Access to financing is one of the most important keys to success for any business. If you are looking to get funding for your 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 financing providers. Check out the list below or simply apply online here, and let us connect you to the most appropriate small business loan provider for your situation.
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 starting a business 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 tend to be risker, so most lenders ask for collateral. If your business is just starting and doesn’t have a lot of assets, you might be required to pledge personal assets like your home as collateral. This provides the lender with the added reassurance there’s a good chance it will be paid back if your business runs into financial trouble.
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.
Here are some factors to consider when choosing the business loan that’s right for you.
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 is directly associated with growth. Capital is crucial for any business and most stakeholders are not in the position to use personal funds when starting a company. A business loan gives the initial capital needed to get a business running and profitable so that in turn the business loan pays for itself.
More than just starting a company, business loans can be used for multiple purposes:
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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.
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.
Here is a list of factors lenders consider.
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.
1. What type of credit score is needed?
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 it reduces the spread on top of the prime rate that would need to be paid to the bank.
2. How important is cash flow?
This depends on the type of loan being obtained. For unsecured (no collateral) loans, the importance of cash flow is magnified while it may not be as big a factor in collateralized loans.
3. What is an SBA loan?
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.
4. Can business loans be used for refinancing other debts?
In a nutshell, yes. However, there are real-world 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, debt refinancing etc.
5. When should loans NOT be used?
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 and/or where the company is not a limited liability company.
6. Who is eligible for a small business loan?
Small business loans are relatively easy to obtain compared to financing for corporates. 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 and reasonable cost control.
7. Is a personal credit score and business credit profile the same thing?
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.
8. Is a business plan necessary?
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 an application support requirement for all. 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
9. I’m considering doing business internationally. What do I need to know?
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.
10. How to select the best lender?
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.
11. Can a business based out of a home qualify for such a loan?
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.
The figure on the right shows that commercial lending has steadily grown with each semi-annual period over 2011 to 2017 exhibiting growth. This is attributable both to increased confidence in the Canadian economy by business owners, as well as the historically low interest rate environment that we have witnessed this past decade.
As is illustrated by the table on the right, domestic and international banks provide the lion’s share of financing to the business community of small businesses, mid-sized enterprises and large corporates. While credit unions and insurance companies are exhibiting growth, the banks remain popular options according to research due to their sales expertise with these products, wide range of ancillary financial solutions, and standardized application processes.
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.