Business borrowing guide stage 1: Loans for startups

Need a startup business loan? Learn how and where to apply to set your business plan in motion.

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If you’re thinking about starting a new business, you’re not alone. In recent years, cities across Canada have become hubs for startups, attracting talent from near and far. While there’s plenty of creativity going around, not all startups make it past their first few years. One of the biggest problem startups tend to face is not having access to adequate funds for their business plans.

You can get funding for a startup in a variety of different ways, and picking the right kind of loan to get your business going can be a daunting process. This guide gives you insight into your options, helping you to pick the best one for your needs.

Can I get a business loan as a startup?

Yes you can, although it can be difficult to get approved since your business hasn’t generated much revenue yet. Most lenders have minimum monthly revenue requirements as well as business age requirements, however there are more and more lenders offering loans to startups each year. You will likely need to turn to a nontraditional lender, since banks rarely offer loans to startups.

How does a startup loan work?

Startup loans work like almost any other business loan: Your business borrows money, then repays it plus interest and fees over a set period of time.

Generally, what sets startup loans apart is the eligibility criteria and application process. Since your business isn’t off the ground yet, your lender doesn’t have much to go by other than your personal credit and business plan. Both of these need to be strong to qualify for most startup loans.

While applying for a business startup loan does not take much time, it can take up to a month or more for the lender to process your application and disburse your loan funds.

11 ways to finance a startup

Taking out a business loan isn’t the only way to cover the costs of your new business. In fact, it might not even be the best option for your needs. Before you take out a loan, consider all of your options.

1. Canada Small Business Financing Program (CSBFP)

The Canada Small Business Financing Program offers loans to startups and small businesses with annual revenues of less than $10 million. At least 75% backed by the Government of Canada, these loans are provided through banks or other financial institutions.

While you will need to meet certain eligibility criteria, these loans can be used for a variety of reasons including purchasing or improving land or buildings, doing renovations to a property, or purchasing new or improving existing equipment. To learn more, you’ll need to speak to your bank or financial institution and present a business plan.

2. Unsecured business loans

An unsecured business loan is a business loan that doesn’t require any collateral. These can be hard to come by if you haven’t opened your business’s door — you’ll have to find a provider that’s willing to work with startups. It can also be expensive, since lenders tend to see startups as high risk.

You won’t risk losing any of your business’s assets if it folds and can’t pay back the loan, however you could still lose some of your personal assets if the lender requires a personal guarantee.

3. Secured business loans

A secured business loan is a loan backed by collateral, whether it’s a business or personal asset. These loans can be easier to come by as a startup, since the collateral offsets the risk for the lender. They also tend to have more favourable interest rates and terms than unsecured business loans. However, you could lose your collateral if you can’t make your repayments.

Compare secured business loans

4. Microloans

This small-dollar financing option is available to all types of businesses, including startups. These small loans are designed to help you cover the little things when you’re just getting on your feet like buying office supplies or stocking up on your first set of inventory. These loans typically start around $1,000 and come with shorter terms than your typical unsecured loan, but they tend to have higher interest rates.

5. Personal loans

If you have strong personal credit and a steady source of money coming in, a personal loan could be a potential option over a business loan when you want to start a business. Your lack of business experience won’t hurt your application and you may find the eligibility requirements easier to meet. However, personal loans rarely go above $35,000 or come with terms longer than ten years. In other words, it might not be able to cover all of your startup costs.

6. Equity investments

One of the more common ways to fund a startup is to take on investors in exchange for equity, or partial ownership of the company. Typically, small businesses can get an equity investment through a venture capital firm or an angel investor.

There’s no limit to how much money you can raise through this method — aside from how much your investors think your startup is worth. While you won’t have to pay back any of the money you receive from an investor, you could lose partial control of your company since you’ll often need to offer up a stake in the company to these types of investors.

7. Crowdfunding

Entrepreneurs that have an easily-pitchable idea might want to also look into equity or rewards-based crowdfunding. With equity crowdfunding, your company starts an online campaign to get funding from multiple investors in exchange for partial ownership. With rewards-based crowdfunding, your business offers prizes in exchange for donations. Much like a personal loan, crowdfunding might not cover all of your startup costs, but could be great for funding a project.

8. Business grants

Startups with a mission — especially nonprofits — might want to look into business grants to get off the ground. Like an investment, you don’t have to repay a grant. However, they can be highly competitive and require a lot of work to apply for. They also typically don’t get much higher than around $15,000, so your business might not be able to cover all of its startup costs with a grant only.

9. Credit cards

A credit card can be a great way to cover smaller expenses and manage your company’s spending, since multiple employees can have cards from the same account. Some business credit cards have low annual fees and competitive interest rates and are startup-friendly, making it a viable option for a startup business.

10. Business incubators

Business incubators are designed to help startup businesses get off the ground. Offering up a variety of services including free office space, training programs and more, you could potentially take advantage of the many services offered in order to save money in some areas of your business. Not only can you save on office space and training costs, you could potentially benefit from speeding up your business’s growth and success.

11. Friend and family loans

Borrowing from your friends and family is sometimes the easiest way to get startup funding — if they believe in your business plan. Borrowing money from friends and family can be a surefire way to damage a relationship if you are unable to pay it back. You can, however, use a service like LoanWell to whip together a legally binding contract with interest fees and late penalties. This can help keep your repayments and your relationships on track.

Do banks lend to startups?

Usually no, since the risk is high and they tend to have much stricter eligibility requirements in order to let individuals or businesses borrow money. However, through the Canada Small Business Financing Program, loans are offered to startups and small businesses via banks and other financial providers since they’re at least 75% backed by the Government of Canada – which reduces the risk.

What’s more, if you decide to go the personal loan route, you should be able to turn to banks for funding.

How do I find the right loan for my startup?

Consider the following features when comparing business startup loans:

  • Interest rate. Even a seemingly small difference in percentage can have a big effect on how much you end up paying as interest, especially if you borrow a large sum over a considerable period of time. To get an accurate picture of how much the loan will cost you, look at the APR, which includes both the interest rate and the fees.
  • Eligibility criteria. Not all providers of business loans for startups have the same eligibility requirements. Make sure that you meet the criteria before you apply.
  • Turnaround time. Startup loans typically take longer to process than personal loans, with some lenders taking up to a month or even longer. That said, some lenders can have the funds to you within a few business days. If you need money in a hurry, consider other forms of credit, such as a personal loan.
  • Collateral. Many startup loans require you to provide some form of collateral. This can be through equity in your home or in the equipment or vehicles you own as part of your business. You can even get a business loan to purchase new equipment where the equipment itself acts as collateral.
  • Loan amounts. You’ll need to have a clear idea of your startup costs before you apply for a loan to avoid borrowing too much or too little.

Do I qualify for a business startup loan?

Eligibility requirements tend to vary between lenders. However, most focus on the entrepreneur’s history of paying off personal debt. Typically, you must have:

  • Good credit. Many providers will be looking for a personal credit score of 650 or higher.
  • No recent bankruptcies. In addition to looking at your credit score, startup lenders typically also look at your credit report.
  • No recent delinquencies. If you’ve been late paying off debt, that could also hurt your chances of getting a startup loan.
  • A strong business plan. Since your business doesn’t have a track record to back itself up, your business plan is often the only place where you get to make a case for yourself.

How to estimate the cost of starting a new business

You won’t know how much you need to borrow until you calculate how much it’s going to cost to start your business. Here’s how to do it in four steps:

Step 1: Calculate startup expenses

These are one-time costs for things that you will not own long-term that come with starting a new business before the official launch. Expenses usually include:

  • Legal fees. Licensing, trademarking and the cost of setting up your business fall under this umbrella.
  • Insurance. For real estate, inventory, equipment, vehicles or anything else that you need to cover before launch day.
  • Rent. Include first month’s rent plus the security deposit when calculating this cost.
  • Brand design. Paying any contractors for website and logo design.
  • Payroll expenses. Did anyone do work for your business before opening? That’s a startup expense. Common startup payroll expenses include graphic design, consultant and legal fees.
  • Website domain fees. Getting a domain that makes sense for your business isn’t always cheap, but it could be vital to attracting customers.
  • Office supplies and computers. Purchasing equipment to run your business could run up a costly bill.
  • Training. Take any classes or workshops on how to start a business? That counts.

Step 2: Add startup assets

Assets are things that you will have for a long time, like chairs, equipment and even intellectual property.

  • Inventory. Nonperishable inventory can typically count as an asset — though not always.
  • Office furniture. Chairs and desks count as assets.
  • Improvements. Renting an office you plan to fix up? Those costs might seem like expenses but are counted as a business assets.
  • Equipment. Need any machinery for your business besides computers? Most equipment is typically an asset.
  • Land. Add how much you paid for your land when you bought it, not its current value.

Step 3: Estimate recurring costs

What’s the bare minimum you’re going to need to keep your business afloat each month? You might need help paying for important factors like these:

  • Rent. How much you pay in rent for your office, storefront or any other real estate.
  • Utilities. Electricity, water, internet and any other monthly bills involved with keeping your business spaces running.
  • Payroll. The combined monthly salaries of all employees, plus estimated salaries for any freelancers.
  • Inventory. How much money does it cost to purchase, process, store, distribute (or do anything else to) your inventory?
  • Marketing. Include all advertising expenses with the exception of salaries.

Step 4: Add all three totals together.

This is the approximate cost to get your startup off the ground. You probably won’t need a loan to cover all of these expenses. Subtract any funds or expenses you’ve already got — like savings and office supplies you brought from home — to calculate how much financing you need.

How to apply for a startup loan

Once you know how much you need to borrow and have shopped around for lenders, you’re ready to apply. To speed up the application process, ask your lender what documents and information you’ll need before you begin completing your application. Many ask to see financial projections, a business plan and your personal credit report.

Next, follow your lender’s instructions to complete the application. Many allow you to apply online, though for business startup loans you might need to speak with a loan specialist first to make sure your business is a good fit.

Startup loans can take longer to process than other types of business financing because lenders consider it to be more of a risk. They also aren’t able to rely on the data they might otherwise use to evaluate your business’s creditworthiness like time in business and revenue, which can slow down the time it takes to underwrite your application.

Benefits and drawbacks of startup loans

  • Hold on to equity. When you get the right kind of startup loan, you don’t have to give up equity in your business. After you repay the loan completely, you retain complete ownership of your company.
  • Establish business credit. By getting a business loan and repaying it in a timely manner, you build a positive credit history for your business, which will improve your ability to get future credit at better rates.
  • Traditional loans available. As long as you have good creditworthiness, you will have various traditional business loan options to choose from. Traditional loans can be appealing because they tend to offer competitive interest rates.
  • Can take a long time to process. The time that startup loans take to process can vary between lenders, from a few business days to months. Generally, business loan underwriting takes more time to process compared to other loans.
  • Need good credit. You will generally require good credit to apply for a startup loan. If you’re securing the loan with collateral, you may be able to get away with having a lower credit score.
  • Can be expensive. Even if you have excellent credit, lending to a startup can be risky for a lender. Generally, the riskier the business, the more expensive the loan.

Bottom line

Taking out a loan to start a business isn’t always a bad idea, but it can be risky and expensive. Steer clear of startup loans until you have a well-thought-out business plan in place. Even the best ideas require careful implementation.

If you feel that you may have trouble repaying the loan on time, seriously reconsider taking one out in the first place. To learn more about how business financing works, check out our comprehensive guide on business loans.

Want to buy an existing startup? Compare financing options to buy a business.

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