Small Business Loans Canada: Everything You Need to Know
A plain guide to small business loans in Canada: the main loan types, government-backed programs, what lenders look for, what it costs and how to apply.
Most small business loans in Canada come from a handful of places: banks and credit unions, the government-backed Canada Small Business Financing Program (delivered through those same banks and credit unions), the Business Development Bank of Canada (BDC), and alternative lenders, often reached through a broker. Each has its own rules on who qualifies, what the money costs and how long you have to repay. This guide covers how they work, what lenders look for, and how to apply.
Key Takeaways
- Canadian small businesses can borrow from banks, credit unions, BDC, government-backed programs and alternative lenders.
- Each option has its own eligibility rules, costs and repayment terms, so match the loan to what the money is for.
- Lenders focus on cash flow, credit and documentation. Getting those in order before you apply saves time.
Understanding Small Business Loans in Canada
A loan can pay for growth, cover a large purchase, or carry the business through a timing gap. Here’s what a small business loan is, how it works, and where Canadian businesses get them.
What are Small Business Loans?
A small business loan lets a business owner borrow money from a lender for a specific business purpose and repay it, with interest, over a set period. Common uses include buying equipment, hiring, adding inventory and expanding into a new location.
How do Small Business Loans Work?
When you apply, the lender assesses your creditworthiness and your ability to repay. Depending on the lender and the size of the loan, that means reviewing your bank statements, financial statements, credit history and sometimes a business plan. If you’re approved, you sign a loan agreement setting out the amount, rate, term and any security, and the lender releases the funds.
Types of Small Business Loans in Canada
The main sources of small business loans in Canada are:
- Canada Small Business Financing Program (CSBFP)
- Business Development Bank of Canada (BDC) loans
- Traditional bank and credit union loans
- Alternative and online lenders
Each has different eligibility requirements, interest rates and repayment terms, so it pays to compare them against what you need the money for.
Types of Small Business Loans
Loans also differ by how they’re structured. These are the most common.
Term Loans
A term loan gives you a lump sum that you repay over a set period with interest. Term loans suit larger, one-time expenses, such as buying equipment or expanding. Repayment terms range from a few months to several years, depending on the lender and the amount. For equipment purchases specifically, equipment financing or leasing, which is secured by the equipment itself, is often easier to qualify for than an unsecured term loan.
Lines of Credit
A line of credit gives you access to a set amount of money that you draw on as needed. You pay interest only on what you’ve drawn, and you can repay and draw again. Lines of credit suit businesses with ongoing, uneven needs like inventory or payroll. If the gap comes from customers who take a long time to pay, invoice factoring is another way to get that cash sooner.
Government-Backed Loans
Under the Canada Small Business Financing Program, the federal government shares the risk with the lender, which makes it easier for smaller and newer businesses to get approved by a bank or credit union. Term loans under the program can cover real property, new or used equipment, leasehold improvements, intangible assets and working capital, and there’s a line-of-credit option too. The program caps the interest rate lenders can charge and adds a one-time registration fee that can be financed. You apply through a participating lender, not the government.
Microloans
Microloans are small loans, usually aimed at businesses that are just getting started or need a modest amount of capital. They’re often offered by non-profit and community lenders, such as the Community Futures offices that serve rural areas.
Merchant Cash Advances
A merchant cash advance gives you a lump sum in exchange for a share of your future card sales, taken automatically until the advance and its fee are repaid. Approval is fast, but it’s usually the most expensive way to borrow. The cost is often quoted as a factor rate rather than an interest rate, and once you convert it to an annual rate it typically runs far higher than a term loan. Work out the full cost before you sign.
Eligibility Criteria for Small Business Loans
Every lender sets its own rules, but most look at the same handful of things.
Credit Score Requirements
Your personal and business credit scores are a big part of the decision. A good score improves your chances of approval and can get you a better rate and terms. Banks usually want strong personal credit. Alternative lenders are often more flexible with a weaker score when the business shows steady revenue.
Business Revenue and Profitability
Lenders look at revenue and profit to judge whether you can afford the payments. Minimum revenue requirements vary widely by lender and product. CBL’s working capital loans, for example, need monthly revenue over $15,000.
Banks often want to see a track record of profitable years. Alternative lenders tend to put more weight on recent revenue. If your business isn’t profitable yet, a solid business plan and financial projections become more important.
Collateral and Guarantees
Many lenders ask for collateral, a personal guarantee, or both. Collateral is an asset you pledge as security for the loan, such as real estate, equipment or inventory.
A personal guarantee is your promise as the owner to repay the loan if the business can’t. Offering either can improve your chances of approval, but it also means you could lose the asset, or be personally on the hook, if the loan goes unpaid.
Business Plan and Projections
For larger loans and bank or government-backed programs, lenders will also review your business plan and projections. The plan should cover what the business does, what it sells, who it sells to, the competition and how you plan to grow.
Your projections should include a budget, a cash flow forecast and a projected income statement showing that the business can generate the revenue to repay the loan.
How to Apply for a Small Business Loan
The process is similar across most lenders.
Preparing Your Documentation
Get your documents together before you apply: recent business bank statements, financial statements, tax returns and, for larger loans, a business plan. Be ready to provide personal financial information too, such as personal tax returns and consent to a credit check.
Choosing the Right Lender
Banks, credit unions, BDC and alternative lenders all offer small business loans in Canada, and each has different requirements and rates. Compare them on the full cost and the terms as well as the headline rate. A broker such as CBL Financial takes one application to the lenders that fit your file, which saves you applying to each one separately.
Loan Application Process
Once you’ve picked a lender, you fill out the application and provide your documents. The lender reviews the file and may come back with questions. Answering quickly keeps things moving.
If you’re approved, you’ll sign a loan agreement setting out the terms. Read it carefully, including the fees, the security and any prepayment conditions, before the funds are released.
Interest Rates and Fees
The rate is only part of what a loan costs, so look at both rates and fees.
Understanding Interest Rates
Rates depend on the lender, the type of loan, your credit and the security you offer. Bank and government-backed loans usually sit at the lower end, alternative lenders in the middle, and merchant cash advances at the top. Compare the total cost of borrowing (interest plus fees over the full term), because a low rate with heavy fees can cost more than a slightly higher rate without them.
Rates can be fixed or variable. A fixed rate stays the same for the life of the loan. A variable rate moves with market rates, so your payments can go up or down.
The repayment term matters too. A longer term lowers the payment but increases the total interest you pay.
Fee Structures
On top of interest, small business loans can come with fees such as:
- Application fee: Some lenders charge to process your application.
- Document preparation fee: Covers the cost of preparing the loan documents.
- Registration fees: Government-backed programs such as the CSBFP charge a one-time registration fee based on the loan amount. On a secured loan, the lender may also pass on the cost of registering its security interest under provincial personal property security law.
- Administration fee: Covers the cost of administering the loan, and is sometimes built into the rate.
Ask for every fee in writing before you sign. Some are negotiable and some aren’t, and knowing them all is the only way to compare offers fairly.
Loan Repayment and Terms
Before you commit, understand how often you’ll pay, for how long, and what happens if you want to pay the loan off early.
Repayment Schedules
Many lenders let you choose weekly, biweekly or monthly payments to match how cash comes into the business. Some offer a grace period before payments start, which can help when the loan funds something that takes time to start earning.
Term Lengths
Terms depend on the type of loan and what it pays for. Working capital loans tend to be short, equipment loans usually run in line with the equipment’s working life, and real estate loans run the longest. Through CBL, terms run 24 to 72 months. A longer term means a lower payment but more interest over the life of the loan.
Early Repayment Options
Paying a loan off early can save interest, but some lenders charge a prepayment penalty, so read that part of the agreement before you sign. Others allow early repayment without a penalty. Ask about it up front.
Benefits of Small Business Loans
Used well, a loan lets a business do things it couldn’t pay for out of current cash.
1. Access to capital
A loan gives you capital you might not otherwise have. That matters for newer businesses without much cash built up, and for established businesses facing a large investment.
2. Flexibility
Loans come in many forms, so you can match the product to the need. A term loan or equipment financing suits a large one-time purchase. A line of credit suits ongoing expenses.
3. Improved cash flow
A loan can cover the gap between paying your costs and getting paid by your customers, so a timing problem doesn’t turn into a missed payroll or a late supplier payment.
4. Opportunity for growth
A loan can fund the next step, whether that’s a new product line, more staff or a second location, as long as the growth it pays for can also cover the payments.
Challenges and Considerations
Borrowing has costs and obligations, and it’s worth being clear-eyed about them before you apply.
Debt Management
Every loan is a fixed payment that comes out of your cash flow whether sales are good or slow. Before you borrow, build the payment into a budget alongside your other expenses and make sure the numbers still work in a slow month.
Impact on Credit Score
Applying for a loan usually triggers a credit check, which can cause a small, temporary dip in your score. After that, on-time payments build your credit history, and missed payments damage it.
Lender Restrictions
Loans come with conditions. A lender may require collateral, limit how much you can borrow, or set covenants you have to keep meeting. Read the terms carefully and make sure you understand them before you sign.
Alternative Financing Options
Loans aren’t the only way to fund a business. These are the most common alternatives.
Crowdfunding
Crowdfunding raises money from a large number of people, usually through an online platform. Rewards crowdfunding on platforms like Kickstarter and Indiegogo works well for consumer products with a story to tell. Equity crowdfunding, where backers get shares, is regulated by provincial securities regulators and comes with more paperwork.
Venture Capital
Venture capital firms invest in exchange for equity, usually in high-growth businesses with the potential to become very large. Expect to give up a share of ownership and some control, and expect a long, selective process.
Angel Investors
Angel investors are individuals who invest their own money in exchange for equity, often earlier than venture capital firms would. Many are more hands-on and offer mentorship alongside the money. Angel groups operate in most major Canadian cities.
Personal Financing
Some owners fund the business from personal savings, credit cards or personal loans. It can get a business started when other options aren’t available yet, but it puts your personal finances on the line and can be an expensive way to borrow.
Frequently Asked Questions
What are the typical interest rates for small business loans in Canada?
Rates vary by lender, loan type, your credit and the security offered, and they move with the wider market. Bank and government-backed loans tend to be cheapest, alternative lenders cost more, and merchant cash advances usually cost the most. Compare offers on total cost over the full term.
How does the Canada Small Business Financing Program work?
The Canada Small Business Financing Program makes it easier for small businesses to get loans from banks, credit unions and caisses populaires by sharing the risk with those lenders. Most for-profit, not-for-profit and charitable small businesses below the program’s revenue ceiling can use it, including start-ups (farming businesses aren’t eligible). You apply to a participating lender, which makes the credit decision. The program sets maximum loan amounts, caps interest rates and charges a registration fee, and the current figures are on the program’s site.
What are the eligibility criteria for a BDC small business loan?
According to BDC, your business should be registered in Canada, have recorded sales, have personal and business credit in good standing, have all shareholders of legal age, and hold an account with a financial institution. BDC also has revenue and time-in-business guidelines, which are on its site. Businesses that are just starting out or don’t have revenue yet can be referred to BDC’s partners.
Are there specific small business loan options available in Ontario?
Ontario businesses have access to the same federal options as the rest of the country, including the CSBFP through a bank or credit union, and BDC. Provincial and regional programs open and close over time, and pandemic-era supports such as the Ontario Small Business Support Grant have ended. For what’s available now, check the Government of Ontario’s business support pages or ask your local Small Business Enterprise Centre.
What types of small business grants are available in Canada?
Federal grants usually target specific activities, such as research and development, exporting (through programs like CanExport SMEs), and hiring and training, which is often delivered through the provinces. Most grants share part of a project’s cost rather than paying for it outright, and they’re competitive. The Government of Canada’s grants and funding search is the place to start. Grants rarely cover equipment or day-to-day costs in full, which is where financing usually comes in.
What are the personal liability implications for small business loans like CEBA?
The Canada Emergency Business Account (CEBA) was a pandemic-era loan program and is closed to new applicants. Whether you’re personally responsible for a business debt like CEBA mostly comes down to how the business is set up. A loan to a sole proprietorship or partnership is effectively a loan to the owners. A corporation’s debt generally belongs to the corporation, unless someone has signed a personal guarantee. Refinancing can change that if the new lender asks for a guarantee. For your own situation, talk to your accountant or a lawyer.
General information, not financial advice.
