Entrepreneurs and small business owners know that starting and running a business isn’t easy.
Are you a small business owner in need of a loan? You’re not alone. As of late 2020, small businesses cumulatively had $255 billion in credit from banks in Canada.
The options for small business lending can be confusing, so this guide is designed to help you understand the basics. We’ll cover the different types of small business loans available in Canada, eligibility requirements and the application process. Are you ready to take your business to the next level? Our comparison tool will help you compare insurance plans to get the best deal possible!
What is a business loan?
A business loan is similar to any other loan. A bank or other lender gives an individual or business a lump sum of money for a proven, valid business need. For example, the loan money could go towards helping your new company get off the ground. Another reason could be to use the money to finance the purchase of supplies, inventory or a project. When applying for small business loans, it is important to have a strong application to increase your chances of being approved.
What types of small business loans are available?
There are many different types of small business loans available. These may be for commercial real estate, working capital, purchase orders or technology purchases. Below, you will find some business loans explained:
Term business loans
There are three main types of term loans: short-term, intermediate and long-term term loans.
Term loan gives you a lump sum of money up-front. Over a length of time, known as the term, you pay back the money plus interest. This repayment period typically lasts between one and five years, but the length can vary depending on the purpose and size of the loan, the business and the lender. Here are characteristics of term loans:
Quick upfront money =YES
Competitive interest rates =YES
Short or long repayment periods=YES
Credit requirements= NO
Long-term commitment=NO
Backed by collateral (may lose it if you can’t pay back loan)=NO
Short-term term loans
Short-term loans need to be paid in a short time period. This is usually under a year. Short-term loans are useful for addressing quick cash flow problems, say the purchase of additional inventory before the holiday season. Monthly payments can be large because of the short payment term, but this is an inexpensive mechanism for borrowing if you know you can pay it back quickly.
Note that all of the term business loans below use 20.32% interest (an excellent rate) to illustrate how the length of a loan affects what you will pay. In reality, longer loans are usually more expensive, so the interest paid on the longer examples would be even higher.
| Example Small Business Loan | Amount |
|---|---|
|
Loan amount |
$40,000 |
|
Loan term (months) |
12 |
|
Interest rate |
20.32% |
|
Monthly Payment |
$4,010.67 |
|
Total interest paid |
$8,128 |
Apply for a loan
Intermediate term loans
Intermediate-term loans last between 1 and 3 years. There are fixed maturity dates and repayment terms. They are a good loan to take if you need working capital for expenses such as hiring new employees, expanding to another location or refinancing debt.
Below is an example of a business loan:
| Example Small Business Loan | Amount |
|---|---|
|
Loan amount |
$40,000 |
|
Loan term (months) |
36 |
|
Interest rate |
9.5% |
|
Monthly Payment |
$1,281.32 |
|
Total interest paid in 3 Years |
$6,127.45 |
Long-term term loans
Long-term loans last between 3 and 10 years. They allow you to have more time to repay with lower monthly payment amounts.
| Example Small Business Loan | Amount |
|---|---|
|
Loan amount |
$40,000 |
|
Loan term (months) |
120 |
|
Interest rate |
5% |
|
Monthly Payment |
$424.26 |
|
Total interest paid in 10Years |
$10,911.45 |
Equipment financing
Equipment financing gives you the funds to purchase or lease equipment for your business. The equipment leased becomes collateral for the loan. Therefore, even with bad credit, it is relatively easy to be approved for equipment financing. You can use the money for anything from machinery to furniture. Here are some characteristics of equipment financing:
Easy to be approved =YES
Built-in collateral =YES
Limits on what you may use the funds to purchase =NO
Apply for a loan
Need Loan related answers now?
Call +1 438 701 3770 to speak to our advisors right away, or book some time with them.
+1 855 410 9006 (Toll-Free for Outside Canada)
Business line of credit
A business line of credit (LOC) is a preset amount of money a bank allows a business to borrow. They may freely tap into it until that limit is reached. You only pay it back if you use the money. The line of credit may be secured or unsecured (with or without collateral needed), depending on the size of the LOC requested and the evaluation results. Here are some characteristics of business lines of credit:
- Less expensive interest than a credit card= YES
- Borrow when you need it (no additional waiting)=YES
- Borrow exactly how much you need=YES
- Requires discipline=NO
- Personal credit issues may restrict your application=NO
- May be backed by collateral=NO
- To put business LOCs into context, imagine that your business has been approved for $100,000. Some months, you may use none of the money and pay no interest as a result. However, 6 months later you may decide you need to use $40,000 to replenish supplies or make a repair. You must now pay back the money. If you don’t pay it back the month you use it interest will accrue on the balance
What is the difference between a secured and unsecured loan?
If a loan is secured or unsecured, it means if the loan requires collateral or not. Unsecured business loans, that do not require collateral, are riskier to lenders. This makes them harder to get and usually means higher interest rates. On the other hand, a secured loan is a business loan that does require collateral. Collateral could be anything the lender considers to be a valuable asset. Secured loans often have lower interest rates as they pose less risk for lenders. However, if you default on your loan you will lose this asset.
How do I apply for a business loan?
- First, you need to decide where to apply. Check the standing of your finances to see where you are most likely to be approved. Think carefully about what type of funding you need. For example, if you need the money to buy heavy machinery, a lender with dedicated equipment financing may be best suited for you. Also, the timeframe that you need the money in will determine if you prioritize online lenders, for example.
- Second, you will need to prepare your application documents. These documents will include information about your business, financial statements for you and your business and details about the business owners.
- Third, review your application. Consider having someone else look over all your documents, especially things that are open to interpretation, like your business plan. A second pair of eyes will help you notice mistakes and problems in your application.
- Finally, follow the lender’s instructions to apply. Depending on the lender, each application process varies slightly.
What is the typical loan period for a small business loan?
A term loan period will vary drastically depending on the lender, the loan type and the term you choose to pay. The length of the loan will also change the total interest paid. Below are some examples to show how different term lengths can dramatically affect the total interest owed:
Duration of loan
1 Year
5 Years
10 Years
Loan Amount
$40,000
$40,000
$40,000
Interest Rate
3%
3%
3%
Total Interest
$652.98
$3,124.86
$6,349.16
As you can see, the difference between a short-term loan and a long-term loan has a large effect on the total interest paid. You should take this into account when applying for a small business loan.
What lenders offer business loans?
Many traditional and nontraditional lenders provide business loans. As a driving force of local economic development, there are a lot of players helping to finance business. On one hand, there are banks, and on another, non-profits and local organizations. Businesses that promise great growth might tap into venture capital or angel investment. Smaller family and lifestyle businesses may have more luck with an online lender or their existing bank or credit union.
In some rare cases, limited grant funding may even be available.
Here are some popular lenders in Canada:
What are the different types of small business lenders?
You can borrow for your small business from traditional lenders like Canada’s big five banks or a local credit union. Alternative lenders may be a better match for startup businesses or borrowers with a problematic credit history.
Small business loans through traditional lenders
Apply for a loan
Traditional lenders are banks or credit unions. Canada’s five major banks for business loans are TD, RBC, Scotiabank, BMO and CIBC. They all offer programs for small businesses. Interest rates differ from bank to bank and program to program. While traditional lenders offer the lowest cost of capital the approval process is often long and difficult. They are likely to require collateral. Building a long-term relationship with them can be beneficial for small businesses that anticipate regular financing.
Small business loans through alternative and online lenders
Alternative lenders include any small business lender who is not associated with a traditional bank. They offer all types of business loans, except for long-term installment loans and commercial mortgages. Alternative lenders have high approval rates and more short-term options. Be sure that you know who your lender is and carefully check the loan terms. Not all alternative lenders are equally credible and interest rates can be very high.
How are business loans different for startups vs established businesses?
Business loans are different for startup businesses and established businesses. This is because startup businesses have no real collateral to offer lenders, apart from personal assets, like their house. However, established businesses may have a strong record of using credit and paying back credit as well as pre-existing relationships with traditional lenders.
As a result, interest rates may be higher on business loans for start-up businesses. It may also be hard to be approved as your business plan and financial standing will be thoroughly analyzed by lenders.
Loans for startups
Require solid business plan and well-reasoned financial projections
Harder to get
May have to pledge personal assets
Interest rates higers
Loans for established businesses
Easier to get approved
Existing banking relationships
May pledge business assets as collateral
May have an existing banking relationship
What are the interest rates on business loans?
Interest rates will vary depending on the lender, the loan type, your financial situation and the collateral involved. Currently, competitive small business loan interest rates range from 2.54% to 7.02%. For example, TD Bank is currently offering small business loans with floating interest rate options based on TD Prime Rate with no prepayment penalties. Also, TD Bank has fixed interest rate options available with the flexibility to make up to 10% principal prepayments of the original loan amount annually. Interest rate conditions will vary largely from lender to lender.
What eligibility requirements exist for getting a business loan?
There are four main factors to think about when it comes to business loan eligibility: credit scores, annual revenue, business plan and collateral.
A business plan
A detailed business plan will show lenders how your business will use and benefit from the loan. It will also show the credibility of your business, its objectives and sustainability. The business plan gives an overall representation of your business, goals and how you will repay your loan. If your business plan is not convincing, then you can easily be rejected for the loan by lenders.
Credit scores
Both your personal and business credit reports will help lenders evaluate how you manage debt. The higher your credit score, the more likely lenders will be to give you a loan.
A bad credit score, on the other hand, may indicate a high risk to the lender and suggest that you may not pay back the money. If you do find yourself with bad credit, there are other options available to you. This is explained further down this page.
Annual financial statements
Your business’s annual revenue is the total amount of money your company generates through its primary lines of business. Lenders will assess annual revenue (and expenses) as it shows them how your business can support future debt payments.
Collateral
With secured loans, lenders require you to offer some type of collateral. Collateral is an asset of value, for example, buildings, equipment or inventory.
Of course, these are not the only considerations to take into account. Overall, you will need to come to a lender with a well-considered business need and a plan to pay back your credit in order to convince them to lend you money.
Why do I need collateral for a business loan?
Collateral is important to getting a business loan as it reduces the risk for lenders. This means that if you fail to make payments on your loan, the lenders can take your collateral to replace the money you cannot pay. Collateral significantly increases your chances of being approved for a business loan, which is why it’s so important. However, if you want to take out a business loan without the need for collateral, there are options available to you. Unsecured loans do not require collateral, and you can find these through alternative and online business lenders.
What small business loan programs exist for minorities?
Receiving funding from a traditional financial institution can, unfortunately, be more difficult for members of minority groups and immigrants. Potential problems included unconscious bias from lenders, insufficient credit and limited banking history. A 2019 report from the Federal Reserve found similar approval rates for white and black-owned businesses among online lenders; however, this was not the case for in-person banks. If you are having trouble being approved for a business loan through traditional lenders, consider the programs below and/or alternative and online lenders.
Additional help for minority-owned businesses:
Lender About
Innovation Canada : Innovation Canada is a federal department that supports minority-owned small businesses. On the website, you can find a personalized list of government financing programs. This includes great opportunities and services that can help benefit your business. The Business Benefits Finder allows you to input your business’s financial situation, how much money you would like and what would you like it for. It will list programs available to you will appear. The website is very simple to navigate, making a stressful time feel more simple.
Canada Small Business Financing Program (CSBFP) Loan : The CSBFP Lona offers loans of up to $1 million to startups and small businesses. You can apply through many banks including TD, Canada Trust, CIBC, Scotiabank and BMO. The amount you qualify for will depend on how the bank evaluates your loan application and credit score.
Black Entrepreneurship Program (BEP) : The BEP is a partnership between the Government of Canada, Black-led business organizations and financial institutions. Black-owned businesses can apply for a loan of up to $250,000. The BEP also includes a Black Entrepreneur Knowledge Hub to help identify barriers to success and opportunities for growth.
Women Entrepreneurship Strategy : The Canadian Federal Government has published a Women’s Entrepreneurship Strategy. Its homepage has up-to-date information on small business loans specifically for women entrepreneurs. In general, however, the Business Development Bank of Canada is often a good source of funds for businesses run by women entrepreneurs.
Need Loan related answers now?
Call +1 438 701 3770 to speak to our advisors right away, or book some time with them.
+1 855 410 9006 (Toll-Free for Outside Canada)
What is the difference between a secured and unsecured loan?
If a loan is secured or unsecured, it means if the loan requires collateral or not. Unsecured business loans, that do not require collateral, are riskier to lenders. This makes them harder to get and usually means higher interest rates. On the other hand, a secured loan is a business loan that does require collateral. Collateral could be anything the lender considers to be a valuable asset. Secured loans often have lower interest rates as they pose less risk for lenders. However, if you default on your loan you will lose this asset.
How do I apply for a business loan?
- First, you need to decide where to apply. Check the standing of your finances to see where you are most likely to be approved. Think carefully about what type of funding you need. For example, if you need the money to buy heavy machinery, a lender with dedicated equipment financing may be best suited for you. Also, the timeframe that you need the money in will determine if you prioritize online lenders, for example.
- Second, you will need to prepare your application documents. These documents will include information about your business, financial statements for you and your business and details about the business owners.
- Third, review your application. Consider having someone else look over all your documents, especially things that are open to interpretation, like your business plan. A second pair of eyes will help you notice mistakes and problems in your application.
- Finally, follow the lender’s instructions to apply. Depending on the lender, each application process varies slightly.
What is the typical loan period for a small business loan?
A term loan period will vary drastically depending on the lender, the loan type and the term you choose to pay. The length of the loan will also change the total interest paid. Below are some examples to show how different term lengths can dramatically affect the total interest owed:
Duration of loan
1 Year
5 Years
10 Years
Loan Amount
$40,000
$40,000
$40,000
Interest Rate
3%
3%
3%
Total Interest
$652.98
$3,124.86
$6,349.16
As you can see, the difference between a short-term loan and a long-term loan has a large effect on the total interest paid. You should take this into account when applying for a small business loan.
What lenders offer business loans?
Many traditional and nontraditional lenders provide business loans. As a driving force of local economic development, there are a lot of players helping to finance business. On one hand, there are banks, and on another, non-profits and local organizations. Businesses that promise great growth might tap into venture capital or angel investment. Smaller family and lifestyle businesses may have more luck with an online lender or their existing bank or credit union.
In some rare cases, limited grant funding may even be available.
Here are some popular lenders in Canada:
What are the different types of small business lenders?
You can borrow for your small business from traditional lenders like Canada’s big five banks or a local credit union. Alternative lenders may be a better match for startup businesses or borrowers with a problematic credit history.
Apply for a loan
Need Loan related answers now?
Call +1 438 701 3770 to speak to our advisors right away, or book some time with them.
+1 855 410 9006 (Toll-Free for Outside Canada)
Small business loans through traditional lenders
Traditional lenders are banks or credit unions. Canada’s five major banks for business loans are TD, RBC, Scotiabank, BMO and CIBC. They all offer programs for small businesses. Interest rates differ from bank to bank and program to program. While traditional lenders offer the lowest cost of capital the approval process is often long and difficult. They are likely to require collateral. Building a long-term relationship with them can be beneficial for small businesses that anticipate regular financing.
Small business loans through alternative and online lenders
Alternative lenders include any small business lender who is not associated with a traditional bank. They offer all types of business loans, except for long-term installment loans and commercial mortgages. Alternative lenders have high approval rates and more short-term options. Be sure that you know who your lender is and carefully check the loan terms. Not all alternative lenders are equally credible and interest rates can be very high.
How are business loans different for startups vs established businesses?
Business loans are different for startup businesses and established businesses. This is because startup businesses have no real collateral to offer lenders, apart from personal assets, like their house. However, established businesses may have a strong record of using credit and paying back credit as well as pre-existing relationships with traditional lenders.
As a result, interest rates may be higher on business loans for start-up businesses. It may also be hard to be approved as your business plan and financial standing will be thoroughly analyzed by lenders.
Loans for startups
Require solid business plan and well-reasoned financial projections
Harder to get
Loans for startups
Require solid business plan and well-reasoned financial projections
Harder to get
What are the interest rates on business loans?
Interest rates will vary depending on the lender, the loan type, your financial situation and the collateral involved. Currently, competitive small business loan interest rates range from 2.54% to 7.02%. For example, TD Bank is currently offering small business loans with floating interest rate options based on TD Prime Rate with no prepayment penalties. Also, TD Bank has fixed interest rate options available with the flexibility to make up to 10% principal prepayments of the original loan amount annually. Interest rate conditions will vary largely from lender to lender.
What eligibility requirements exist for getting a business loan?
There are four main factors to think about when it comes to business loan eligibility: credit scores, annual revenue, business plan and collateral.
A business plan
A detailed business plan will show lenders how your business will use and benefit from the loan. It will also show the credibility of your business, its objectives and sustainability. The business plan gives an overall representation of your business, goals and how you will repay your loan. If your business plan is not convincing, then you can easily be rejected for the loan by lenders.
Credit scores
Both your personal and business credit reports will help lenders evaluate how you manage debt. The higher your credit score, the more likely lenders will be to give you a loan. A bad credit score, on the other hand, may indicate a high risk to the lender and suggest that you may not pay back the money. If you do find yourself with bad credit, there are other options available to you. This is explained further down this page.
Annual financial statements
Your business’s annual revenue is the total amount of money your company generates through its primary lines of business. Lenders will assess annual revenue (and expenses) as it shows them how your business can support future debt payments.
Collateral
With secured loans, lenders require you to offer some type of collateral. Collateral is an asset of value, for example, buildings, equipment or inventory.
Of course, these are not the only considerations to take into account. Overall, you will need to come to a lender with a well-considered business need and a plan to pay back your credit in order to convince them to lend you money.
Why do I need collateral for a business loan?
Collateral is important to getting a business loan as it reduces the risk for lenders. This means that if you fail to make payments on your loan, the lenders can take your collateral to replace the money you cannot pay. Collateral significantly increases your chances of being approved for a business loan, which is why it’s so important. However, if you want to take out a business loan without the need for collateral, there are options available to you. Unsecured loans do not require collateral, and you can find these through alternative and online business lenders.
What small business loan programs exist for minorities?
Receiving funding from a traditional financial institution can, unfortunately, be more difficult for members of minority groups and immigrants. Potential problems included unconscious bias from lenders, insufficient credit and limited banking history. A 2019 report from the Federal Reserve found similar approval rates for white and black-owned businesses among online lenders; however, this was not the case for in-person banks. If you are having trouble being approved for a business loan through traditional lenders, consider the programs below and/or alternative and online lenders.
Additional help for minority-owned businesses:
Lender About
Innovation Canada : Innovation Canada is a federal department that supports minority-owned small businesses. On the website, you can find a personalized list of government financing programs. This includes great opportunities and services that can help benefit your business. The Business Benefits Finder allows you to input your business’s financial situation, how much money you would like and what would you like it for. It will list programs available to you will appear. The website is very simple to navigate, making a stressful time feel more simple.
Canada Small Business Financing Program (CSBFP) Loan : The CSBFP Lona offers loans of up to $1 million to startups and small businesses. You can apply through many banks including TD, Canada Trust, CIBC, Scotiabank and BMO. The amount you qualify for will depend on how the bank evaluates your loan application and credit score.
Black Entrepreneurship Program (BEP) : The BEP is a partnership between the Government of Canada, Black-led business organizations and financial institutions. Black-owned businesses can apply for a loan of up to $250,000. The BEP also includes a Black Entrepreneur Knowledge Hub to help identify barriers to success and opportunities for growth.
Women Entrepreneurship Strategy : The Canadian Federal Government has published a Women’s Entrepreneurship Strategy. Its homepage has up-to-date information on small business loans specifically for women entrepreneurs. In general, however, the Business Development Bank of Canada is often a good source of funds for businesses run by women entrepreneurs.
Need Loan related answers now?
Call +1 438 701 3770 to speak to our advisors right away, or book some time with them.
+1 855 410 9006 (Toll-Free for Outside Canada)