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When seeking financing for your small business, the interest rate is understandably one of the most crucial factors to consider. Small business loan interest rates in Canada depend on the financial conditions of the business, such as how long it’s been operating, current and historical revenue, and personal and business credit score.
Compare business loan interest rates in Canada
Compare the latest small business loan interest rates from direct lenders and brokers.
What is the average business loan interest rate in Canada?
According to the Bank of Canada, the average business loan interest rate in Canada is 7.02%. This includes both mortgage and non-mortgage business loans.
Check out the average monthly business loan interest rate from January 2013 to May 2023 in the chart below (data for non-residential mortgages to the personal sector was excluded as of January 2019).
Business line of credit interest rates in Canada
If you think your business would benefit from having access to ongoing financing, a business line of credit might be a better fit than a term loan.
A business line of credit is an open credit account with a set maximum credit limit, where you can borrow however much you need up to the maximum to cover business expenses. You’ll make repayments and be charged interest on any outstanding balance.
Business line of credit interest rates tend to be variable, meaning your rate will change depending on the Bank of Canada’s prime rate, which is regularly adjusted based on market conditions. The rate your approved for typically depends on factors like your personal credit score, business plan, personal business investments and overall financial health.
Up to $250,000, or up to $500,000 with hard security
Unspecified
Variable based on TD Prime (7.2%)
Unspecified
Unspecified
Other types of business loan interest rates in Canada
There are many other types of business loans beyond term loans and lines of credit. Generally, if a business loan is secured with the equipment or vehicle that it’s financing, it will come with lower interest rates compared to unsecured business loans.
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How is interest charged on a business loan?
The type of loan your business needs will influence how the interest rate is charged. There are plenty of things to know about interest before you get started, so read up on them before you start the borrowing process.
Fixed interest rate. This rate remains the same for your whole loan term, which in turn keeps your payments the same each time they’re due.
Variable interest rate. Your interest rate fluctuates throughout your loan term and your repayments can change.
Factor rate. This is a decimal figure that is essentially a payment multiplier. The interest does not compound and is charged to the principal loan amount. It’s often applied to unsecured, short term business loans.
Monthly fee. This type of cost structure may be used by invoice financing and factoring companies. The monthly rate is a percentage and is charged to the value of the invoices submitted.
You may be able to deduct the cost of interest from your income, if the interest payment was for a loan made against an insurance policy. You may also deduct certain fees related to your business loan including application, appraisal, processing and insurance fees as well as legal, finder and brokerage fees. See the Government of Canada website for more information.
What affects business loan interest rates?
As a general rule in lending, the more a lender perceives you to be at risk of defaulting on a loan, the higher the interest rate–and vice versa. The following items can impact your business loan interest rate in varying ways.
Personal and business credit scores
Loan payments have the biggest impact on your credit score. If your credit repayment history isn’t great, you’ll be perceived as a high-risk candidate, so your business loan interest rate will be higher.
Thankfully, no credit score stays the same forever. Your credit score will increase as you make payments on time and in full and also when you pay off old debt.
Revenue and expenses
Creditors will assess your revenue and expenses to determine if you can reasonably afford financing. The higher your net income, the more favourable you’ll appear in the eyes of lenders.
Valuable assets
Your business assets can be used as collateral against a loan to decrease the perceived risk and interest rate. When a loan has collateral, it is a secured loan, and when a loan doesn’t have collateral, it is an unsecured loan.
Lenders may prefer secured loans because they have an asset they can repossess if you fail to repay the loan. Borrowers may prefer unsecured loans because they won’t need to worry about losing significant assets.
Loan type and purpose
The type of loan and the intended purpose of the loan impact the business loan interest rate. In general, short-term business loans and merchant cash advances are viewed as being higher risk so they come with a higher interest rate.
Time in operations
If you’re launching or operating a startup, you are perceived as a riskier investment because the risk of your business failing is high. Startups are riskier because they require more capital, the market is not necessarily stable and the key personnel are new to operations.
When you’ve been in operations for several years, the perceived risk decreases because your operations are secure and you’ve established precious business knowledge.
Who qualifies for the best business loan rates in Canada?
The lowest business loan interest rates in Canada are reserved for businesses with strong financial circumstances. People that fit the following criteria typically receive the lowest interest rates:
Stable, positive cash flow (as opposed to seasonal, cyclical or negative cash flow)
Excess net income that will comfortably cover loan payments
In business for several years
Able to provide collateral
The candidates that meet these criteria have the highest probability of repaying the loan, which is why they receive the best rates.
5 tips to finding a competitive business loan interest rate in Canada
Check your credit. Business credit scores are important, but lenders tend to focus on personal credit scores. Before applying for a business loan, review your credit report for errors and opportunities for improvement.
Improve your legitimacy. Applying for a business loan is almost like a job interview. One of the most important things in a job interview is verifying legitimacy. Working with a bank is no different. Ways to improve your business’s legitimacy include preparing a detailed business plan, separating your personal and business finances and presenting proper financial statements.
Offer collateral or a lien. Many business loan lenders ask for a personal guarantee. Instead of committing to a personal guarantee, you can offer collateral or a lien on the assets of your business. Not only will this reduce your interest rate, offering collateral and liens can be used for further negotiation.
Shorten the term. Lenders want their money returned to them sooner rather than later. By shortening the term, you’re reducing the risk and making the offer more desirable to the creditor.
Obtain a few offers. Don’t accept your first offer. Instead, obtain a few offers from various lenders. From there, you can compare and negotiate to get the best offer. Try not to rush the process either. You will likely be committed to a business loan for several years, so take the time to choose.
Business loan interest rates in Canada by type of provider
While your business loan interest rate will be determined by your personal factors such as your financial statements, time in business and both personal and business credit scores, where you apply matters too. Each creditor is unique, which means their risk assessment and approval processes vary.
In general, there are 3 types of business loan providers: financial institutions, alternative lenders and brokers.
Financial institutions. These include banks, credit unions and other traditional lenders. They tend to have the most competitive business loan interest rates in Canada, but they have the strictest requirements for approval.
Alternative lenders. Online lenders, crowdfunding and peer-to-peer lending fall under this category. The approval requirements of alternative lenders tend to be more lax. As an example, collateral is not often a requirement. However, the lender is taking on more risk, which means you’ll be offered higher business loan interest rates.
Business loan broker. A business loan broker is an intermediary who’ll take your application to multiple lenders to help you find the best business loan interest rate. They can work with both financial institutions and traditional lenders.
How do business loan interest rates work in Canada?
There are various meanings behind the term “rates.” The word could mean interest rate, annual percentage rate (APR) or factor rate.
Interest rate
An interest rate is the amount a lender charges someone to borrow money. Usually, an interest rate is expressed as a percentage of the total funds borrowed.
Business loan interest rates in Canada can be fixed or variable, and the interest can be simple or compound interest.
Fixed vs variable interest
A fixed rate remains the same throughout the life of the loan. This means the percentage and cost do not change throughout the course of the term. Individuals typically choose this option if they want stability and predictability in their loan payments.
Variable business loan interest rates fluctuate based on changes to an index rate. Normally, the index rate is the lender’s prime rate, but it could be linked to other indexes as well. As a borrower, this means your loan payment can go up or down depending on the index rate’s activity.
Simple vs compound interest
Simple interest is a fixed percentage of the principal amount that was borrowed. You can calculate the amount of simple interest payable on your business loan using the following formula:
Principal × interest rate × loan term (in years) = simple interest
A business loan with a compound interest rate continually charges interest on both the principal and previous interest charges.
Interest can be compounded on an annual, monthly, weekly, daily or on any other defined time period. You’ll pay more interest with shorter compounding periods. You can calculate the amount of compound interest payable using the following formula:
Principal amount × (1 + annual interest rate)^number of years interest is applied − principal amount = compound interest
Simple interest
If you borrowed $10,000 with a 5-year term and a simple interest rate of 3%, your interest payable over the entire course of the loan is $1,500:
$10,000 x 3% x 5 = $1,500
Compound interest
If you borrowed $10,000 with a 5-year term and an interest rate of 3% compounded annually, your interest payable over the entire course of the loan is $1,592.74:
$10,000 x (1 + 3%)^(5) – $10,000 = $1,592.74
Annual percentage rate (APR)
The annual percentage rate is the amount of interest charged to borrowers expressed as a percentage for a whole year. Unlike the interest rate, the APR captures additional costs of financing, such as fees. Typically, lenders advertise the APR because it is the most accurate value that reflects the borrowing cost.
Factor rate
Factor rates, sometimes referred to as buy rates, are specific to business financing. It isn’t common to see factor rates. They are most frequently used for high-risk lending products such as merchant cash advances or short-term business loans. Instead of expressing a factor rate as a percentage, lenders usually quote it as a decimal number. The value tends to fall between 1.1 and 1.5. You can calculate the cost of your loan using the following formula:
Factor rate x loan amount = loan cost
The cost of a factor rate business loan is fixed and does not change over time. Because financial products with a factor rate are generally higher risk, the financing cost is typically higher too.
Costs to consider besides the interest rate
Below are 9 fees you may encounter. Business loan fees vary among lenders, so you may not need to pay all of these.
Expect to pay: 2% to 7% of your loan amount.
Lenders charge origination fees to cover the costs of processing your loan application including verifying information, credit checks and administrative expenses. They typically take your origination fee directly out of your loan amount, so you’ll want to calculate how much you need to apply for to get the amount you want after the origination fee is subtracted.
Expect to pay: $1 to $3 per withdrawal.
If your loan is issued with a Visa or debit card, you may pay a fee for every transaction executed with your card, especially if you’re withdrawing from another bank’s ATM.
Expect to pay: $30 to $80 per outgoing transfer; incoming transfers may cost $10 to $20.
This fee is meant to cover the extra cost of sending a payment via wire transfer rather than direct debit.
Expect to pay: $5 to $25 or between 3% and 5% of the amount due.
Lenders usually charge a fee if a repayment is late, typically after a grace period of 10 to 15 days. Read the terms of your loan to learn about your lender’s policy on late payments.
Expect to pay: around $50 or between 3% and 5% of the amount due.
Lenders charge NSF fees if you set up autopay or otherwise authorized them to withdraw an amount from your account that is doesn’t have. It’s typically the same as your lender’s late fee.
Expect to pay: Cost varies widely.
If you settle the whole balance before the end of the loan term or make early repayments, you may be charged fees. Prepayment penalties vary widely depending on your loan type and lender. They can come as a flat fee, a percentage of the amount you owe or change depending on how much is left in your loan term. But don’t worry — some lenders don’t charge prepayment fees.
Expect to pay: 2% registration fee, plus the lender may charge any fees that they would typically charge for a conventional loan of the same amount.
The Canada Small Business Financing Program (CSBFP) requires all lenders to pay a registration fee over and above the fees charged by their participating lending institution.
Expect to pay between $50 and $100 per month for a loan under $250,000.
Lenders may charge a monthly fee to cover the cost of monitoring and administering the business loan. The administration fee depends on the size of the business loan.
To finalize a loan application, you may have to pay for credit reports, audits or disbursements, among other things.
Understanding amortization
Business loans are often amortized, meaning that you pay the same amount each month. Many have a monthly amortization, meaning that you make a repayment on interest and fees each month.
But some come with weekly, bi-weekly or even daily amortization. Ask your lender for an amortization schedule to plan for repayments before signing the business loan agreement.
Unexpected business loan costs
Getting a business loan can also come with non-monetary costs.
Time. The amount of time you spend meeting with lenders, filling out applications and corresponding adds up.
Opportunity cost. Another non-monetary cost is the opportunity cost of pursuing one business loan over another. For example, banks usually have the lowest interest rates, but they are much slower to approve business loans. Online lenders usually have higher interest rates, but they are much faster to approve loans. If you decide to wait weeks or months to get approved for a bank business loan, you may save on interest, but you may lose profit during that time, especially if you have immediate use for the funds.
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Bottom line
When it comes to businesses and interest rates, understanding the application process and how interest rates work will help when making a financing decision for your business. To learn more about how business loans work, check out our guide.
Frequently asked questions
Are personal loan rates lower rates than business loan interest rates?
They can be, though it depends on your personal financial situation. If you have poor credit, a personal loan might come with a higher rate than a business loan — especially if you have other business partners who can qualify for the loan.
What is the average term for a small business loan?
It depends on the type of loan you’re applying for. Term loans tend to come with terms ranging from 1 to 5 years, but can sometimes extend up to 7 or 10 years. Short-term loans can come with terms ranging from 3 to 24 months.
Why is the APR so important?
The Annual Percentage Rate (APR) of your business loan is how you can see the true cost of the loan. It reflects the yearly cost of having a loan and takes into account the principal amount of the loan plus accrued interest and fees. Because of this, the APR allows you to analyze multiple loans and find one that balances cost and usefulness for your business.
What is the prime rate and how do lenders use it?
The prime rate is based on the overnight lending rate set by the Bank of Canada, which is the rate banks use to lend to other banks over a 24-hour period. Lenders use this rate to determine the interest rate attached to your loan. The better your credit and the larger your business, the more likely you’ll be offered interest closer to the prime rate.
Some loans with variable interest rates will calculate changes based off the prime rate. This may be done monthly, quarterly or annually depending on your lender and the terms of your loan.
How do lenders set interest rate?
Lenders set their base rates by the market rate, which may be offered with little markup to established businesses with low risk of default. If your business is still developing, you may have to sign a personal guarantee or provide collateral to secure your loan. This will lower your risk, which will then lower your interest rate.
Veronica Ott was a writer at Finder. She's written for numerous finance and business websites including Loans Canada, Borrowell and Fresh Start Finance. She previously worked as a professional chartered accountant in the private equity and advertising industries.
2M7 provides up to 125% of your average monthly sales in a merchant cash advance that you’ll repay incrementally based on your daily sales transactions.
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