Guide to the best Canadian small business loans

You have been working hard for months to launch your business. You’ve got a brilliant idea and a business plan. Now you want to launch your new business.

There is only one problem. To attract customers, you will need to raise funds to purchase the equipment, train and hire the right people, as well as promote your product.

Ask your family and friends to donate the money. Apply for a grant from the government. There’s also an option to apply for a loan.

A small business loan is money that is provided to an existing or new company to finance various aspects of its business. There are many options available.

December 2017: 1.15 million ( 97.9%) were small businesses. 21,926 (11.9%) were medium-sized.

These businesses account for just slightly more than half of the country’s value added.

Banks and the Canadian government are keen to help SMEs succeed.

It can be daunting to ask for money without understanding what you are expected to do. Let’s look at your options to help you find the best loan option for your small business. Learn more about how to start a business.

Benefits and challenges for small business loans

Many entrepreneurs find it difficult to decide how to finance their small business with a loan. There are many options for funding your small business with equity or debt. Each option has its pros and cons.

When deciding whether a loan is right for your needs, consider the following.

Benefits for small businesses

Conserve equity

It is your goal to keep as much equity in your company as possible. It’s your sweat, blood, and tears that will build it. The best thing about obtaining capital via a loan instead of equity financing is that you don’t have the obligation to sell a portion of your company.

Autonomy

You can usually make the decisions with small business loans. The lender will want to know what you intend to do with the money. They won’t ask about the details of how the loan is used.

Preferable terms

Small business loans offer better terms like a lower interest and a higher credit limit. Credit cards and other financing options, like credit cards, can have higher interest rates and lower credit limits, which can restrict flexibility and limit long-term payoffs.

Problems with small business loans

Guaranteed by a personal representative

A bank or government official might ask you to guarantee your loan if your company has poor financial records. The personal guarantee can be in the form a car, real property or other valuable assets. This asset could be forfeited if you default on the loan.

Credit history

Your loan options may be limited if your credit score isn’t in a good standing. You may not be eligible to receive the preferred terms for the loan you choose.

Higher debt-to equity ratio

A small business loan will result in a greater amount of debt on your financial statements, which will affect your debt-to equity ratio. It is a measure of financial leverage in your company.

Economic impact

The economic state can have an impact on your ability to obtain a small business loan. This is something you cannot control. If the economy is experiencing credit problems and the availability of credit is decreasing, banks might be less likely to lend small businesses money. Startups are always at high risk.

What are the types of loans available for small businesses?

There are many loans available. Most loans fall within the categories we have listed below.

Small business loans from the government

Canadian businesses have a number of loan options that they can apply for from the federal and provincial governments. The Canada Small Business Financing Program is the most important. This program was created to make loans easier for small businesses by sharing the risk with lenders.

What is Canada’s Small Business Financing Program (CBSFP)?

The CSBFP agreement allows the Government of Canada to share the risk of lending to small and start-up businesses with a lender. It is run by traditional banks, credit unions and caisses populaires (credit cooperatives in Quebec). The government is a guarantor for the loans.

Industry Canada reports that small businesses have received more than $9.6 billion in asset-based finance over the past ten year, which amounts to over 63,000 loans.

Are you eligible?

This government loan may be available to you if your small business or start-up has annual sales less than $10,000,000. The program is not available to farming businesses, charities, religious organizations, or non-profits. CSBFP funds can’t be used to fund goodwill, working capital inventory, franchise fees or research and development.

To finance eligible expenses such as land, buildings and equipment, you can borrow upto $1 million. Other common expenses include commercial vehicles, machinery, computer and telecommunications equipment, and other items.

You are also eligible to make tenant leasehold improvements to buildings. The limit is $350,000. Programs may also cover the cost of buying a franchise.

What is the secret to it?

Talk to your bank about the loan process. They will work with you to determine if CSBFP is right and what assets might be eligible. To ensure that the loan is covered, it’s the responsibility of the bank to register it with the Canadian government.

Small businesses can take advantage of the CSBFP benefits

It is important to understand that the program won’t automatically give you a lower interest rate or longer terms for your loan. There are limits to the interest rates banks can charge you under this program. These rates can be negotiated individually.

The risk of the loan being defaulted on by the Government of Canada is shared, so the bank may be able to offer you better terms. You can use your negotiation skills to make the most of this knowledge.

The program’s main benefit is that it allows you, as a small or startup, to access capital that you may not otherwise have.

Online and traditional bank loans

The traditional loans offered by financial institutions are reliable and economical sources of funding. Most banks offer a variety of programs and options. Installment loans, also known as term loans, are repayable over a set period of time, often in monthly payments.

Small businesses are often unable to show collateral or credit history that would allow them to be eligible for loans, particularly in the initial phase. Personal loans can be another option for small-business owners with good credit.

You can borrow against credit cards or take out a personal credit line. Be aware of the long-term tax and interest implications. Your credit score, repayment history, and business plan will all be considered by your bank (more details later).

A loan can also be applied for through an independent online lender such as iCapital and Thinking Capital. These lenders can lend you several hundred thousand dollars, or more depending on the details of your application. We’ll be covering this shortly. For small businesses, they offer flexible and fixed repayment options.

 

Lending Loop was the first peer-to-peer lending platform for small Canadian businesses. To invest in small businesses, Canadians can contribute at least $25. After you submit an online application, your company is evaluated and assigned a loan rating from A to F. Individuals can then decide whether or not they wish to support the growth of your business. As the principal is repaid, investors and borrowers make monthly fixed payments. Borrowers pay interest.

These opportunities come with challenges.

Challenges

It is important to carefully review the terms of any loan you choose, whether it be online or traditional. You may find a better deal if you shop around. Terms can differ between lenders and banks. Pay attention to these details when you compare loans.

  • Interest rate
  • Application fees
  • Repayment period
  • Use restrictions
  • Late payment fees
  • Personal liability

Banks are reluctant to lend less than $50,000 as the service costs outweigh the profits. This is where microloans are useful.

Microloans

Microloans are designed to help small business owners create new jobs in their local communities by providing access to less capital.

Based on the microloan organization, the definition might vary slightly. Most microloans are:

  • Very small loans (500 to $150,000)
  • Loans for short-term
  • This program is for small businesses without credit histories, startups with low costs, sole proprietorships, and businesses with a few employees.

They can be used for working capital, inventory, fixtures/furnishings, and equipment or machinery for your business.

Microloans can often be used to assist disadvantaged groups, such as women and minorities or businesses that provide employment in areas where there is little. These entrepreneurs might have difficulty getting bank loans or traditional sources of financing.

Benefits

This is the main benefit: you can access smaller amounts of financing that banks won’t be able to offer.

Microlenders can provide additional support for those who are just starting out in business management and entrepreneurship. Before they will consider your application, many microlenders require that you take courses in topics like business planning writing, financial, and marketing.

Microlenders tend to focus on the numbers more than banks, but they are more open to considering the bigger picture and how your plans for growth will benefit your community.

Challenges

This channel has a limit on the amount of loans you can get. You should carefully review the terms and conditions of each option, just as with other loans.

Microloans have a higher interest rate than larger loans, so be aware.

To be eligible for these opportunities, you must have good credit ratings.

Where can I get microloans?

The Business Development Bank of Canada

 

BDC provides online loans of up to $100K to small businesses who need funds quickly. Online application is possible and it costs nothing. Once your application is approved, you will be able to access your funds in 24 to 48 hours. You can also defer repayment up to six months. You can also defer repayment for up to six months.

BDC offers a loan program to help newcomers who have poor credit ratings or are not able to pay their bills. The Newcomer Entrepreneur loan allows those who meet all criteria to get up to $50K.

Futurepreneur Canada has a similar program in partnership with BDC that provides Canadian newcomers upto $45,000 in financing.

Black Business Initiative

The BBI offers small term loans up to $25,000 and microloans up to $5000 for Black Nova Scotian-owned companies. The owner must be at least 33% Black and must be a registered proprietorship or partnership. The applicant must have a business plan with cash flow projections for two years, as well as a management strategy.

Lendified

You can apply online via Lendified. They offer loans up to 150K. They will send you a customized quote that is tailored to your business. Once approved, you will be able to access the loan within 48 hours. You can repay the loan in as little as 24 months with bi-weekly payments.

Kiva Zip

Zip allows entrepreneurs to get microloans directly from individual lenders through a peer-to–peer lending platform. This is a spinoff from Kiva, a global microlending organization that allows individuals to make $25 loans to entrepreneurs in developing countries.

First, you must create a microloan on the site. Next, get friends and family members to lend you money in order to prove your creditworthiness. After clearing these hurdles, your company is uploaded to the Kiva Zip website, where more that one million lenders can view your profile.

Many microlenders are focused on particular regions, provinces or communities. You can also find microloan sources through your local chamber of commerce or economic development organisation. Some examples include:

  • Alterna Savings and Community Micro Loan Program (Toronto).
  • Centre for Entrepreneurship Education and Development
  • Enterprise Fredericton
  • Enterprise Saint John
  • Montreal Community Loan Association
  • Western Economic Diversification Canada

Find the right loan for you business

We now have a better understanding of the various types of loans that are available. Let’s take a look at specific loans that can be accessed based on your personal needs.

Startups

Many startups start with credit cards and personal lines of credit, in addition to the microloans described above and the CFBSP. You may also be interested in crowdfunding options (platforms that allow anyone to fund your business from anywhere in the world) via sites such as Kickstarter or IndieGoGo.

To expand your business

It’s much easier to apply for traditional loans once you have been in business for some time and can prove that you have strong sales growth projections. At this point, a well-written and detailed business plan will help you get bank and government loans. This list contains all available government financing options in Canada.

Business owners with poor credit

Bad credit can make it difficult to qualify for a loan. You can still get funding from many microloan providers. This list contains a great selection of resources to explore across Canada.

For women

Canada’s federal government launched the Women Entrepreneurship Strategy. It committed $2-billion to increase the number of women-owned companies by 2025. The program offers support and funding options for female entrepreneurs. Here’s another useful list of federal funding options for Canadian women entrepreneurs.

For veterans

Prince’s Operation Entrepreneur provides a national program to assist transitioning members of the Canadian Armed Forces who are interested in starting their own businesses. They provide education, tools and resources that will help you become an entrepreneur.

Agriculture

The Canadian Agricultural Loans Act provides loans for aspiring farmers. We have compiled a list of Canadian agricultural loan options.

For First Nation and Indigenous Canadians

The Business Development Bank of Canada offers a variety of loan options for various industries and provinces. It also has programs that offer loans up to $250,000 to Indigenous Canadians. You can use loans to start exporting or increase your working capital. Flexible repayment terms are available for these loans, and BDC will give a portion to your community.

Construction

The CSBFP and BDC are the most common options to obtain loans. You can also apply for federal and provincial tax credits. The Apprenticeship Tax Creation Credit covers 10% of wages and salaries per trainee with a maximum credit of $2,000

For fisheries

The east-coast province Fisheries Loan Guarantee Programs can be used to assist commercial fishing businesses. These loan guarantees are supported by the Fisheries and Aquaculture Development Board and pay for fishing licenses, boats and equipment as well as refinance loans.

The fishery loan guarantee promises the board that it will take over any or all of your debts if you default on the loan. You can apply for the loan guarantee program at most banks or financial institutions.

 

How to get a Canadian business loan

These are the steps to follow in Canada for small business loans.

1. Finding the right loan for your business

Take a look at all your options, including traditional banks, government, microloans, and online options.

You should also research loans that may be suitable for your location, industry, or stage of business growth.

Before you sign up for a loan, do your research and ensure that you fully understand each term. There are some loans that have a more flexible repayment schedule than others. Before you apply, be sure to inquire about this.

Next, read through all the qualifications requirements to decide if it is worth your time to apply.

2. Apply for a loan to your business

You will often need the following to be eligible for a loan for your business:

  • A well-written business plan
  • Good credit scores
  • Refer to professionals
  • Solid financial projections, cash flow statements and sales reports.
  • Personally guarantee the loan and offer collateral (such as a car or other business assets)

These are the steps to prepare them:

How to apply for a government or traditional bank loan

It is crucial to provide potential lenders (banks) with the necessary documentation in order to enable them to make informed decisions.

The requirements for your business will differ depending on its history and nature. Here are the most important requirements to include in your application

First, create a loan proposal

A well-crafted loan proposal is essential for maximizing your chances of securing a loan. Lenders want to feel confident that your business is a solid investment with a long-term outlook.

Your proposal should address the top concerns of your lender. It should contain the following documents:

  • What amount of money do you need for your business to borrow?
  • What will you do with the loan proceeds?
  • What will happen to the loan repayments?
  • What makes your company a good candidate for a loan offer?
  • What can your company do if it is unable to repay the loan?

Your loan purpose must be stated in your proposal. Lenders will want to see evidence that you took the time to determine how much money your company needs and how it will be used.

Many banks offer small-business loan calculator that allows you to calculate how much money you can borrow, based on your interest rates and repayment terms.

Be specific when describing the purpose of the loan.

Next, create a detailed business plan

Because it is the proof that a lender needs to believe your business can succeed, your business plan will be the heart of your loan proposal. Your business plan should clearly outline your company’s mission, values, and primary goals.

A complete business plan should contain an executive summary, company description and a marketing and competitive analysis. It also includes a sales strategy, management profiles and financial projections.

Marketing analysis should include a description of your market and the competition. Your strategies to capitalize on this information and capture market share must be detailed.

Your sales goals should be outlined in your sales plan. These objectives should also include the strategies you use to convert your target market into customers.

 

This template will help you cover all your bases .

Create your financial statements

Lenders will look back at your financial history in order to assess your management abilities and to evaluate your future business prospects. Each lender may have different requirements but most require a three year projection for your income statement and balance as well as your cash flow statement.

Startups should provide an opening day balance sheet, first and second year projections, as well as initial startup costs. Although it is difficult to predict future results, lenders expect that you have an idea of the capital and cash flow required to run your business.

These statements should be comprehensive and include an analysis of how overhead, cost of goods and net profit have changed over the years. Also, what these changes mean for the company going forward.

This forecast should be built from the bottom up and not from the top down by simple multiplication. Know the cost and time it takes to drive customer purchases, and the gross profit for each sale. Know the lifetime value (LTV), of each customer. Demonstrate where there is leverage to increase profit and how the company can make money as it grows.

You may need to seek the guidance of an expert in business accounting or use Quick Books Online to create financial statements .

Make a loan guarantee

Some lenders may require personal guarantees if your business has poor credit or no collateral. Lenders first look at the business as collateral. Lenders will look at the equity position of the business owner if it is not sufficient.

All collateral forms must be listed on a loan guarantee document. Lenders may require a personal financial statement as well as three years’ tax returns for a personal loan guarantee.

It shows the bank that you are willing to take on the risk they have taken by bringing it up to them first. Remind bankers if necessary of your personal record of loan repayments to this bank or another banks. Any past repayment history will help the bank make a decision.

Lenders look beyond the analysis and numbers to determine your ability to present a loan proposal. They also consider how it is presented. It is important to present it professionally.

How do you qualify for a Microloan?

Although obtaining a microloan can be easier than getting approved to a traditional bank loan in general, there are still some things you need to do:

First, create a business plan. Lenders are interested in your plans for the future and what you will do with the money.

Second, increase your personal credit score. Before applying for a microloan, improve your credit rating.

  • Micro lenders want you to put your skin in the game. Even if it is a small amount, they expect you to invest your money in your business. Some expect you to borrow money from family and friends before applying for a loan.
  • You should be prepared to offer collateral or a personal guarantee.
  • If required, receive business training from the microlender before you apply.

You can significantly increase your chances of getting capital by taking the time to research your microloan options and writing a detailed business plan before applying for a loan.

3. Application for a Business Loan

There are many ways to improve your chances of getting a small business loan.

It may be easier to apply for microloans, CSBFP and other online loans. It doesn’t hurt to apply for loans according to traditional bank advice.

One common saying is that banks don’t lend money to companies that don’t require it. Canadian banks are particularly guilty of this as the low interest rates they charge mean that they don’t have to take much risk in lending money. They are not equity investors like venture capitalists or angel investors who can expect a large payday.

Banks typically return only a single-digit percentage rate, which means they are more selective about who they lend loans to. Here are some ways to increase your chances for getting the loan you need.

1. First, establish a real connection

People are more inclined to help those they like, trust and know. Real relationships must be built over time.

This is especially true for banks. Before applying for a loan, take the time to get to know people at different institutions.

It’s a good idea to call your online lender ahead of time to ask questions. You will be more successful when you submit your application. The lender will also know your name, and some details about your business. Now you’re not just an anonymous applicant.

Establishing trust and making contact early makes financial projections and documents much more convincing.

2. Be familiar with your numbers

Banks and government officials are data-driven. Numbers help them to manage any risk. They can always rely on the past to predict what the future will bring.

Understanding the reasoning behind each number, and any fluctuations in it, is key. Be confident, and practice your presentation before an accountant. Ask them tough questions about data. Throughout the presentation, it is important to reiterate that this loan is low-risk.

3. Describe how you came up with your forecasts

Don’t give unrealistic estimates that are difficult to believe. It’s unlikely that you will convince bankers that your small company can achieve the same results as other companies.

You can increase your expected expenses by 25%, and reduce revenue growth forecasted by 50% to ensure that the forecasts are accurate. Can the company make it through this scenario and still repay the bank? You shouldn’t give anything that you don’t believe can be delivered on the basis of current facts.

4. Show them how they got their money back

The biggest concern of a bank is “How will this company repay the loan back if everything goes wrong?” Provide forecasts for the worst case scenario and show how it still works in their favor. Banks want to reduce downside risk. The bank will pay particular attention to the worst-case scenario.

Talk to multiple banks, not just the one you use for your business account. Each bank has different guidelines regarding their loan portfolio. Don’t forget that a “no”, does not necessarily mean that the answer is right for you. It might just be a “no”, for now. Ask the banker to explain what needs to be done in order to obtain the loan in future.

Before you start the process of getting a business loan,

All funding options have pros and cons. You, as a Canadian small-business owner, have the power to decide which funding option is best for your company. It is important to weigh all options. Before you make a decision on a small business loan for your company, talk to multiple lenders about their terms and interest rates.

It’s crucial to your success that you find the right financing. So it’s worth your while to research and find the best solution for your type of business.

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