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Types of small business loans in Canada

There are several different types of business loans out there, each offering different terms and benefits. Which one is best for your business depends on its specific situation. For example, if cashflow is an issue, a merchant cash advance or invoice financing might be the way to go.

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Here’s a closer look at lenders providing business loans, including their product’s key features, loan types on offer, interest rates and eligibility requirements. The information below is checked regularly to ensure accuracy.

How do business loans work?

Business loans provide your company with funding for any business-related expenses – like growth, filling in cash flow gaps and covering other expenses. With a traditional small business loan in Canada, you can typically borrow from $5,000 to $5 million at a fixed or variable interest rate typically starting at around 5%.

You repay the funds, plus interest and fees, in monthly installments, often over 5 to 20 year terms. Some business loan providers require collateral, while others offer approval based on your creditworthiness, revenue and other factors.

How to compare features of small business loans

There are a number of factors that you should consider when applying for a business loan:

• Loan amounts. Some lenders offer relatively small loans while others will lend you up to $5 million if you qualify. Find the loan amount that best suits your needs at an interest rate you can afford.
• Interest rates. Rates vary depending on which lender you apply with. Rates run as low as 3% and as high as 30-40%, depending on the state of your credit score and other variables. Compare lenders to find the best rates for your unique situation. Learn more about business loan interest rates.
• Loan terms. Loan terms can range from 6 months to 20 years, based on how much you borrow. You’ll want to look for a term that gives you manageable repayments without charging you too much interest.
• Fees. Many small business loans come with hidden fees that can drive up the cost of your loan. Make sure you understand how much you’ll have to pay for application and origination fees as well as any ongoing annual or monthly fees.
• Repayment options. Some loans let you pay your balance back in regular installments while others take a portion of your monthly sales. Pick the option that makes the most sense for your financial situation.
• Cash availability. The majority of small business loans lend you a lump-sum cash payment that you then pay back in regular installments. That said, it might make more sense for you to take advantage of a business line of credit. This could be a better solution if you plan to borrow money for ongoing business expenses.

Where to get business loans

There are generally 3 main options where you could apply for business loans in Canada. Picking the right option for you will depend on your business needs, financial situation and preferences.

1. Online business loan providers

Online business loans are easier to get than bank business loans: There’s less paperwork and a shorter application. It’s now also easier to qualify for an online business loan as a small business.

Here’s a few types of loan providers you might find online:

• Direct online lenders. These lenders fund your loan themselves and often handle all aspects of the application process in-house.
• Peer-to-peer (p2p) platforms.These online platforms act as liaisons between borrowers and investor funding. The platform sets the terms and conditions and is your point of contact if you have questions about the process.
• Business loan brokers.Hiring a business loan broker gives you a chance to sit down in-person and discuss your options. You may have to pay a broker fee if the broker doesn’t make commission from the lender when you sign up.

Across the board, online lenders place less emphasis on your personal and business credit score compared to traditional lenders like banks and credit unions. Instead, online lenders focus on your business’s overall financial health, your monthly revenue and projected gains. Their aim is to determine whether you have the funds to keep up with loan repayments. If your business is new and doesn’t have established credit, you’re more likely to successfully secure a business loan via an online lender.

Best online business loan lenders in Canada

2. Bank business loans

Bank loans could be a good option for established businesses pulling in at least $1 million in annual revenue and need large amounts of funding — say, over $100,000. Bank loans are provided by Canada’s Big Five Banks and other major financial institutions. These loans often come with higher interest rates and have strict repayment requirements. In the majority of cases, you will need to apply for a business loan in person at a local branch compared to online applications via online lenders.

Providers include BMO, TD Bank, RBC, CIBC, Scotiabank, HSBC, Canadian Western Bank and National Bank.

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3. Credit union business loans

Credit unions provide small business loans that are a little bit more flexible than big bank loans. You’ll typically need to be signed up with the credit union you want to borrow from and you may need to have an established relationship with them to qualify. Keep in mind that credit union business loan amounts are often capped at $50,000. Credit unions may have more flexible repayment options and other benefits compared to banks.

Providers include Meridian, Servus, Vancity, Connect First, Conexus, First West, Steinbach, Alterna Savings and Coast Capital Savings.

Credit union business loans

Online business loans vs bank business loans

If you’re shopping for a business loan, you may find yourself deciding between an online lender and a bank. While the options are plentiful for either route, bank loans and online loans have some key differences, from the application process to eligibility requirements, interest rates and loan repayment terms.

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What are the interest rates for small business loans?

Unfortunately, there is no one-size-fits-all solution for business loan interest rates in Canada. Your interest rate will depend on a variety of factors, including your credit score, your loan type, your loan amount and the length of your loan.

Interest rates range from 4.96% right up to 29% with online lenders, while Canada’s major banks don’t disclose their interest rates on their websites. Instead, you’ll need to book an appointment and apply for a business loan in person if you decide to apply for a business loan with any of the big banks. As a general rule of thumb, banks offer lower interest rates compared to online lenders though.

If you want to qualify for a lower interest rate, you’ll need to make sure you have the following:

• 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 at least two 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. Read more about how to compare small business loan interest rates.

Small business loan calculator: calculate your monthly payments

What do lenders look for?

Preparation is the key to success if you’re applying for a business loan. Before you make your case to lenders, make sure you have all of your financial ducks in a row to put your best foot forward. It could be your business’s make-or-break moment to secure the funding you need. Here’s what you should keep in mind as you prepare your application:

• Business age

  You’re more likely to be approved for a loan if your business has been in operation for two or more years, although many online lenders will qualify you for a loan as long as you’ve been in business for six months. Startups and companies that have only been operational for a few months may need to search for loans that are targeted towards new businesses.

• Minimum credit score

  You’ll typically be required to have a minimum credit score of 640 to qualify for most small business loans. That said, you may be able to get a loan with a lower score if you’re willing to accept higher rates or able to put up an asset such as your home or vehicle as collateral.

• Monthly or annual revenue

  Your business revenue will be a key factor that lenders will assess to decide how much you can borrow. The higher your revenue, the more likely you are to be approved for higher loan amounts (unless your revenue is already allocated to other debts). Most lenders will stipulate the minimum revenue you need to pull in each month or each year to qualify for a loan.

• Collateral

  Assets such as company equipment, vehicles and property are helpful, especially if you’re willing to use these company resources as insurance on your loan. You can secure lower interest rates because your lender has collateral to fall back on if you default on your loan.

• Commitment

  Lenders will take into consideration how much of your own cash you’ve poured into your business. The more skin you throw into the game, the more you’ll show lenders you’re committed to your business. Showcasing your company vision via a detailed business plan can also help to show your lender what your long-term goals are, how you plan on achieving them and how this funding will help.

To help pull your loan together, you’ll typically be asked for some of these common documents:

• Government-issued ID. You’ll need to be a Canadian citizen or a permanent resident with a valid Canadian address to apply. Typically, lenders verify this by requesting to see two valid pieces of identification, like a driver’s licence and passport.
• 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 also ask for a business plan – or at least financial projections.
• Profit and loss statement. Also called an income statement, your P&L statement breaks down your company’s net revenue and helps your lender verify how much debt your business can afford to take on.

How to get online business loans in six steps

Here’s what you can expect to happen when you apply for a small business loan in Canada.

1. Know what your business needs.
   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 financing. With this information, you can begin narrowing down lenders.
2. Compare lenders.
   You know what you’re looking for. Now it’s time to start comparing business lenders. Ask yourself questions about the loan amount, cost, repayments and the company’s reputation while narrowing down your choices.
3. Get prequalified.
   After you’ve narrowed down your options to a handful of lenders, prequalify for a few before making a decision. Most online lenders in Canada offer prequalification through a quick form on their website. Large banks might need you to to call customer service or visit a local branch in person.
4. Submit requested documentation.
   After preliminary approval, the lender will likely need to verify your documents. Some lenders ask for a long list of documents and information. Others don’t require any paperwork.
5. Complete the application.
   You’ll typically be assigned an account manager who can guide you through the full process. 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.
6. Review and sign your documents.
   Make sure you understand the terms and conditions of your business loan before you sign the business loan agreement. If you don’t understand a clause or term, ask your lender — or better yet, a lawyer. That way, you won’t be hit with any surprises down the road.

How long does it take to qualify for a small business loan?

The application process for a small business loan can be seamless as long as you have a clean application with all of the relevant information and documentation prepared. If your lender needs to circle back with you to verify information or to ask follow up questions, this could delay progress.

Where you apply for your loan also makes a key difference. Some online and traditional lenders may approve you in a matter of hours or days. Other lenders may need a few weeks to go through your application details and all of your supporting documents. An easy way to find out how long it takes is to contact your lender directly to find out about processing times.

Pros and cons of small business loans

Small business loans in Canada for bad credit

If your personal credit is less-than-perfect, don’t be dissuaded from applying for a business loan. Small business loans in Canada for bad credit are still readily available.

Traditional lenders like banks and credit unions may make it harder to qualify for a business loan, but alternative financial lenders, especially in the online space, tend to have more relaxed criteria. Instead of shining a light on your credit score, they may qualify you based on other criteria, such as your monthly revenue and assets you’re willing to put up as collateral to secure your loan. Ultimately, if you can prove you can manage your loan repayments, these alternative lenders are more likely to grant you a business loan.

Assets, such as business equipment, vehicles, property and funds in savings accounts, can all be used as collateral for a secured business loan. Just be careful: if you can’t make your repayments, your lender can sell your assets to cover what you owe.

What are some business loan alternatives?

If you’re having trouble getting approved for a business loan, or you don’t meet the basic eligibility requirements, consider these alternatives:

• Crowdfunding.Crowdfunding is a method where you raise money online for a project or product. Typically people give you money in small increments. Friends, family and even strangers can contribute to help you reach your total goal. Based on the type of crowdfunding you use, you’ll offer donors something in exchange for their money.
• Credit cards.Business credit cards may be the right option if you only need to borrow a small amount. Credit cards can typically come with higher interest rates than a secured business loan, so only use this option for small purchases that you’re sure you can pay off quickly.
• Personal loans. Personal loans can typically be used for any legitimate reason, including financing a business. However, you should consider that your name – not your business’ name – is attached to the loan. So you are personally liable for paying back the loan in full, regardless of whether it’s from your personal or business account.
• Equity investors. With this method, investors give you money in exchange for equity or partial ownership of the company. Small businesses can get an equity investment through a venture capital firm or an angel investor. While you won’t have to pay back any of the money you receive from an investor, you will have to share profits and decision-making power with them as your company grows.
• Friends and families. You can ask family and friends for contributions if they have enough liquid capital to finance you. Just be aware that borrowing from friends and family can create tension in your relationships, so it’s important to have a solid repayment plan in place to keep both of you on the same page.

Bottom line

Small business loans can offer competitive advantages over personal loans in some cases. Benefits can include lower rates, longer terms, higher financing amounts and less personal liability. Taking out a business loan may be a good fit for you if you have a well-established business that makes a significant amount of revenue. You may want to choose something else if you’re looking to start up a business or you would like to borrow money for personal use.

FAQs about business loans in Canada

• How hard is it to get a small business loan?

  It depends on the type of financing you’re looking for. Bank loans can be difficult to qualify for if you have a young business or don’t have excellent credit. Online loans can have more relaxed eligibility requirements, but the most competitive rates still tend to go to businesses that have been around a few years and whose owners have excellent personal credit.

• How long will it take to process my application?

  That depends on your lender. Some lenders may approve you in a matter of hours or days. Other lenders may need a few weeks to go through your application details and all of your supporting documents. An easy way to find out how long it takes is to contact your lender directly to find out about processing times.

• How do I refinance a business loan?

  Refinancing your business loan comes in different shapes and sizes. Your options include extending the terms of your current loan by another 5 to 10 years, applying for a brand new loan to pay off existing debts or choosing a different loan product altogether, such as a business line of credit. Keep in mind that if you’re considering refinancing your loan, try to ensure your business is in better financial shape or you have new assets. With more revenue or assets under your business’s belt, you’ll be able to secure better terms for your refinancing.

• Do I need to have a business credit score to apply?

  While it can help to have a well-established business credit score, you may be able to get by with just your personal score. Just be aware that you may be required to sign a personal guarantee for your business loan if you use your personal credit score to qualify. This will make you personally obligated to repay your loan if you default on payments.

• Why do lenders care about my personal credit score?

  Business credit scores aren’t as widely used. The owner’s personal credit score could be better 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.

• Can I get a business loan without collateral?

  Definitely! If you don’t have any assets to put up or you just don’t want to use them as collateral to secure your loan, you can apply for an unsecured business loan. This type of loan will use your credit score to determine if you’re eligible for financing. This means your credit score will suffer if you don’t make your repayments on time.