Small Business Loans in Canada

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📅 Last Updated: August 26, 2024

When it comes to financing your business, you have several options to choose from.

Business Loans

A regular business loan is a term loan that can be secured or unsecured and is only available to businesses or business owners. Money is borrowed from banks or alternative lenders and then paid back in equal installments over an agreed period of time. The total amount repaid will include the principal amount that you borrow plus interest.

What can you use a business loan for?

A business loan can be used for a wide variety of expenses, including but not limited to:

To increase working capital
To open a new location
To pay wages
To consolidate debt
To cover the cost of marketing
To renovate
To expand your e-commerce efforts

How much can I borrow?

There is no limit to how much money you can borrow. Rather the limit is dependent on how much the lender can provide, how much you need, and how much you qualify for.

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Commercial Mortgages

A commercial mortgage is a loan that a business will take out to buy commercial property or to expand its existing property. The money borrowed will be secured against the property bought. Meaning, the property will be used as collateral if the borrower defaults on their payments.

How does it work?

Typically, a commercial mortgage loan term can range from five to 20 years, but depending on the lender it may even go up to 30 years. Often times though, the term of a loan differs from the amortization period. For example, you may have a loan term of 12 years with an amortization period of twenty-five. This means you’ll make regular payments for 12 years after which you’ll make one last balloon payment with interest of course, at the end of the term to pay off the rest of the debt.

What can you use a commercial mortgage for?

As mentioned, a commercial mortgage can be used to buy land or property for commercial use. A commercial mortgage is also often more cost-effective than renting a space, especially for business owners who plan to stay for many years.

How much can I borrow?

Typically a lender will finance a certain percentage of the property’s value. On average, ranges can go as low as 65% up to 75% of the property’s value

A Business Line of Credit

A business line of credit is a revolving loan that comes in two forms: secured and unsecured. It works a lot like a credit card but with better features. Business lines of credit typically have lower interest rates and higher credit limits. Moreover, a business line of credit can be used for cash advances.

How does it work?

You can reuse a business line of credit as many times as you like so long as you make payments on time and don’t go over the credit limit. Similar to the credit card, as you pay off the amount used, you regain access to those funds. So, if you have $50,000 and access $20,000. You only have $30,000 left. But if you pay off the $20,000, you’ll have access to the $50,000 again.

What can you use a business line of credit for?

A business line of credit is typically used to finance a business’s short-term needs like day-to-day operations, paying suppliers, or to help with cash flow problems.

How much can I borrow?

The amount you qualify for depends on if you get an unsecured or secured line of credit and how much you can afford. Lenders will typically have a set of requirements that you’ll have to meet to determine the amount.

Equipment Financing

Equipment financing is a loan that is used to acquire the equipment you need to run your business. For the lender’s protection, they may require a lien on the equipment to use as collateral. Meaning, if you default on your payments the lender has the authority to seize your equipment to pay off the loan.

How does it work?

An equipment financing lender will either purchase the equipment for you or provide you with the funds to purchase the equipment. Then you will pay off the loan with interest in equal installments over a predetermined period of time. The equipment is free of lien after you have completely paid back the lender.

What can you do with an equipment financing loan?

The best time to use equipment financing is when:

You need equipment to run your business but don’t have the funds to buy it
Don’t want to disrupt your cash flow by purchasing a new piece of equipment

Depending on the industry your business is in, you can use an equipment loan to finance:

Machinery
Computers
Furniture
Vehicle
Construction equipment

How much can I borrow?

The equipment loan amount is dependent on the value of the equipment you’re looking to buy. While there is no limit on the loan amount itself, the lender may have restrictions on what type of equipment you need and how much they themselves can finance. For example, some lenders will finance only 70% of the equipment you need due to its high value. As such, you may need to finance the rest yourself or find a different lender.

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Commission Advances

A commission advance is a financial service where a real estate agent can sell a future commission in exchange for immediate cash. The service provider is paid a percentage of the commission.

How does a commission advance work?

To get a commission advance you simply fill out a form where you identify yourself and a few details regarding your sale like (but not limited to):

A completed sales agreement
Your closing date
Proof of commission

Once your application is processed and accepted you’ll receive a percentage of your commission for a rate, which you’ll pay off in one lump sum amount when you actually receive your commission.

What can you do with a commission advance?

A commission advance can help real estate agents regulate their finances as working in real estate isn’t synonymous with regular income. Moreover, a commission advance can be used for anything like:

Emergencies
Everyday expenses
Marketing expenses to build your brand

How much can I borrow?

Depending on the lender you choose you can get up to 95% of your commission.

Inventory Financing

Inventory financing is a secured loan that comes as a line of credit or a short-term loan and is designed to help businesses purchase inventory from their suppliers. All the inventory you buy using the loan will be held as collateral, so if you default on your payments the lender will have the right to seize your products to pay off the loan.

How does it work?

Once approved the lender will pay your supplier for the inventory you need who will then send you the products. Repayment is expected to start right after the loan terms are agreed upon.

What can you do with inventory financing?

As mentioned, this loan is specifically used to help businesses meet their financial obligations with their suppliers when they need to restock their inventory.

How much can I borrow?

The amount you can borrow is dependent on how much the lender can provide, how much you need, and how much you qualify for.

Merchant Cash Advances

A merchant cash advance is a sum of cash a lender will provide you in exchange for your business’s expected future sales.

How does it work?

When you apply for a merchant cash advance, lenders will look at your historical sales to determine how much money you qualify for. Once you receive the money, you’ll have to pay it back as a percentage of your future debit and credit card sales on a monthly or daily basis until the debt is cleared.

What can you use a merchant cash advance for?

A merchant cash advance is great for emergencies because it is fast and easy to access. Depending on your needs, a merchant cash advance can be used for almost anything, for example:

To pay for unexpected expenses
To increase cash flow
To pay for equipment repairs
To cover the cost of day-to-day operations

How much can I borrow?

A lender will limit the amount you can borrow based on your historical sales. The more time you’ve been in business and the more consistent your sales are, the higher the loan amount you’ll qualify for.

Canadian Small Business Financing Program (CSBFP)

The Canadian Small Business Financing Program is developed by the government of Canada and is offered through banks. Its program is designed to help small businesses and start-ups gain the financing they need when they are unable to access it through traditional means.

How does it work?

Simply go to any one of the participating banks and ask about the CSBFP. They will walk you through the process and discuss the terms of the loan.

What kind of business is the loan good for?

This financing program is available to all businesses except for farming businesses, non-profit organizations, and religious organizations. Businesses that are eligible must have gross annual revenue of $10 million dollars or less.

What can you do with the CSBFP?

It may be used for any of the following expenses:

To buy or renovate the businesses commercial property
To buy or upgrade equipment
To make improvements on the business leased property (can only use $350,000 of the loan for this category)

How much can I borrow?

You can get a loan of up to $1,000,000.

When will I receive my funds?

On average it can take between 30 to 90 days to receive your funding. However, approval can go beyond that if more information is required.

How to Choose The Right Financing Option

The type of financing option you choose will have an impact on the success of your business. So, you should make sure to understand all the benefits and risks involved with the type of financing you’re choosing before making a decision. Here are some things you should consider:

Do you need short-term funding or long-term funding?

Can your business afford a short-term loan or does it need a longer repayment period to pay off the loan? You should choose the financing option that caters to your financial state.

What is your cash flow like?

The type of loan you choose is dependent on your business’s cash flow. Poor cash flow can lead to an inability to pay off current debts, payroll, and other immediate expenses. So, if you need to increase cash flow to pay for day-to-day operations, perhaps a merchant cash advance may be worth looking into. If you’re a business whose cash flow is affected by seasonal changes, you should consider a line of credit over a business loan.

How much will the loan cost you?

Before choosing to take on debt, you should understand how much the loan will cost you. Beyond the obvious interest rate, you should scrutinize other factors, for example:

The loan term: A short-term loan will lead to more expensive payments but a lower amount of interest paid on the loan. The opposite holds true for a long-term loan. Depending on your circumstances either option may work for you.

Repayment flexibility: Can you pay your loan off early without a penalty? Can you hold off on a payment for a couple of months if you run into any financial difficulties?

How much of the expense will your lender finance? For example, sometimes a lender will only be willing to finance 80 percent of your equipment due to its high costs. If that is the case, you must determine if you can finance the other 20 percent or if you need a second lender.

Fees: Fees like administration fees, application fees, and penalty fees.

Collateral: Is the loan worth the collateral you’re putting up?

Common Business Loan Fees

In exchange for the money you are given to start or grow your business, you will be charged certain fees. In addition to charging interest on loan amounts – which is how lenders make money on business loans – there are fees charged that help cover the cost of these financing products for lenders. The fees can vary quite a bit and typically include any of the following:

Application fees
Origination fees
Late-payment fees
Non-sufficient funds (NSF) fees
Prepayment penalties

It’s important to understand the true cost of borrowing so that you know exactly what your financing product is going to cost you in the long run.

What Do Business Lenders Look For When Approving an Applicant?

Banks and lenders will look at a number of factors other than your credit score. Though your credit score will play a significant role in determining your eligibility with traditional banks, other aspects of your business’s financial profile will play just as big of a role with other alternative lenders.

Time in business

The amount of time you’ve been in business can affect the likelihood of you receiving a loan. The longer you’ve been in business, the more stable and reliable you’ll look to your lender.

Monthly or annual revenue

Most lenders will require businesses to have a certain amount of revenue coming in each month or year. They want to assure that you have enough income coming in to pay off your current expenses along with the new debt you are applying for.

Personal credit

If you’re a fairly new business owner who hasn’t really gotten a chance to build your business credit. Lenders will check your personal credit to gauge your creditworthiness.

Security

Often times lenders will require collateral to approve you for a loan. This is a layer of protection for the lender if you default on your payments. The higher the value your collateral is, the more likely you are to be approved.

Documents

Almost all lenders will want to know about your business’s financial health. Lenders will ask for your business bank statements, cash flow statements, and income statements as it’s a good indicator of whether your business will be capable of repaying the debt.

So, what will the funding department look for in my bank statements?

NSFs – Non-sufficient funds
Ending balances
Large withdrawals

Business tax return

Lenders may use your business tax return to verify certain aspects of your business in order to determine the terms of your loan. Lenders can use your business tax return to check information like:

Verify income
Check your debt to income ratio
Trust – If there are discrepancies between your tax return and the information you’ve provided your lender about your business, that can lead to a bad level of distrust.

Business plan

Depending on what kind of loan you’re asking for or how long you’ve been in business, a business plan may be required to convince the lender to finance you. A business plan shows the lender how serious you are and how much effort you’ve put into what you’re trying to finance.

Why Was My Business Loan Application Rejected?

Each rejection is dependent upon each applicant and their business’s financial circumstances. Below are a few reasons why your business loan may have been rejected.

Lack of revenue

Poor revenue and cash flow shortages are signs that you may have trouble keeping up with your payments.

Low credit score

One of the most common reasons a lender may reject you is due to your credit score. A low credit score is usually a clear indicator to lenders that you’ve struggled to meet your debt obligations in the past.

Too much debt

Lenders will often look at how much debt you have to see if you can handle another monthly payment.

Not enough time in business

The younger your business is the riskier you are to invest in. As such, many lenders will have “time in business” restrictions when approving applicants.

How Much is My Business Eligible For?

Whether you’re an entrepreneur, a small business owner, a medium-size business owner, or a well-established business owner, the amount you qualify for will depend on how much you can afford and the type of loan you are looking for.

When is it the Right Time To Apply For a Business Loan?

Considering the fact that you will be assuming a certain amount of debt when you take out a business loan, you want to make sure you are doing it for the right reasons. You’ll be responsible for making regular payments, and failure to do so can have a negative impact on your credit and financial profile.

That said, there are some sound reasons why you may want to take out a business loan, including the following:

You want to build business credit – As a business owner, building a strong credit score is important (learn more about business credit scores). Without it, it will be difficult to get approved for any loans in the future. By making timely payments on a business loan, you can effectively build up your credit.

You need to expand – If business is going great and you’re finding that your current situation is not enough to accommodate further growth, it might be time to expand your current space or move to a new one.

You need to hire new staff – Along with a growth in business often comes the need to add more staff to your roster. As with anything else in your business, this requires money, which you can get from a business loan.

You need new equipment – Whether you need to accommodate growth in business, are just starting out, or simply need to replace obsolete equipment that you already have, a business loan can help you finance such expensive purchases.

Your marketing campaign needs a boost – Whether you’re just opening your business’s doors for the first time or simply want to stay top-of-mind among your clients, a sound marketing campaign is essential. But again, this can be expensive, and without adequate funds, your advertising efforts could fizzle out. With funds from a business loan, you can fuel your marketing and see your business take off.

You’re in a slow season – As a business owner, you know that positive cash flow is necessary to stay afloat. But sometimes, it’s possible to find yourself in the red from time to time, especially during slower times of the year. With a business loan, you can gain access to funds to help cover your daily expenses until things start to pick up again.

What Lenders Offer Business Financing?

Business financing is offered by many, as seen below.

Banks/ Credit Unions

Banks and credit unions are the most common way to get business financing. They tend to have stringent borrowing policies making it difficult for smaller businesses to get approved. They typically require a good credit score, a solid source of revenue, and healthy financial statements.

Peer to Peer Lenders

P2P or crowdlending is an alternative method of financing. It is an online marketplace that is controlled by a third-party lender. Investors look at your application and will either invest wholly or partially or not at all depending on how they like your application.

Online/Alternative Lenders

Another great way to finance your business is to look at alternative lenders. They are not as strict and base their requirements on other aspects of your business.

Business Loan Brokers

Depending on what you’re looking for, a business loan broker can help you compare rates and lenders to find the best fit for your needs.

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Frequently Asked Questions

I received a business loan last year and now I need more money? Can I get approved for another business loan?

Technically yes, but it depends on many factors. First of all, you have to make sure that your previous business loan terms allow you to take on additional financing. Second, what kind of loan are you looking for? Many people have a mortgage, credit cards, car loans etc, so it isn’t uncommon for businesses to have a diversity of loans as well. Taking on more debt typically becomes a problem if:

You’re struggling to pay off your current loan
You’re offering up collateral from another loan
Your other lender has terms that prevent you from doing so

Can I get a business loan to start my business?

Lenders are more wary of giving startups a loan as statistics show most businesses fail in their first couple of years. Though it can be difficult to acquire, it is not impossible.

Can I get funding to purchase an existing business?

There are a number of different financing methods you can use to acquire an existing business.

Vendor take-back financing: Sometimes, the owner himself can provide you with the financing you need to buy his business.
Secured business loan: Often times when you want to purchase an existing business, there will be equipment that comes with it. If the equipment still has enough value, it can be used as collateral to secure a loan.
Bank loan: The most traditional way you can finance your purchase is by seeking a loan from the bank. Though it may be hard to get approved, it is an option.

When will I receive my funds?

The time you receive your funds depends on the lender and the type of loan you’re seeking. For example, a merchant cash advance or a commission advance can take as little as 24 hours, but an SBA loan can take as long as 90+ days.

Can I repay my business loan early?

Oftentimes, lenders will have prepayment penalties as it affects the interest they receive from you. Though you may save interest from paying the loan off early, it’s important to calculate if the penalty associated with it is worth the savings.