The baking market in Canada is an $11.8 billion dollar industry1. It includes bread, cakes, biscuits, pastries and even frozen baked goods and desserts. With the increasing demand for special dietary products in the baking market, many entrepreneurs are looking to open their own bakeries. However, whether you’re trying to start a bakery, expand your services, hire new employees, or cover some unexpected cost, you’ll need access to some working capital.
Fortunately, several startup business loans are available to aspiring bakery owners to help cover the costs of buying, starting, or expanding a bakery business in Canada.
Key Points:
- Canada’s baking industry is worth about $11.8 billion, creating strong opportunities for entrepreneurs to start or expand bakery businesses.
- Business loans can help bakery owners cover key expenses such as retail space, renovations, baking equipment, renovations, and employee costs.
- Lenders evaluate factors like credit score, revenue, cash flow, debt levels, and business plans when deciding whether to approve bakery financing.
- Bakery owners can also access alternative financing options, including equipment loans, invoice factoring, merchant cash advances, and business lines of credit.
Importance Of Financing Your Bakery
Whatever type of bakery you’re running, one thing is sure. With great quality comes great financial responsibility. That’s why it’s important, for the sake of your business, that you get the best business financing whenever you need it. That’s right, like any type of homegrown business out there, owning a bakery surely comes with a lot of expenses that require just as much attention as a cake in the oven.
That’s why it’s important to scope out the various loans for hospitality businesses to help you out when extra capital is needed.
How Good Business Financing Can Benefit Your Bakery
While managing your own bakery can certainly be expensive, a little bit of financing is helpful in more ways than one. You could use your business loan to cover the costs of:
Baking Ingredients
A business loan can help finance the ingredients you need to create delectable bread, cakes, muffins, tarts, cookies, pies and other delicious treats. This includes dry ingredients like flour, white/brown/icing sugar, yeast, baking powder/soda, sprinkles, chocolate chips, syrups, and cocoa powder. It can also be used to finance raw ingredients such as fresh or candied fruit, nuts, eggs, cream cheese, butter, shortening, cooking spray/oils and more. If you plan on offering vegan or gluten-free baked goods, you’ll also need to purchase separate ingredients for that.
Purchase Equipment
Baking is an art, it requires great precision and top-quality baking equipment. Unfortunately, paying for industrial stoves, ovens, blowtorches, hand or planetary mixers, freezers, refrigerators, cooling racks, food processors, and other crucial equipment, upfront is very expensive. Fortunately, a small business loan can help cover and spread the costs.
Baking Tools and Supplies
Spatulas, measuring cups/spoons, rolling pins, knives, dough cutters, cake and pie pans, cookie scoops/cutters/trays, cutting boards, decoration tools and more are small expenses that quickly add up. As a bakery, these are necessary baking tools that you must have on hand in order to properly operate. In addition, you need to consider the items you’ll need for takeaway and delivery such as cake/pie boxes, doggie bags, wax paper, string/ribbon and more.
Repairs and Renovations
With time, equipment will wear down and break, causing unexpected needs for funds to repair or replace equipment. Depending on demand, you may also need to expand your kitchen or renovate your sitting area to better accommodate your customers.
Employee Expenses
In order to properly run your bakers, you’ll need a team to support you. Waiters, cashiers, cooks, cleaners, are just some of the types of employees you’ll need to hire to run the front end of your business. In addition, you’ll need to provide them with aprons, smocks, hairnets, chef hats, name tags, oven mitts, and more for safety and branding.
Best Business Loan Providers For Bakeries
What Are The Eligibility Requirements For a Business Loan
Whether you apply with a bank, credit union or alternative lender, the requirements for approval will vary. Each lender has its own underwriting guidelines that they use and abide by. However, there are a few factors that are commonly used to evaluate a business’s ability to repay debt.
- Credit Score – Lenders will evaluate both your personal and business credit score to determine if you are creditworthy enough for a small business loan. The higher it is, the higher your chance of approval and getting a lower rate.
- Revenue – The consistency and level of revenue generated by your business is a key component in a lender’s decision-making process.
- Cash-Flow – Your business’s cash flow is a direct indicator of your ability to repay debt. When businesses have negative cash flow it means they are spending more than they are earning. This suggests you will be unable to repay the loan as your business is already struggling to keep up with its current expenses.
- Assets – If you’re providing collateral, lenders will verify your asset’s value.
- Debt – If you currently hold a lot of debt in comparison to your income, lenders will be less likely to lend to you. In general, lenders like to see a debt-to-income ratio of 36% or lower.
- Time in Business – Banks often lend to businesses that are well established as they have a lower risk of failing than young businesses. On the other hand, alternative lenders typically require businesses to be at least 3 months old.
- Business plan – A business plan is a detailed report on your business goals, objectives, and finances. Lenders use this to understand your business’s viability and potential to repay debt.
| Can You Get A Business Loan With Bad Credit? Yes, it’s possible to get a business loan with bad credit, but you’ll likely face higher interest rates, stricter terms, and may need to rely on alternative lenders instead of traditional banks. Many lenders will still consider your application if you can show strong revenue, provide collateral, or demonstrate a solid plan for using the funds effectively. Learn more: Small Business Loans Without A Credit Check |
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Other Financing Options to Finance Your Bakery
Alternative financing options that may be suitable include the following:
Equipment Loan
As previously mentioned, bakeries require an array of equipment to properly run their business. Unfortunately, paying for the equipment outright is very expensive. That’s where an equipment loan comes in. An equipment loan works like a traditional business loan but, the equipment you purchase acts as collateral to secure the loan. This security makes equipment loans easier to qualify for and get a better rate.
Merchant Cash Advance
A merchant cash advance is an expensive but quick way of obtaining a lump sum of cash. This form of credit works well for bakeries and businesses that accept cards (credit, debit) as a form of payment. The reason is, a merchant cash advance is not a typical loan, it provides a lump sum of cash in exchange for a portion of your future card sales.
Invoice Factoring
As a bakery, you’re likely to offer catering services for big events like weddings, baby showers, birthday parties, Christmas parties, and other events and holidays. While some clients pay their invoices quickly, others may lag behind. This, in turn, can cause a shortage of cash flow.
That’s where invoice financing can help. Invoice financing works by selling your outstanding invoices to a lender at a discount. This ensures you get the money you need quickly to run your business.
Learn more: What Happens When Clients Don’t Pay Their Invoices?
Business Line Of Credit
Running a bakery involves managing a lot of inventory. You need to keep tabs on your takeout items like the cake/pie boxes, doggy bags, wax paper, as well as the ingredients for baking all your goods. However, sometimes, miscalculations or sudden increases in demand can lead to shortages and urgent needs for more inventory.
In such cases, a business line of credit can help fund small emergency expenses like these. You’re able to withdraw money up to a certain credit limit whenever you need and you only need to pay interest on the amount you use. It is a versatile and highly accessible form of credit that every business owner should have.
Government Financing
There are a number of financial services for small businesses available through the Government of Canada.
One of the most well-known and most accessible loans available is the Canadian Small Business Financing Program (CSBFP). The CSBFP is partially backed by the government and you can apply for it with any major financial institution such as banks and credit unions. You can qualify for up to $1.15 million in funding for your business expenses2. However, loans for equipment purchases and leasehold improvements only go up to $350,000.
Final Thoughts
True, running your own bakery can be extremely expensive and time-consuming. However, with an appropriate business loan, you’ll be able to put your mind at ease and concentrate on what’s really important, the success of your shop.
Bakery Loan FAQs
How to qualify for a small business loan in Canada?
- Business financial statements
- Business bank account statements
- Proof of personal income (you may be asked to provide your personal bank statements and personal tax returns)
- A business plan
- Personal and business credit scores
Do lenders check personal credit scores for business loan applications?
How big of a loan can I get for my bakery business?
How long does it take to get approved for a business loan?
References:
1Government of Canada. Sector Trend Analysis – Bakery trends in Canada. Canada.ca
2Government of Canada. Helping small businesses get loans. Canada.ca
