despair,” Mr. Zakharia says.

Not having books and records maintained by an accountant may be another barrier. When you are applying for financing from a bank, it will ask for a notice-to-reader, or unaudited, financial statement prepared by an accountant. While many online lenders don’t have this requirement, Mr. Zakharia says it is standard for banks.

“The only way you can access the lower rate and better repayment term loans are with financials from an accountant,” Mr. Zakharia says.

Mr. Kelly says if you receive a rejection for financing, you should not interpret that as an across the board “no.”

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“There are other players out there,” he says, adding that under the Small Business Banking Code of Conduct, banks are supposed to explain why they rejected a loan application and also provide information on alternative sources of financing.

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