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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.
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.
Each type of business loan offers different costs, terms and benefits.
| Loan type | Best for | How it works | Typical loan amount | Typical APR |
|---|---|---|---|---|
| Term loan | 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. | $1,000 to $1.25 million | 4% to 36% |
| Line of credit | Access to working capital to cover ongoing costs. | Qualify for access to a specific amount of funds, which your business draws from when needed. | $5,000 to $1.25 million | 7% to 36% |
| CSBFP loan | Small business or startups that need capital to purchase land or buildings and do renovations. | These are Government backed loans offered by banks or other financial institutions. Your business must make under $10 million in revenue annually to be eligible for this program. | Up to $1 million | Prime + 3%, plus a 2% registration fee |
| Equipment financing | Businesses that need to buy new equipment. | Borrow up to 100% of your equipment cost and pay it back in installments plus interest and fees. Your equipment is used as collateral to secure the loan. | $5,000 to $1.25 million | 7% to 36% |
| Vehicle financing | Businesses that need to buy a car, truck or other type of vehicle. | Take out a fixed-term loan to cover the cost of new vehicles for business use, using the vehicles as collateral. | $5,000 to $1.25 million | 7% to 36% |
| Invoice factoring | Businesses that rely on invoices from government agencies or other companies. | Sell your business’s unpaid invoices to a third party at a discount. | 80% to 90% of invoice value | 2% to 4.5% of invoice value |
| Invoice financing | Businesses that rely on invoices from government agencies or other companies. | Take out a term loan backed by your business’s unpaid invoices as collateral. | 80% to 90% of invoice value | 2% to 4.5% of invoice value |
| Merchant cash advance | 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 | Varies |
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.
Ask yourself the following questions when comparing business loan providers:
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:
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.
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.
It depends on your lender, loan type and how much you want to borrow.
Most loans require you to meet minimum requirements that can include:
Other common business loan 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.
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:
Don’t think you’ll qualify for a business loan? Explore alternative options for borrowing.
| Alternative | Best for | How it works |
|---|---|---|
| Personal loan | 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. |
| Business grants | 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. |
| Investor financing | 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. |
| Crowdfunding | 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.
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.
Working capital. Money used to cover the cost of a business’s day-to-day operations.
