Business loans aren’t what they used to be a few decades ago. While you can still walk into a bank and fill out an application for a small business loan, other options may be faster and easier to apply for.
In our guide, we take you through the different business loan types, potential costs and what you can expect from the online application process.
SharpShooter Funding Business Loan
Min. Loan Amount: $1,000
Max. Loan Amount: $300,000
Interest Rate: Starting at 5.49%
Requirements: Annual business revenue of $60,000
Borrow up to $300,000
Online loan application
SharpShooter Funding Business Loan
SharpShooter Funding offers loans up to $300,000 for small business owners who have been business for at least 100 days and can show a minimum of $5,000 in monthly deposits ($60,000/year).
A business loan is money that your business borrows to cover expenses it can’t afford up front. You repay what you borrow over a period of time, typically several months or years. How this works depends on the type of loan you’re interested in and your lender.
Most loans charge interest and fees, which is expressed as the business loan’s annual percentage rate (APR). Some require your business to put up collateral, though not all do. You can also find business loans with monthly, weekly and sometimes even daily repayments.
Small business loan types
Each type of business loan offers different costs, terms and benefits.
How it works
Typical loan amount
Covering a large one-time expense.
Borrow a lump sum and pay it back plus interest and fees in fixed installments, usually over three months to 20 years. Depending on the borrowed amount, it may be a secured loan.
Retail and ecommerce businesses that rely on consumer sales.
Get an advance on your future sales and pay it back with a percentage of daily sales, and sometimes a fee.
$10,000 to $300,000
How to get a business loan in 7 steps
Small business loans work by giving your business access to funds to expand or cover day-to-day costs. Here’s what you can expect to happen when you apply for a small business loan.
The first step to getting a business loan is knowing what your business needs funds for in order to grow or stay afloat.
Is it generally short on working capital? Then a line of credit, invoice factoring or a merchant cash advance might be a good place to start. Need a fleet of vans? Look into vehicle loans.
Armed with this information, you can begin narrowing down lenders. On top of the loan type and amount, your business’s needs indicate what you need to prioritize.
If you need funds fast, you might want to skip banks and credit unions and go for an online lender. Don’t have time to compare lenders? Consider using a loan connection service or a broker.
You know what you’re looking for. Now it’s time to start comparing lenders.
Focus on the part of the loan that’s the most important to your business, such as speed or costs. Don’t rule out other factors, like the quality of customer experience.
To speed things up, make sure your business is eligible before you start thinking seriously about one particular lender. There tend to be more eligibility requirements for business loans than for personal loans.
After you’ve narrowed down your options to a handful of lenders, try to get pre-approved for a few before making a decision. General ranges of rates, loan amounts and terms give you a ballpark idea of what you might expect from a lender, while pre-approval provides a more accurate picture of what your business can expect.
Some online lenders let you get pre-approved through a quick form on their website. If you’re applying with a large bank, you might need to call its customer service team or visit your local branch in person for an estimate on rates.
Ask your lender about the documents and information you need to have on hand for your application. Typically, you’ll need at least a copy of your valid Government-issued ID, business bank statements and tax returns. You’ll also need to answer questions about your business’s annual and monthly revenue.
Having this information on hand can significantly cut down the time it takes to complete your application.
How this works depends on your lender. Some offer their entire application online, while others prefer to guide you through the application process.
To get a bank loan, you’ll typically need to meet in person at least once to complete your application.
Depending on your business and your lender, you might be asked to submit additional documentation. More involved business loan applications might involve a site visit from your lender or even an interview.
Make sure you understand the terms and conditions of your business loan before you sign any documents. If you don’t understand a clause or term, ask your lender — or better yet, a professional. That way, you won’t be hit with any surprises down the road.
Most term loans come with fixed monthly repayments, while other types of financing require weekly or even daily repayments.
To save time, consider signing up for automatic repayments. If your lender doesn’t charge early repayment penalties, see if you’re able to pay off your business loan early to save on interest and lower your business’s debt load.
How can I find the best loan for my business?
Ask yourself the following questions when comparing business loan providers:
Is my business eligible? Most lenders list basic eligibility requirements online. Otherwise, speak with a representative to learn if your business can qualify.
Can I borrow as much as I need? If your financing needs don’t fall into the lender’s range of loan amounts, you might want to look at different loans.
What’s the overall cost? With term loans, the fastest way to compare business loans is to look at the APR — as long as the lenders offer similar loan terms.
How long can I take to pay it back? If you’re applying for a loan with interest, your loan term affects both your immediate and long-term costs. Shorter term loans give your business higher repayments but lower overall costs.
Where can I get a small business loan?
It used to be that banks and credit unions were your two main options for business loans. That’s no longer the case. Let’s take a look at some common business loan providers.
Borrowing online is significantly easier than borrowing from a bank: There’s less paperwork and a shorter application.
It’s also often easier to qualify for an online business loan as a small business, since banks are less likely to take the risk.
Here are a few types of loan providers you might find online:
Direct lenders fund your loan themselves and often handle all aspects of the application process in-house. They’re the closest to a bank or credit union loan: Your information stays in one place, and it’s easy to know how to get in touch.
Relatively new to Canada but growing in popularity, P2P platforms work a lot like direct lenders. The difference is that instead of funding the loan itself, it connects borrowers with investors who provide the money. The platform sets the terms and conditions and is your point of contact if you have questions about the process.
These marketplaces are also called loan connection services or brokers. With these providers, you complete an application on their website to get pre-approved for multiple business loan offers at once. They can be particularly helpful to business owners that don’t have time to get pre-approval for multiple lenders separately or have trouble finding approval for a loan.
Most online marketplaces are free for borrowers to use because they rely on a pay-per-lead model from their partner lenders. You’re limited to its network of partner lenders, which means you might not get connected with the absolute best option out there for your business needs.
Online marketplace users also often complain about getting lots of calls from interested lenders, even after they’ve taken out a loan.
Banks and credit unions
Some business owners are more comfortable borrowing from a big bank with a name they recognize, even if bank loans are more difficult to qualify for. This kind of loan could be a good option if your business has been around for years, makes at least $1 million in annual revenue and needs funds for a large expense — say, over $250,000. You’ll also face higher personal credit requirements to qualify.
Through the Canada Small Business Financing Program (CSBFP), you can apply for a loan if your startup or small business grosses less than $10 million in revenue annually. These loans can be applied for through a chartered bank, credit union or a caisse populaire and are at least 75% backed by the Government of Canada, which makes them less risky for banks. That said, your financial institution will be the one to determine whether they approve you for the funding or not. You’ll need to meet certain criteria to be eligible for the loan, as well as use the loan for specific purposes. You can receive up to $1 million in funding at a competitive interest rate, however you will have to pay a 2% registration fee.
Credit unions are nonprofits, so you might think they can afford to be more forgiving when it comes to loan amounts and eligibility. But credit unions actually reject more applicants than any other type of lender, since it’s often too risky for them. You’ll also need to become a member to be eligible, which adds an extra step to your application.
You probably won’t get your funds fast: Both bank and credit union loans tend to require more documents and require longer turnaround than your average online loan — sometimes weeks or even months longer.
Fixed-term loans — including general use, equipment and vehicle loans — come with interest and fees. Interest is a percentage of your loan balance that your lender applies daily, weekly or monthly, depending on your loan terms.
Term loans also often come with an origination fee, typically from 1% to 5% of the loan amount. Usually, it’s taken out of your funds before you get the money. So if your business qualifies for $10,000 with an origination fee of 2%, you’d receive only $9,800.
The APR is an expression of a term loan’s interest and fees. It’s the easiest way to understand how much your loan is going to cost you over time.
Other types of loan costs
Not every business loan comes with an APR. Invoice factoring, for instance, typically charges something called a discount fee, often 2% to 4.5% of the value of your invoices. It can be a fixed rate, but the longer your clients take to pay off a loan, the more you’ll likely pay.
With merchant cash advances, you’ll run into something called a factor rate, which is a number your lender multiples your loan amount by to come up with the amount you’re on the hook to pay back.
Alternative business loans — for high-risk industries or bad credit owners — come with a pricing scheme that works like a factor rate, though lenders often express it as cents on the dollar.
The way you’re charged will likely depend on the type of loan you take out, the provider in question and other factors like your credit score and business income.
Five reasons why business loan applications are rejected
Weak business performance
Not enough collateral
Low credit score
Already carrying too much debt
Short credit history
Don’t meet the eligibility requirements
Most of these reasons are related to your business’s ability to repay. To a lender, weak business performance might mean that you’re more likely to default on a loan. If your business already has several debt obligations, lenders might be concerned about your ability to take on more regular costs. If you want to apply for a secured loan, your business needs to have business assets worth enough to cover the cost of your loan balance, should your business default.
The other two reasons have to do with the business owner’s personal credit history. A low credit score could indicate to a lender that you’ve had trouble paying off debt in the past. A short credit history might imply that you don’t have much experience handling credit — which is also seen as a risk.
Can I get a loan to start a business?
Yes, but it won’t be easy to get a traditional business loan. Entrepreneurs looking for funding to cover startup costs might need to get creative. Even if you’ve already opened your business’s doors, you might not find many loan options if its younger than six months.
Your best bet is to contact a service or provider that works with start-up businesses. Entrepreneurship and start-ups are important to the Canadian economy, so there are a few resources out there, however they tend to be unique to the province or territory that you reside in.
It depends on your lender and your business’s financials. Online lenders typically ask to see fewer documents than banks do. Younger businesses often need to provide more documents than businesses that have been around the block a few times.
Common documents that business lenders may ask to see include:
Government-issued ID. The identification of all applicants must be verified. Typically, lenders do this by requesting to see a driver’s license, passport or other official ID.
Business bank statements. Lenders often like to look at the past two to six months of your business’s most recent bank statements to get an idea of its current cash flow.
Tax returns. Your taxes give lenders an idea of how much your business makes annually. Some lenders only ask for business tax returns, while others like to see your personal return as well.
Business plan. More common with banks and credit unions, some online lenders ask for a business plan — or at least financial projections.
Profit and loss statement. This breaks down your company’s net revenue and helps your lender verify how much debt your business can afford to take on.
Business loan alternatives
Don’t think you’ll qualify for a business loan? Explore alternative options for borrowing.
How it works
Entrepreneurs and business owners with good credit and high income
Take out a term loan in your name based on your personal creditworthiness. Remember that you will be personally responsible to pay back a personal loan.
Nonprofits, tech industry businesses owned by women or minorities, businesses located in economically disadvantaged areas
Complete an application for funding from the government or a private organization. You don’t have to pay it back, but grants tend to be smaller than loans and more difficult to qualify for.
Startups and potentially highly profitable businesses with a plan to expand
Sell a percentage of your business’s ownership — it’s equity — to venture capitalists in exchange for upfront financing.
Businesses and entrepreneurs with a strong social media presence
Set up a campaign asking for small donations from your friends, family and social network. Many platforms take a percentage of the funds you raise as a fee.
Friends and family
Business owners and entrepreneurs with friends and family interested in investing
Set up an informal agreement or use services like Loanable to make a formal loan contract outlining the terms and conditions for paying back a family loan.
Accounts receivable. Money that a company is owed by its clients, usually in the form of outstanding invoices. This counts as an asset.
Accounts payable. Money that a company owes a supplier, vendor or another source when it purchased goods or services on credit. These count as a liability.
Asset. Anything of value that a person or business owns or buys, as well as the money they are owed (accounts receivable).
Bridge financing. A high-interest short-term loan, usually two weeks to three years to cover gaps in longer-term financing. Typically used to cover the initial costs of a project or change to a business that hasn’t yet been finalized.
Business assets. Generally, business assets refer to property or equipment that a business owns, including inventory, real estate, securities and accounts receivable.
Daily holdback. When a creditor takes a percentage of a business’s daily sales as repayment for a cash advance.
Cash flow. The amount of money going into a business, minus the amount of money going out. Positive cash flow means that you have enough money to cover your expenses. When you get into negative territory, you might need a working capital loan to keep afloat.
Debt-service coverage ratio (DSCR). Also, debt coverage ratio. A business’s cash flow (usually the net operating income) divided by debt service payments (loan repayments and leases). Used by creditors to determine how able a business is to repay a loan (similar to a debt-to-income ratio).
Gross profit. The total amount a business made, minus the cost of producing goods or delivering a service.
I to P
Lien. A legal agreement that allows a creditor to take certain assets if the borrower is unable to repay a loan. A form of collateral.
Microloan. A small loan — typically less than $35,000 — that can help cover small expenses when a business is getting off the ground.
Net income. The difference between how much a business makes and how much it costs to run.
Net operating income. The difference between a business’s profits and its expenses, taxes and interest.
Payback period. The estimated amount of time it will take for a business to repay a cash advance — similar to a loan term.
Personal guarantee. A promise to repay a loan if the business is unable to, usually backed by your personal assets.
Q to Z
Working capital. Money used to cover the cost of a business’s day-to-day operations.
Frequently asked questions about small business loans
It depends on the type of financing you’re looking for. Bank loans can be difficult to qualify for if you’re a young business or don’t have excellent credit. Online loans can have more relaxed eligibility requirements.
The most competitive rates still tend to go to businesses that have been around for a few years and whose owners have excellent personal credit.
Business loans are generally limited to covering legitimate business expenses. Most loans don’t have many more restrictions aside from that.
However, commercial, equipment and vehicle loans are designed to cover the cost of one particular item. You often can’t use part of your equipment vehicle loan for working capital — the same way you can’t use part of your mortgage to pay for a vacation.
Yes. It’s called an unsecured business loan. However, even many unsecured business loans require a personal guarantee from the business owner, which means that you’re responsible for covering the loan amount if your business fails.
This technically isn’t collateral, because it doesn’t name any specific assets. However, it’s a risk you’re taking on as a business owner.
The owner’s personal credit score can be an indication at predicting whether the business is a risk to lend to.
Many business loans — even unsecured loans — also require a personal guarantee from at least one business owner, meaning that you’re responsible for paying off the loan if your business defaults.
It might be possible, but there are not many options. If you have a partner who is a Canadian citizen or a permanent resident, you might have a better chance of qualifying for more competitive rates if you apply with them.
Emma Balmforth is a Producer at Finder. She is passionate about cryptocurrency, credit cards and loans, and enjoys helping people understand the often confusing world of finance. Emma has a degree in business and psychology from the University of Waterloo. She wants to help people make financial decisions that will benefit them now and in the future.
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