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Compare business loan interest rates in Canada
Compare small business loan interest rates from a selection of lenders.
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 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.
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:
- Good or excellent personal credit
- 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.
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 determine the amount of simple interest payable using the following formula:
Principal x interest rate x loan term (in years) = simple interest
Compound interest accumulates interest throughout the term of the loan. This means you pay interest on your interest. Interest can be compounded on an annual, monthly, weekly or daily basis or on any other defined period of time. The shorter the time period, the more interest is compounded and the more you pay. You can determine the amount of compound interest payable using the following formula:
Principal amount x (1 + annual interest rate)^number of years interest is applied – principal amount = compound interest
Here’s a short example of simple and compound 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
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 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.
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 3.26%. This includes both mortgage and non-mortgage business loans.
Costs to consider besides the interest rate
Business loan interest rates are easy to compare but don’t forget about business loan fees. Here are some of the common fees you might incur when taking out a business loan.
|Origination fee||2% to 7% of the loan amount||When your lender disburses your funds, this fee is either added to your loan amount or deducted from your funds before you receive them.|
|Referral fee||Varies||If you take out a loan by using a connection service or third party organization.|
|Canadian Small Business Financing Program (CSBFP) registration fee||2% of the total amount of the loan||When your lender disburses your funds, this fee is either added to your loan amount or deducted from your funds before you receive them.|
|Late fee||Either between $5 to $25 or 3% to 5% of your loan amount||This fee applies if you miss a payment. Many lenders have a grace period before charging the fee.|
|Insufficient funds fee||Around $50||This fee applies whenever your business’s bank account doesn’t have enough funds to cover the payment.|
What to consider other than interest rates and fees
On top of fees, there are other factors you might want to consider before agreeing to a business loan:
- Down payments. Business loan lenders may require you to make a down payment. This is common for equipment loans, mortgages and vehicle loans. Keep an eye out for loan-to-value ratios when shopping for financial products. This ratio is the maximum amount a lender is willing to contribute towards financing. The remainder is the minimum you must put down.
- Personal guarantee. Unsecured business loans usually require a personal guarantee from the business owners. A personal guarantee means that you agree to repay the loan if your business cannot afford to repay it. A lien may be put on your personal assets as well. Accepting a personal guarantee can result in more favourable loan conditions, but it’s a greater risk to you.
- Loan term. If you’re getting a loan with interest, how long you have to pay back your loan affects your total loan cost just as much as the APR. Longer terms can make your loan more expensive but lower your monthly repayments. To keep down the total cost, try to avoid unnecessarily long loan terms.
- Business objectives. At the end of the day, you need to consider if the loan will achieve your business objectives. It’s easy to hone in on details and forget about the bigger picture.
Find a small business loan for you
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 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.
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