I would like to start a small business and need financing. Could you tell me what types of loans are most suitable for a business?

Financing strategies for new businesses differ as much as the businesses themselves. Before immediately looking for a loan, you might be smart to work out a business financing strategy that could convince a lender or other type of financier to give you a look.

Remember one thing, however. Because you are asking them to risk their money on you, financing from lenders' points of view is all about risk management. Therefore, you already have one large strike against you, since you are starting a new business. Because so many new businesses fail, they pose a significant risk, and private lenders usually consider them untouchable.

The kind of financing you should seek depends very much on what kind of business you plan to operate. Restaurants have very high failure rates, for example. Also, lenders tend to avoid knowledge-based, or expertise-based, service businesses because they involve few physical assets that can be seized if the loan cannot be repaid.

Conversely, if your new business is in some specialty area favoured by provincial or federal governments, such as technology, you may be able to access some start-up funding from a special fund created for that purpose. You will have to research this possibility, and I suggest you go to your nearest Canada Business Services Centre.

Your entrepreneurial or management history will likely come into play when you are seeking financing. If you have some kind of proven track record, or a long relationship with some lenders, you may find them more amenable to talking about a loan.

Usually, when someone starts a new business and approaches a lender for financing, the lender will steer them to the ""personal guarantee"" loan. Essentially, this means that you will have to pledge a physical asset such as a house as collateral. Most lenders justify this (correctly) by pointing out that they shouldn't be expected to take all the risk for your new venture. To help you sort through this dilemma, you might want to arrange a meeting with your local BDC office, which specializes in arranging financing for small businesses.

No matter whom you approach for financing, however, you are going to have to develop a solid strategic plan, which in this case would mean a formal business plan. No one will even discuss financing with you if you can't clearly define your business, your market and your processes, and provide at least two to three years of financial information such as revenue projections, costs, cash flow projections and profit potential.