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Business startup loans in Canada
Find out where you can get startup financing to set your business growth in motion.
Finding business startup loans in Canada doesn’t have to be challenging. In fact, there are a variety of options you can pursue to get the money you need to start or grow your new business.
How do I get startup business loans?
Getting a loan to start or grow a new business differs from getting a loan for an established company. Lenders normally want proof that a business is doing well before they’re willing to give you a loan, which can include revenue statements and documents showing time in business. As a startup, you may not have these, so you’ll need to show that you’re committed to growing or starting your new business in other ways. This can include presenting a business plan to your lender and giving them access to your personal credit score.
That being said, there are several ways to get startup business loans using various types of loans and grants.
1. Startup funding from financial companies
You can apply for business startup loans in Canada from banks, credit unions and online providers. The following loan types below are available to many startups, provided that you meet the requirements.
Business loans
- Unsecured business loans. An unsecured business loan is a business loan that doesn’t require any collateral. Unsecured loans are issued based on how good your credit score is. You’ll usually need a personal score of at least 650 to qualify for these types of startup business loans. Unfortunately, your credit score will also suffer if you don’t pay these loans back on time.
- 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 than unsecured loans, since you lower the lender’s risk by using an asset such as your home or car to secure your payments. The downside is that your lender can seize this asset to repay your loan if you run into financial trouble.
Startup business loan you can apply for
Personal loans (for any use, including business)
Personal loans for business use and other uses are a suitable option if you can’t seem to qualify for business financing. These loans don’t rely on your business information to determine your eligibility. They also let you borrow against your personal credit score or assets – and the money you’re approved for can be spent on pretty much anything you want (meaning it won’t be tied to your business). 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.
Compare personal loans for business use
Merchant cash advances
A merchant cash advance is money you receive in advance from the lender in exchange for a percentage of your daily credit card and debit sales in the future. Merchant cash advance loans can be a suitable option for startups since they get repaid based on a percentage of your sales, which means that you’ll repay more in months where you net a higher revenue and less in months where your business is less busy.
Line of credit
Revolving lines of credit give you more flexibility in terms of how you can access money. You can dip into these “loans” whenever you need cash and pay them back whenever you have a surplus of revenue. The best part is you’ll only pay interest on the amount you withdraw.
2. Startup loans from the Canadian government
Government-backed business startup loans are funded by the Canadian government and come with lower interest rates and more flexible terms than private loans. An example is the Canada Small Business Financing Program (CSBFP) loan. You can apply for this loan through a chartered bank, credit union or a caisse populaire. You would need to present a business plan.
The CSBFP loan is at least 75% backed by the Canadian government and can be used for many purposes, including to buy or renovate property and to purchase equipment for your startup. You can negotiate with the financial institution to determine how much you can borrow, but the maximum loan amount is $1 million. Fees associated with this loan include the registration fee, interest rate and lender fees. To find out more about this option, you can read our guide on the CSBFP loan or visit the government’s page.
3. Startup grants in Canada
You may be able to apply for business startup grants from the Canadian government and other organizations if you operate a specific type of business. For example, you could qualify for a business grant if you’re a new farmer, operate an export business or want to market an innovative product or service. It’s also possible to get grant funding if you’re looking to train and develop your workforce.
4. Startup funding from a group of individuals
If you’ve exhausted your options to get startup funding from a more traditional lender, you may be able to get a new business loan from non-corporate sources:
- Microloans. Microloans (also called peer-to-peer loans) are small loans that are given out by individuals and are used to cover small startup expenses. These loans can be issued by a single person or multiple individuals who each contribute a portion of the total amount. They tend to come with higher interest rates but can be a good option if you’re struggling to get approved by the bank. Learn more about peer-to-peer business loans.
- 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. 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 hold yourself accountable and keep them in the loop.
- Crowdfunding. Entrepreneurs that have an easily-pitchable idea may want to pursue equity or rewards-based crowdfunding. With equity crowdfunding, your company solicits online investments from multiple investors in exchange for partial ownership of your company. With rewards-based crowdfunding, your business gives prizes in exchange for donations.
5. Other ways to finance your startup
If you’re not able to get a startup loan for a new business directly, you may want to consider the following options if they make sense for your business:
- Business credit card. A credit card can be a great way to cover smaller expenses and manage your company’s spending. Some business credit cards come with low annual fees and competitive interest rates and are startup-friendly, making these a viable option for your business if you’re just starting out.
- 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.
Examples of business incubators
- Research Innovation Commercialization (RIC) Centre. Located in Brampton, Ontario, RIC Centre is a not-for-profit innovation hub that provides mentorship, funding, connections and incubator space for entrepreneurs, no matter which stage the startup is in. The services they provide depend on which stage your company is in and your goals.
- MaRS. Located in Toronto, Ontario, MaRS offers support to Canada’s most promising startups. MaRS can provide startups with expert advice, access to investors and access to partners. It accepts startups in the early stages.
- Launch Academy. Located in Vancouver, BC, Launch Academy specializes in helping international tech entrepreneurs launch or expand their business globally. It works with startups that already have a product in the market and are somewhat established financially. Its focuses include SaaS, fintech, eCommerce, data science, eSports and more. Apply for their program by June 15, 2021.
- Innovate Calgary. Located in Calgary, Alberta, Innovate Calgary is University of Calgary’s business incubator. It provides services to researchers, entrepreneurs and businesses in the advanced technology sector.
How do startup business loans work in Canada?
Business startup loans in Canada work just like personal loans, except they’re usually for larger amounts and you can only use them to cover your business expenses. There are a number of loan types that you can choose from, depending on what makes the most sense for your personal situation and business.
Startup loans for small businesses come with fixed or variable interest rates, and you’ll usually make repayments in regular installments. You’ll typically need to have a good to excellent credit score if you want to get competitive interest rates. You can use your startup funding to pay for any business expenses you may have as you establish and expand your business.
Fixed rate vs variable rate startup business loans
- Fixed rate loans. Fixed rate business startup loans are probably the most popular type of loan since you pay them back in regular installments over a fixed period of time. This lets you budget ahead and predict your monthly payments with no surprises.
- Variable rate loans. Variable rate loans go up and down in accordance with the Bank of Canada’s prime rate. This means your monthly payments will fluctuate from month to month – but you could save money if national interest rates go down.
Do I qualify for startup financing?
Your ability to qualify for financing will depend on your personal situation and business profile. Factors that your lender may assess include the following:
- Personal credit score. Your personal credit score will have a huge influence on whether you can get the money you need for your business. You’ll usually have to have a score of at least 650 to qualify for startup financing for your small business. Find out your credit score.
- Professional experience. Your work experience can factor into whether you get approved or denied for a business startup loan. For example, you’ll be much more likely to get financing to start a woodworking business if you’re a red seal carpenter than you will if you have zero experience in the field.
- Project viability. You’ll usually need to submit a detailed business plan, which will help lenders decide if your endeavour will be successful. This may include information such as how much you plan to make each month, where you’ll source your customers and what type of equipment you’ll need to get up and running.
- Amount of funding you request. You’ll be much more likely to get approved for startup financing for your small business if you request a small amount (such as $5,000 or less). As that number increases, lenders will probably ask for more proof that you’ve done your research and have a solid business plan in place before they finance you.
- Portion of the project that’s already funded. You may have more success getting financing if you can show that your business already has support. Businesses that have 50% or more of their startup funding already lined up should have better success with lenders.
How do I choose the right business startup loan in Canada?
There are a number of factors that you should consider when applying for startup financing:
- Loan amounts. Some lenders offer relatively small business startup loans while others may lend you up to $1 million. Your best bet is to look for the loan amount that suits you best at an interest rate you can afford.
- Interest rates. The interest rates you’ll pay can make or break your loan experience. You may be able to qualify for rates as low as 3% or as high as 40% – but it makes sense to avoid any rates above 15% if you want to repay your loan in a suitable time frame. Learn more about business loan interest rates.
- Loan terms. Loan terms can range from 6 months to 20 years, depending on how much you borrow and how long you want to take to pay it back. You should aim to get the shortest term available that still gives you manageable repayments.
- Fees. Many business startup 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 need to be repaid in regular installments while others claim a portion of your monthly sales as payment. Pick the option that makes the most sense for your future business needs.
- Cash availability. Taking out a business startup loan in Canada will give you a lump sum of cash to spend right away. Opening a line of credit can give you access to a revolving line of cash that you can borrow and repay on your own schedule.
How to apply for a loan for a new business
Application process
- Fill in an online application with the lender of your choice by visiting their website.
- Input personal information such as your full name, date of birth, address, phone number and email.
- Provide details about the business you intend to start and make sure to include a comprehensive business plan to show that you’ve done your research.
- Provide financial details such as your bank name and transit number as well as your personal or business account number.
- Submit to a credit check or fill out the necessary paperwork to put up an asset as collateral to secure your business startup loan.
Loan eligibility requirements
To qualify for a business startup loan in Canada, you may need to meet the following eligibility requirements:
- You have to be at least 18 years old or the age of majority in your province or territory.
- You’ll need to be a Canadian citizen or a permanent resident with a valid Canadian address and two valid pieces of identification.
- You may need to show that you already have a portion of your financing needs covered by your personal finances or contributions from investors.
- You’ll typically need to have a minimum credit score of 650 and not be recovering from a recent bankruptcy or consumer proposal.
You may be asked to sign a personal guarantee to assume personal responsibility for your startup loan if you can’t make your repayments.
Pros and cons of business loans for new businesses
Benefits
- Higher loan amounts. You may be able to borrow as much as $1 million in startup funding, depending on factors such as your personal credit score and business plan.
- Competitive interest rates. You’ll usually get fairly competitive rates if your credit history is solid and you don’t have any missed payments.
- Many loan options. You can apply for a number of different startup loans for small business, depending on your unique set of needs and personal situation.
- Reduced personal liability. You may be exempt from personal liability for repaying your startup loan as long as you don’t sign a personal guarantee.
Drawbacks
- Can be difficult to qualify. You may have trouble qualifying for startup financing if you don’t have a solid professional reputation or a well-developed business plan.
- High credit score is required. You’ll generally need a credit score above 650 to apply for business startup loans in Canada.
- Can be expensive. Lenders may charge you more for your loan since lending to a startup carries more risk than lending to a business that can show proof of revenue.
- Personal guarantee may be required. You could be required to sign a personal guarantee, which makes you personally liable for repayment.
Bottom line
There are many types of startup loans that you can take advantage of to get your business off the ground. Just make sure that you have a decent credit score and a solid business plan to bolster your application. You can also pursue a personal loan or an alternative method of funding (such as crowdfunding or equity-sharing) to get the startup funding you need.
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