The Ultimate Guide to Small Business Loans in Canada

For small businesses in Canada, receiving a small business loan can provide a much-needed and immediate injection of capital. What can this capital provide? Small businesses can expand operations, hire new staff, and upgrade their current technology platforms. In other words, a small business loan can transform a company and push it to another level.

Traditionally, small business loans have been provided by banks, but in recent years, there has been a rise in companies that specialize in small business lending. As a result, if you are an entrepreneur, there are plenty of options to obtain a small business loan in Canada.

Why Should You Consider Small Business Loans in Canada

Starting any type of small business is never an easy task. Not only could it be years before you see meaningful profits, but operating a business is a 24-hour per day, 365-days-per-year endeavour. On top of all of the blood, sweat, and tears you put into your business, there is also a financial aspect to consider. Just because you want to start a business, it doesn’t mean you need to drain your own personal assets to do so.

A small business loan in Canada can help remove your day-to-day operations’ financial burden. Sure you will have to pay it back, but loans allow you to maintain control over your business without needing the help of outside investors. Holding as much equity in your own company is the best way to ensure that you attain your goals. 

Sometimes a small business loan is the only way for your company to get off the ground. It could be used to purchase assets like computers or machinery that are needed in your daily operations. Or you can use the loan to pay for start-up fees, design a website, or even buy a franchise.

How to Apply for Small Business Loans in Canada

When you feel you are ready to apply for a small business loan, it’s time to weigh your options and decide on next steps. The first thing you will want to decide is where to get the loan from. In Canada, there are a number of different small business loans that are available for different circumstances. The next thing to consider is how much you might need. Here are some of the things to consider before you apply for a small business loan in Canada.

Where Should You Apply for a Small Business Loan in Canada?

Did you know that there are different ways to obtain a small business loan in Canada? While the immediate option that comes to mind for many people are financial institutions such as banks, there are plenty of online lenders as well. What is the difference between a bank and an online lender? It has always been more difficult to get any type of loan from a bank.

Banks always have their own internal policies and stricter underwriting standards that you must follow to become eligible for any type of loan. Furthermore, banks tends to require a personal guarantee before handing over a small business loan. This means that, if the company is unable to repay the loan, the owner of the company will have to repay it personally.

The odds of getting approved for a business loan are often higher with an online lending company than with a bank in Canada. This is attributed to the online lenders employing algorithms that grant or reject small business loans based primarily on the business’s cash flow, instead of the owner’s personal credit score.

Using a Bank for a Small Business Loan in Canada

It makes sense that this is the first instinct for most small business owners in Canada. Most other financial transactions take place at a bank so the natural inclination is that a small business loan would too. If you do decide to go with a bank then it is best to get organized before making your application. 

There are a few things that banks will always want to look for when you apply for a small business loan in Canada. The most important factors that go into being approved for a small business loan include your own personal credit rating, the track record of your business, and of course, your assets that can be used as collateral. Don’t be surprised if you are required to provide other information like specific financial details about your business. Banks want the whole picture and are notorious for making you jump through hoops, even though they benefit from the interest you pay on any loan they approve for you. 

Using an Online Lender for a Small Business Loan in Canada

Thanks to the internet, small business owners can now apply for business loans directly online. As we mentioned earlier, online lenders rely on technology and software to grant or deny loan applications. You still have to provide financial information and documents, but rather than sitting down and filling out paperwork at a bank, it is typically just a short online application form. 

Due to these applications being online, the focus is more on how financially strong and capable your business is. These online lenders usually will run a quick credit check for you and your business as well as review your financial documentation.

Remember, before using an online lender make sure that you know all of the details for the loan you are applying for. Sometimes, online applications can mask the true details like any fees involved or the true annual percentage rate or APR of the loan. Banks tend to spell everything out for you, which is one benefit of actually speaking to someone rather than just applying online.

Using Credit Cards to Finance Your Small Business in Canada

Although credit cards can serve as a financing tool for small businesses, they should only be used as a last resort. This is chiefly because of the high-interest rates tied to both business and personal credit cards, typically ranging between 19% and 23%. However, under certain circumstances, resorting to a credit card could be a practical short-term solution.

Business credit cards, designed specifically for business-related expenses, offer certain advantages like rewards programs and the ability to separate personal and business finances. This separation can simplify financial management and tax reporting. Moreover, responsible use of business credit cards can help establish a business credit history, beneficial for securing other financing options in the future.

Personal credit cards, while not tailored for business use, may sometimes be used to cover small business expenses, especially during the initial stages when other funding options might not be as accessible. Familiarity and ease of use could make personal credit cards appear as an attractive choice. However, using them for business expenses must be done carefully to avoid muddling personal and business finances, and potentially impacting your personal credit score.

Using the BDC for a Small Business Loan in Canada

There is a third option that might resonate more with small business owners in Canada. The BDC or the Business Development Bank of Canada is a bank that is wholly owned by the Federal Government. This bank aims to help businesses in Canada obtain financing and other financial services. It is an especially helpful resource for small to medium-sized businesses and their owners who typically have to take on a lot of this work themselves. 

The goal of the BDC is to help as many qualified Canadian businesses obtain capital in the fastest way possible. What does the BDC take into account when approving small business loans in Canada? It focuses on four specific eligibility requirements: that your business is Canadian-based, that it has a good credit history, it must be in operation for at least 24 months and generating revenues, and that you have reached the age of maturity in the province or territory in which you live. 

If you qualify for those four things then you can be approved for a BDC small business loan of up to $100,000 in as little as 48 hours. The BDC guarantees that there are no fees involved and that the process is completely online. It also provides a lot of flexibility with loan repayment including postponing any principal payments for the first six months.

What to Prepare Before Applying for a Small Business Loan in Canada

No matter which method you choose for applying for a small business loan, it is important to know what you will need to provide to your lender. Having these things prepared can save you a lot of time and grief when applying for small business loans in Canada.

Business Credit Score

The one thing that most lenders want to know about in Canada is the credit health of your business. You might be wondering how a business credit score is even calculated in Canada. It takes into account a few things including how much you currently owe to lenders, how much of that credit you have already utilized, your repayment history, and the age of your company and which industry it belongs to.

Personal Credit Score

Another factor that is important when applying for a small business loan in Canada is your own personal credit score. When it comes to owning a small business, your credit and financial habits will also reflect in how your company operates. Lenders want to know that you are a qualified applicant for a loan and that you will be able to pay them back. This is especially true for online lenders which tend to use personal guarantees to approve small business loans.

Financial Standing of Your Business

Not only do lenders want to know that your company has a good credit score but also that it is in good financial standing. This requires getting together things like your financial documentation, balance sheets, and recent bank statements as well. Are you generating any revenue? What sort of debt are you currently holding and what is the future outlook for both your company and the industry you are in? All of these things are important to a lender in determining if you are eligible for a small business loan in Canada.

Collateral

There aren’t many lenders in Canada that will sign off on a small business loan without seeing some sort of collateral. What is collateral when it comes to a small business loan in Canada? It is typically proof of assets that are owned by the business which can include things like machinery, equipment, real estate, or even owned vehicles. Collateral provides the lender with peace of mind that should you default on your loan, they can come after your business for your high-value assets.

Business Track Record

For many lenders, your “time in business” is another important factor when considering your loan approval. As we saw with the BDC small business loans, you need to be operating in Canada for at least 24 months before applying. This is actually considered a short period of time compared to other lenders across the country. Most will ask for a track record of several years before even considering your small business loan application. Your business should have several years of revenue generation as well as a proven history of financial stability.

Different Types of Small Business Loans in Canada

So which type of small business loan should you apply for? Small business loans in Canada can be divided into four major categories: bank loans, secured loans, unsecured loans, and government-backed loans. What are the differences? Let’s take a look at each type of small business loan and how they can help your business.

What is a Bank Loan?

As its name suggests, bank loans are borrowed directly from a bank and will be paid back to the bank over time. Is there a major difference between a bank and a lender? As we mentioned, banks are a little more particular about what they look for when approving a small business loan application. 

Remember, banks are on the lookout for things like your personal credit score, your ability to provide collateral for the loan, and the track record of your small business. Keep in mind that banks are also not usually as efficient as online lenders or BDC in processing loans. Expect it to take up to a couple of weeks to get the money from the loan in your account if you are approved.

What is a Secured Loan?

A secured small business loan is when you or your company can provide collateral in exchange for borrowed funds. This collateral is then valued by the lender using a loan-to-value ratio. What this essentially means is that the more stable your collateral is, the more the lender will be willing to lend you. If you don’t keep up with your payments, the lender can start coming after you for your collateralized assets. 

Generally speaking, secured loans are much friendlier to the business in terms of repayment options. You can often qualify for lower interest rates, longer repayment times, and you might even be able to borrow a larger amount. Of course, the downside to a secured loan is that your assets are at risk if anything happens to your business. Small business owners with lower credit ratings will often apply for a secured loan since the approval is based more on collateral than your credit score.

What is an Unsecured Loan?

As you might imagine, an unsecured small business loan does not rely on collateralized assets to be approved. Decisions on unsecured loans are made based on information such as your personal credit score, business income, and even your cash flow. These loans are popular with newer businesses that do not have much in the way of assets to provide as collateral. 

Some lenders will even be able to provide the loan faster because they do not have to spend time appraising your collateral. With an unsecured loan, if your company defaults on it there are some serious implications. Rather than coming after business assets like with a secured loan, unsecured loans could potentially come after your personal assets if you provided a personal guarantee. This could also have lasting impacts on you or your business’ credit score, which could make it difficult to secure additional funding in the future.

What is a Government-Backed Loan?

There are numerous programs that are funded by the Canadian government to provide legitimate loans to small businesses in Canada. Note that even though they are called government-backed loans, some of them are still provided by a bank or lender. One of the commonly accessed loan progranms is the Canada Small Business Financing Program. To be eligible for the Canadian Small Business Financing Program, you must have gross annual revenues of less than $10 million and be a non-farming business. Another popular government-backed lending program in Canada is Export Guarantee Program, a lending program managed by Export Development Canada (EDC) that caters to Canadian businesses that are seeking a loan to expand abroad.

What is a Merchant Cash Advance (MCA)?

A merchant cash advance is yet another form of small business loan in Canada. These are similar to traditional small business loans but have some notable advantages. The primary difference between an MCA and a small business loan is that you do not have to pay back your MCA until you start making sales. Rather than a set amount each month, MCAs take a percentage of your sales and revenue. In fact, the MCA can be remitted by taking a direct portion of your credit card and debit card sales. 

They also have a higher chance of being approved and require less paperwork and time to process. It is not technically a loan though as it is considered a sale of your company’s future revenues. If it sounds too good to be true it usually is. MCAs come with a much higher interest rate and can be expensive to repay over time.

The Top Non-Bank Small Business Lenders in Canada

Are you looking to apply for a small business loan in Canada? If you want to consider some of the best non-bank small business lenders in Canada, check out some of our top picks.

Journey Capital

With Journey Capital, you could get a fixed term loan, a line of credit, or flex funds (which offers flexible repayment based on your sales). They serve over 700 industries, so they’ll likely be able to serve you. To be eligible, you must have been in business for at least 6 months, have a business bank account, have at least $100,000 in gross annual revenue and a minimum credit score of 600. Their loans go up to $300,000.

For pre-qualification purposes, Journey Capital will ask 3 questions: How long have you been an owner of the business, what are your annual sales and which product you want. Once you are pre-qualified, there will be further questions about your business and about yourself before you get the funds. Be well prepared and have your business tax ID number on hand, as well as your social insurance number, estimated annual gross revenue and average bank balance. You should also expect a call from Journey Capital to discuss your offers. But they won’t make you wait! They’ll call you within one business day.

Smarter Loans

Smarter Loans, a rate comparison website specializing in lending, allows Canadian business owners to access the funding they need from a single application. This comprehensive online platform connects borrowers with reputable lenders nationwide. It offers a variety of financing solutions to suit a range of business needs, from small business loans to equipment financing and more. Smarter Loans prioritizes transparency, providing detailed lender reviews and educational resources to help borrowers make informed financial decisions.

Loans Canada

Loans Canada is both a rate comparison website and a lender providing personal and small business loans alike. They streamline the loan application process and allow Canadian entrepreneurs and small business owners to access a diverse network of lenders to meet varied business needs. Their platform aims to simply the loan application process. However, specific terms and conditions may vary, so it’s recommended to review these directly on their website.

Sharpshooter Funding

Started in 2015, Sharpshooter Funding has helped more than 4,150 companies across Canada. This online lender provides small business loans for up to $300,000 in all Provinces, including Quebec. Sharpshooter provides a number of different funding options including MCAs, flex funding, fixed funds, and equipment financing. 

2M7 Financial Solutions

2M7 Financial Solutions is one of the leading providers of Merchant Cash Advances in Canada. The site boasts a 97% approval rate with flexible payments and loan deposits within 24-48 hours.

Lendified

Lendified is a Canadian online lender that provides loans of up to $150,000 within 48 hours of approval. This site states that its small business loans are up to 40% cheaper than the average merchant cash advance. As of 2023, Lendified has loaned over $500 million to small businesses across the country. 

Lending Loop

Lending Loop advertises itself as the cheapest small business loan in Canada. This online lender provides loans of up to $500,000 with interest rates as low as 6% per year. The company has lent over $70 million to small businesses in Canada.

FAQs About Small Business Loans in Canada