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What types of small business loans are available 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.

8 types of business loans in Canada

Here’s a break down of the the most common types of business loans available for Canadian businesses:

• Term loans. Borrow a lump sum and pay it back plus interest and fees in fixed installments, usually between 5 and 20 years.
• Lines of credit. Get access to a specific amount of funds, which your business can withdrawal from as needed.
• Canada Small Business Financing Program (CSBFP) loan. Apply for a term loan, which is partly backed by a government guarantee.
• Equipment financing. Borrow up to 100% of your equipment cost and pay it back in installments, plus interest and fees. Your equipment is often used as collateral.
• Vehicle financing. Take out a fixed-term loan to cover the cost of new vehicles for business use, usually using the vehicles as collateral.
• Invoice financing. Take out a term loan backed by your business’s unpaid invoices.
• Invoice factoring. Sell your business’s unpaid invoices to a third party at a discount.
• Merchant cash advances. Get an advance on your future sales and pay it back plus a fee with a percentage of your daily revenue.

Read our full guide to the 8 types of business loans

How do business loans work?

Business loans provide your company with funding for any business-related expenses – like growth, filling in cashflow 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.

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.

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.

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

Compare banks for small business loans

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.

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

Credit union business loans

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.

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What to consider before applying for a business loan

Before applying for a business loan, you should make a clear plan for how you’re going to spend the money you borrow. You should also make a budget and a repayment plan to ensure you can afford to pay your balance back plus interest. This is especially true if you plan to borrow large amounts, your revenue is seasonal or you already have large outstanding debts. Consider the pros and cons of getting small business loans below:

How to get online business loans in 6 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.

What documents will I need to apply for a business loan?

It varies by lender. Online lenders typically ask to see fewer documents than banks, while younger businesses are often required to provide more documents than older ones. Still there are some common documents almost every lender requests, including:

• 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 2 valid pieces of identification, like a driver’s license and passport.
• Business bank statements. Lenders often like to look at the past 2 to 6 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 breaks down your company’s net revenue and helps your lender verify how much debt your business can afford to take on.

The 3 main eligibility criteria for business loans in Canada

Lenders use a variety of criteria to see if you fit their lending profile when assessing your business loan application. These include the following:

• Business age. You’re more likely to be approved for a loan if your business has been in operation for 2 or more years. 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).

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.

Read our guide to alternative business loans

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.

• 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.