The tech industry in Toronto is growing, and there are a number of new startups. That’s why tech startup founders in Toronto do well by considering a private loan rather than a more traditional one. It’s important to understand how to balance the challenges of the tech industry while trying to secure this type of funding at the same time.
Private Lending for Tech Small Businesses
In the digital age, a tech small business in Toronto doesn’t need to be a significant endeavour. People are starting these companies as solo entrepreneurs and outsourcing their needs to freelancers in Toronto and across the globe.
These types of startups can operate at a loss when they first start. However, if the new company operates out of a house and the owner has equity, they can get a private loan. These loans are based on the market value of a property and the equity the entrepreneur has built up in it.
Private lenders use the Loan-to-Value (LTV) ratio, a formula that includes all proposed and existing mortgages and the appraised value of the home. Someone starting a business in the house can get a private loan to keep their cash flow positive as they start.
Here’s how the LTV works. A property with a market value of $400,000 can have an LTV of 75% when the applicant needs a loan of $300,000.
The formula looks like this:
LTV = Loan Amount / Appraised Value of the Property.
Private lenders usually lend up to 75% LTV.
Using Business Assets for Loan Security
Private mortgages offer interest-only loans for people with urgent financial needs, such as tech startups. Even if you have a low credit score and are self-employed with contract income, you can qualify for one of these loans.
Entrepreneurs looking to deal with a private lender understand that these individuals and businesses are not connected to banks and credit unions. An applicant’s financial situation isn’t the major benchmark used here.
The business assets that can be used for loan security don’t just apply to home tech startups. Toronto has a booming tech community that’s changing the economic landscape. Some of these newer startups work in areas like cloud computing and have offices in the Old Financial District.
A real estate investor looking to get involved can get a private loan secured against real estate assets to finance things like shared workspaces.
Flexible Repayment Options for Tech Businesses
Private lenders also offer flexible repayment options, including interest-only loans, where the principal is not touched. Interest-only payments can help new companies preserve cash flow, allowing them to allocate funds toward marketing, hiring, and other essential working capital needs.
That can increase cash flow at the beginning of a business when it needs office space or equipment. Some tech companies will need to take a good look at their compliance requirements. Flexible repayment options through an alternative loan can improve cash flow, helping businesses navigate challenges during this phase.
In the fast-moving tech industry, companies must quickly promote their products and services to stay competitive.
Choosing the Right Private Lender for Your Tech Business
Choosing the right private lender for this type of industry means checking a few different boxes, including the following:
- Compare interest rates, as private loans typically have higher rates than traditional bank loans.
That’s because the requirements are less strict, based on equity and not credit scores, and the risk is higher. For example, as of September 2024, many private lenders charged between 8% and 12% interest rates. Tech startups also need to consider the fees involved. An alternative lender can include broker, legal, and lender fees, ranging from 4% to 8% of the combined loan amount. - You should also look for a private lender with experience funding startups in this industry. The one you finally choose should understand that Tech startups have the potential for quick growth. That’s why the streamlined process offered by these private loans is a big advantage.
Tech startups also need to pick a private lender who understands their cash flow can be unpredictable for some time. That’s why the flexible repayment terms involved become so important. Interest-only payments can boost cash flow during long sales cycles.
Private lenders aren’t as strict with their requirements as traditional banks. However, you should still put together a good application.
Creating a Compelling Loan Proposal
If the private lender approves your loan, ensure they fully understand your startup’s mission and how the funds will be utilized.
Remember to include the nuts and bolts of your business, like your industry niche and target market. For a strong loan proposal, include additional documents such as cash flow forecasts and financial statements projecting the startup’s growth potential.
Remember that the process you need to go through with an alternative lender is more streamlined than with a bank. For a private lender, the market value and equity of the property are as important as a credit score for traditional loans.
