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Access to financing is one of the most important keys to success for any business. If you are looking to get funding for your Canadian business, you probably need the money quickly and on good terms. At Smarter Loans, our panel of over 50 industry experts has reviewed and qualified Canada’s most trusted and reputable business loans providers. Check out the list below or simply pre-apply online, and let us connect you to the most appropriate small business loan provider for your company.
We can help connect you with the top business financing providers in Canada.
A business loan is when you borrow a fixed amount for business needs (as opposed to for personal needs) from a lender and agree to paying it back by instalments over a specified timeline. Business loans usually have specific reasons like purchasing inventory, opening a new location, or fulfilling purchase orders.
Even if you have the money, you might choose to take out a small business loan. Reason being that you may want to save your cash to run your business instead of using it to buy costly assets. By doing this, it can help you grow your business even faster.
Business loans work a lot like personal loans. You’re borrowing money from a lender that you eventually have to repay with interest and fees, as applicable. There are many lenders to choose from for business financing.
There are several important factors to consider when choosing the business loan that’s right for you. They are: loan amount, interest rates, terms, repayment structure and fees.
The loan amount is how much the lender is willing to lend you. This depends on several factors including your income, credit, debts and whether the loan is secured or unsecured against your business.
A loan’s term is the length of time the loan can be outstanding before it’s needed to be repaid. This isn’t to be confused with repayment terms, which is length of time the loan must be paid back in full.
The interest rate is how much the loan will cost you. Business loans tend to come with higher interest rates than personal loans, although you may be able to lower the interest rate on a business loan by pledging an asset, such as real estate, as collateral.
This is the amount and length of time you’re required to pay back the money you borrow in full. Before taking out a business loan, it’s important to make sure you can afford your monthly payments, since this will largely depend on the success of your business.
Some loans may come with upfront fees and ongoing fees. You’ll want to find out about any fees and how often the lender requires you to pay them.
Business funding should be used to grow your business. A business loan can be a great way to make an investment that will generate more revenue for your business. After all, the loan needs to be paid back, so it is important to do the math and understand how you will make the investment profitable in the long run.
Some of the common reasons to take out a business loans are: business expansion, buying new inventory, acquiring or upgrading equipment, marketing campaigns, better cash flow management, opening new locations, among others. Each business is different, so it must be approached on a case by case basis. The key is to make sure you are using the loan to fuel business growth, so you can comfortably pay it back, as well as the interest on the loan, within the agreed upon terms.
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Companies are all different and thus there exists a need for different business loan types to suit the different needs companies face.
A term loan is a fixed amount of money supplied to a business which is paid back over a predetermined amount of time. Term loans are best for businesses with good credit rating and steady sales volumes that are looking to grow their business further. These loan types are frequently used to purchase inventory, upgrading or purchasing new equipment, renovations, expansions and marketing, among others.
Working capital loans are best for financing the day-to-day operations of a business and to supply for short-term operational needs such as payroll and rent. These loans are taken out by companies who experience periods of high seasonality and cyclical sales. The working capital is used to bridge the gap through these periods of lower sales, and are paid off once the busy season hits.
A merchant cash advance allows a lender to grant an advance of capital by purchasing a portion of the daily credit card sales of a company. The company pays back the advance with a percentage of their daily credit card sales. Payback for a merchant cash advance is determined by the business income – in circumstances where business is slow, payback is less and when the business flourishes, payback increases. These loans are some of the most expensive on the market and should only be considered if the business cash flow can handle the repayments.
Business line of credit allows a business to access money that can be used to cover business expenses. Unlike a term loan, there is no lump-sum amount paid out by the lender which requires monthly repayment. Business line of credit is revolving, like with a credit card. Interest will accumulate as funds are used and the amount paid back is again available to be borrowed. Lenders will determine the limits of the amount to be borrowed and review the loan on a term or annual basis.
Businesses that possess assets, such as real estate, heavy equipment or machinery, can use these assets as collateral for a loan. These are typically the largest loans in terms of size, and can be in the millions of dollars, depending on the type of equipment and business. Because these loans are securitized by assets, they usually carry lower interest rates.
Invoice Factoring means that a business is willing to sell a portion of their future invoices, in order to receive cash now. This form of financing is perfect for businesses that must spend money in the short term but do not receive payment until several months later. A good example of this is staffing companies, that only receive payment once they find a hire, and that hire stays with their new employer for at least a month. The staffing company knows there will be payment, but needs funds today in order to stay cash flow positive.
Industry-specific business loans are micro-niche loans designed around the requirements of the business and the industry it operates in. These loans are extremely flexible and fine-tuned to match the requirements of the business it is created for. Furthermore, collateral to acquire these business loans are generally industry specific. Some industries where companies can benefit from industry-specific business loans include: Retail stores, salons and spas, restaurant or automotive shops. Often, these loans are given out in order to make a specific purchase, such as financing kitchen equipment for a restaurant.
New businesses have a difficult time qualifying for traditional loans as there are no guarantees of success or established credit scores for the company in question. Startup business loans are specifically for startup businesses and are granted on the basis of the credit of the entrepreneur starting the company. These loans are not suitable for established companies and come in smaller amounts with high interest rates. Startups can also explore equity funding options, such as venture capital. This means that an investor can provide capital in exchange for shares in the company.
Another factor to consider is getting a business loan with a bad credit score. This may arise when a business does not yet have a credit score or previous dealings have resulted in a negative track record. In the above cases, lenders will need to determine whether or not the business has good sustained growth, if the customer in question has improved upon former negative dealings or if the customer’s personal credit score is better than that of the company. Cash flow and revenue numbers will play a key role in determining if a business would be approved for financing.
To get a better understanding, let’s run through a small business loan example with some numbers.
Let’s say you want to borrow $5,000 at an interest rate (APR) of 15% over 2 years (the loan term/amortization). If the payment frequency is monthly, your business loan payment amount would be $242.43 per month.
Lenders consider several factors before they’ll approve you for a business loan. It’s helpful to know the qualification criteria before applying to ensure your loan application is a good fit for the lender since each loan application counts towards your credit score, even if it’s declined. Typically, a business loan is provided to businesses that have existed for at least 1 year, and generate at least $10,000 in monthly revenue.
Here is a list of other factors lenders consider: your past and current business performance, business plan, capital business assets, number of daily sales transactions on debit and credit cards, monthly revenue numbers, credit score and any available collateral.
Let’s look at the pros and cons of business loans to help you decide whether a business loan is right for you.
By taking out a business loan, it will help build your company’s financial credibility. By doing that, you may qualify for small business loans with more favourable terms, higher credit limits and added credit from your suppliers. It will be a lot easier to get financing in the future when your business has a record of repaying debt.
When you take out a business loan, any interest, fees and penalties that you pay related to the business loan are tax deductible expenses. That being said, it’s important to keep your personal and business expenses separate, as it will make it a lot easier when it comes to filing your taxes.
Business loans tend to have much higher credit limits than personal loans. Although the amount your business is able to borrow largely depends on your income and the collateral you’re offering to the lender.
In many cases, your company must be incorporated to qualify for business loans. This can be a costly expense for businesses just starting out. Some lenders though may approve business loans to sole proprietorships, although the terms may not be as favourable since there’s generally less competition among lenders.
Business loans typically take longer to approve than personal loans. Depending on the size of your business loan, you could end waiting a few days or a few weeks for your business loan application to be approved.
It can be tough for startup businesses to obtain a business loan if the business hasn’t earned much business income. Although if you’re an entrepreneur with a good business plan, you may be able to apply for a startup loan.
Sean Cooper is the bestselling author of the book, “Burn Your Mortgage: The Simple, Powerful Path to Financial Freedom for Canadians”. He bought his first house when he was only 27 in Toronto and paid off his mortgage in just 3 years by age 30. Sean is a personal finance journalist, money coach and speaker, his articles and blogs have been featured in publications such as the Toronto Star, Globe and Mail, Financial Post and MoneySense.
Across diverse sectors and operating models, businesses need capital for varying purposes. A pharmaceutical company might invest heavily into machines and/or research and development (R&D) costs to bring about a viable drug to market. On the other hand, an industrials or chemicals business that has matured might look to consolidate its place in the market via the acquisition of a smaller company. Business financing can therefore help achieve this multitude of purposes. To illustrate these purposes, it is helpful to segregate the uses by the stage of the business lifecycle that they are generally prevalent in.
1. Development/Launch Phase: In the early phases of a company, it is difficult in general to raise debt, particularly for first-time entrepreneurs due to the high business risk that a company that hasn’t even started generating revenue yet provides.
2. Growth Phase: However, once the business starts developing its customer base and attracting revenues, debt is often used to fund the growth costs including sales and marketing expenses, building relationships with partners, buying equipment and/or other capital expenditures to help the company scale and accommodate demand etc.
3. Maturity Phase: Once the business hits maturity i.e. generates stable and/or predictable levels of revenues and expenses year-on-year, the uses for commercial lending turn more into working capital and general corporate expenses. At this stage, the business has an established capital structure which is not prone to change unless there is a materially large event within the company.
4. Consolidation/Decline: Once an industry gets saturated, businesses often look to consolidate by buying other companies to grow in size and command a better position in the market. Commercial loans are often used to fund these acquisitions as well.
Some other uses of these loans could be for funding employee wages (particularly during initial stages when revenue isn’t enough to cover all expenses), commercial mortgages, etc. It is important to note, however, that: a) there are other uses of business loans besides the ones just mentioned above, and b) the uses are not neatly divided by the stage of the business lifecycle. Different businesses may have different needs at each stage of the lifecycle, and the above is simply an illustration of how a typical start-up might use debt over time.
While there is no one magic number that enables businesses to receive the financial resources they need, a higher credit score works to the benefit of the borrower. As a general rule, higher credit rating (either the business, or the business owner) will increase the chances of getting approved for a business loan.
This depends on the type of loan being obtained. For unsecured (no collateral) loans, cash flow is very important, because that’s how the lender evaluates the business’s ability to repay the loan. Daily and monthly sales numbers, especially through debit and credit cards, are a critical factor for business loan approval. For secured loans, where business assets such as equipment or real estate is used, the cash flow may be slightly less important.
For businesses that have a track record of operations in Ontario and across Canada, the Small Business Administration (SBA) provides funding programs through SBA-approved lenders. While the lender (mainly banks and financial institutions) provides the capital, the SBA guarantees up to 85% of the loan amount, which helps the business owner obtain a lower interest rate.
Depending on each individual business profile, the owner can gain up to $5 MM of SBA-backed financing with loan terms from 5 up to 25 years. However, an emphasis is placed upon credit scores and established histories when evaluating businesses for qualification.
In a nutshell, yes. However, there are some nuances. When obtaining business financing, lenders generally require the borrower to explain the purposes and rationale for where the funds will be deployed. Therefore, it is important to notify the lender at the outset whether these funds would go for marketing, capital expenditures, technology purposes or debt refinancing.
While it is ultimately the owner’s discretion and/or company policy that determines how the capital structure is formed, best practices for debt management include being vigilant with it particularly in cases where the business is in trouble. For example, it is not advised to use a business loan to pay overdue bills and employee salaries when the business is not profitable. Business loans should be used to increase revenue and grow a business, so that the there is a positive return on investment after the funds are used up. A great example of this is purchasing inventory that is expected to sell during a busy season, or investing to open a patio for a restaurant, which will bring in extra revenue.
Small business loans are relatively easy to obtain as long as a business has been operational for at least a year and generates at least $10,000 in monthly revenue. To apply and receive funding, business owners need simply to complete an application (online or at specialist lenders) and provide access to their business’s registration details and financial statements, as well as credit profile. While size is not a direct consideration, lenders will want to look at a consistent history of revenue generation, so they can feel confident in a business’s ability to repay the loan.
No, the personal credit score in Canadian provinces and territories is a number between 300 and 900. While there is no equivalent score for a business in Canada, different credit bureaus have adapted a scoring system to rank creditworthiness by evaluating certain behaviours of businesses.
This depends on the type of loan being obtained. While most small business lending companies will want to see how the small business will deploy the funds, a well-formulated business plan may not be a requirement. In the case that it is necessary though, it is important to answer the following questions:
a) What the small business loan will be used for (additional funding “cushions”, expansion, equipment/technology purchases, working capital, funds for supplier/employee payments, capital expenditures, cash flow purposes etc.)
b) Expected business and economic conditions over the next 2-5 years
c) How they will impact profitability and financial strength
If you are currently exporting or considering exporting outside of Canada, you need to carefully consider your strategy. Thankfully, there are great resources available to you.
Smarter Loans has teamed up with Export Development Canada to help Canadian businesses navigate global opportunities. Their unique suite of solutions can help you offset the risks of doing business abroad, finance your deal and access the working capital you need.
Want to learn more about how EDC can help? Send your inquiry to an EDC Trade Advisor today
To keep your financial situation secure, consider talking to an Export Development Canada (EDC) Trade Advisor. EDC has solutions that can protect you against the risk of not getting paid when doing business beyond our borders and help you get more cash to grow your exporting business.
When looking at different lenders for small business financing, it is important to consider a broad list of items before committing to one lending option. While it is tempting to take the offer with the best rate, a lender should be viewed through the lens of a business partner. In the same way that a great business partner can improve the company, a great lender can provide your business with the resources to take it to the next level. As such, the following should be considered, weighed, and decided upon:
a) Their policy frameworks (application processes, information requirements, and ALL fees)
b) Ancillary services they offer (e.g. transaction banking solutions)
c) Term of the loan (measured in years or months)
d) Variable or fixed rates (possibly adjusted to real rates to account for inflation)
e) Funding amount offered and how it matches with the capital that is needed.
Absolutely. If the business is registered and meets the other qualifications of the lender, the business can be located out of a residential living arrangement.
Private business loans in Canada include all loans made to businesses by non-bank lenders. Loans from online lenders, private lending businesses, family members or friends, venture capitalists, or brick-and-mortar financial businesses all count as private loans. Private loans are an option when a business prefers not to deal with a bank, or when a business fails to meet the bank’s strict lending criteria. There are many different types of private lenders, ranging in competitiveness and reputability, so it’s important to find one you trust.
Applying for small business loans online is extremely common, and thanks to streamlined and convenient online application systems, it takes very little time and effort. Most lenders now have an online application option.
While there are many blogs and calculators available online that help search for lenders and calculate monthly loan payments, a good starting point would be to see whether it is worth obtaining a loan in the first place or not. Owners have the option of either selling equity or raising debt via small business financing when they need fresh capital in the company. However, depending on the dynamics of the company, debt may or may not be the most profitable option.
In this scenario (Scenario 1), we are assuming that a company with 100 currently outstanding shares is growing at a steady to fast rate and can afford to service lending requirements i.e. debt repayments adequately. The assumptions made here are that the company can either choose to raise money via $5000 of debt at 5% APR compounding monthly for 5 years or raise the same amount of equity by selling 25 more shares (125 shares outstanding). As can be seen, the EPS under the debt option is greater than the equity option.
In Scenario 2 where the company has declining growth, it would fail to even make the debt repayments by Year 3, forcing it to default. By these examples, it should thus be abundantly clear that while credit can be advantageous, it must be utilized and managed appropriately to realize its true benefits.