Most small to mid-sized start-up businesses may require additional capital within the first few years of being operational. Whether extra funds are needed to help with temporary cash flow issues, expansion, hire additional employees, or start a business from the ground up, small business financing is a common need among entrepreneurs.
Unfortunately, bad credit issues may stand in the way of traditional financing. But it’s not impossible. Read on to find out how to get a small business loan with bad credit in Canada.
Key Points
- If you have bad credit but need financing for your business, consider alternative lenders.
- To improve your chances of getting a small business loan with bad credit, make sure you have a solid business plan, come up with a big down payment, and apply with an alternative lender.
- If time is on your side, consider boosting your credit score before applying for small business financing.
What Is A Small Business Loan?
A small business loan is a type of financing that helps business owners cover the cost to start or expand operations, or manage cash flow. Like a personal loan, a small business loan involves getting a lump sum of money that you repay over a period of time, with interest. These loans are typically offered by banks, credit unions, or online lenders, and may either be secured or unsecured.
Repayment terms, interest rates, and eligibility criteria vary based on the lender, business revenue, credit score, and loan purpose.
Can You Get A Small Business Loan With Bad Credit?
Yes, you can get a small business loan with bad credit, although you may need to apply with an alternative lender that focuses more on cash flow and business performance than credit history. Financing options for borrowers with bad credit include secured loans, merchant cash advances, and invoice factoring, which tend to be more accessible for bad credit borrowers.
Lenders offering these loans may require collateral and a down payment. They may also charge higher interest rates and offer shorter repayment terms or lower loan amounts to offset their risk. To qualify, you’ll need to show a solid business plan and consistent revenue.
| Business Credit Reports And Scores A business credit report is a detailed record of a company’s financial history, including its payment history, debts, and credit utilization. The information in a business credit report is used to generate a business credit score, which reflects the company’s creditworthiness. A business credit score comes into play in several scenarios: – Applying for financing – Leasing equipment or property – Working with suppliers – Getting insurance Learn more: Canadian Business Credit Score and Report |
Where Can You Get A Small Business Loan?
Small business loans are available from several sources:
Banks
Banks in Canada offer various types of small business loans designed to help entrepreneurs pay for startup costs, expand operations, or manage cash flow. Approval typically depends on factors such as business revenue, credit history, and collateral.
The Canada Small Business Financing Program (CSBFP)
This loan program allows small businesses to get loans more easily from financial institutions. While the government does not loan you money, they share some of the risk the lender takes on when they provide loans to small businesses. This allows lenders to approve more loans for small Canadian businesses. Under this program, borrowers can receive up to $1.15 million.
Check out the Government of Canada’s website for more information about The Canada Small Business Financing Program.
Private Lenders
If you’ve applied for a business loan from banks and other traditional lending institutions and you’ve been rejected, you might want to consider an alternative lender. These lenders tend to be more lenient and often have much less stringent requirements compared to traditional banks.
Young businesses or start-ups with little revenue will have more success with an alternative lender.
Best Bad Credit Small Business Loans
Learn more: Best Small Business Loans
What Can You Use A Small Business Loan For?
Funds from a small business loan can be used for any number of expenses, including the following:
- Manage cash flow: A small business loan can help bridge seasonal cash flow gaps, cover daily operating costs, and maintain financial stability during slower times of the year.
- Buy inventory: Funds from a loan can help businesses purchase products, particularly to take advantage of supplier discounts and avoid shortages that could hamper sales.
- Cover labour or other expenses: Loans can cover payroll, training, outsourcing, and increasing operational costs, allowing operations to carry on without a hitch.
- Buy equipment: Financing allows businesses to buy or upgrade machinery, vehicles, technology, and other items without having to tap into cash reserves.
While a business loan can be used for anything, if you’re using one just to keep your company going, it’s not a good long-term solution.
What Information Do You Need To Provide To Get A Small Business Loan?
When applying for a business loan, you’ll usually have to provide the following information.
- Personal information: You’ll need to provide personal information such as your full name, contact information, SIN number and more.
- Business details: You’ll also need to provide your business details, including your business name, industry, time in business, address, phone number and more.
- Financial information: Personal financial information, such as your income, and business bank account details, will likely be requested.
- The 5 C’s: The 5C’s of credit are as follows:
- Character: Borrower’s reliability & debt payment history.
- Capacity: Borrower’s ability to pay back the loan based on income and current debts.
- Capital: Borrower’s personal investment in the transaction.
- Conditions: External variable affecting loan approval.
- Collateral: Assets of value used to secure the loan.
Learn more: What Do I Need To Get A Small Business Loan?
Documents You May Need To Provide
When applying for a business loan, there are specific documents you may need to provide during or even after you’ve sent in your application. Not providing these documents when asked can result in your application being rejected.
- Bank statements: Most lenders will want to see your bank statements to evaluate your business’s cash flow and daily balance. These numbers give lenders an understanding of your ability to repay them and how likely you are to default on a loan.
- Balance sheets: Lenders will use your balance sheet to verify your total assets and liabilities.
- Income statements: Lenders may also want to review your income statement in order to evaluate your expenses, cost of goods sold, and your overall net income.
- Tax returns: Some lenders may ask for your business tax return in order to verify your income. The amount you’ve indicated in your application should not have any major discrepancies from your tax return.
- Business plan: Most lenders require a business plan if you are a small or new business. Having a solid business plan that shows how you will use the loan and how you intend to grow your business will help you earn your lender’s trust.
How To Increase Your Business Loan Approval Odds When You Have Bad Credit
As previously mentioned, having bad credit can limit your ability to get business financing. However, this doesn’t have to be the case, with the right tools and preparation, you can still get a business loan.
Have a Business Plan
Having a business plan can give you the edge you need to get approved for a loan, even if your credit isn’t that great. A business plan that illustrates how your business will grow and how you plan to use the loan is key in building your lender’s trust and presenting yourself as a strong candidate. These business plans are typically between 2 and 3 pages long.
Create a Financial Projection of Your Future Sales
Providing your lender with an accurate projection of your future sales or cash flow can help build their trust. The more accurate and financially stable you look on paper, the more likely your lender will approve you for a business loan.
Improve Your Credit Score
Improving your credit score takes time, discipline, and consistency, but even small increases to your credit score can make a big difference in your borrowing cost and accessibility.
Offer Security
If you’re having trouble getting approved for a business loan because of poor credit, consider offering some form of collateral, such as a house, car or business asset. This asset reduces the lender’s risk, thereby increasing your chances of loan approval.
Use A Loan Broker
Platforms like Loans Canada allow you to apply once and receive multiple offers from different top-rated lenders across Canada who work with bad credit applicants. You may be able to use this method to direct you to a lender that’s most suitable for your situation.
Apply Online
For fast funding and more flexible loan requirements, consider applying with an online lender. Most alternative lenders offer quick online applications, with approvals in as little as 24 to 48 hours.
Here Are A Few Other Business Loan Options
If you have bad credit and are in need of small business financing, consider the following options:
Merchant Cash Advances
Consider looking into a merchant cash advance. If you only need a few thousand dollars due to cash flow issues, then this could be a great option for you. With a merchant cash advance, you’ll get a lump sum in exchange for a share of your daily credit card or debit card transactions. Your lender will continue to take this percentage until you’ve fully repaid them.
Business Line Of Credit
A business line of credit provides businesses with access to a revolving credit account, which they can withdraw from as needed. You can borrow any amount, up to your credit limit, and interest is only charged on the amount withdrawn. Once you’ve repaid what you borrowed, that money becomes available again for you to access without the need to reapply for a loan.
Learn more: Commercial Equity Lines Of Credit (CELOC)
Final Thoughts
Obtaining a small business loan with bad credit is possible, but you may need to look to alternative lenders, increase your down payment, and ensure you have a solid business plan and all necessary documents prepared. If you have time, consider taking steps to improve your credit score before applying for a small business loan.
