Small Business Advice

The Ultimate Guide to Business Funding Options

Canada’s 1.3 million businesses are supported by a $173 billion business financing market, which offers a wide range of financing solutions to meet any and every need. To help you understand your various options, here’s a breakdown of all of the business funding options common in Canada:

1. Traditional Business Loans

The majority of business owners rely on traditional business loans from their bank or credit union in order to finance their business needs. These loans are based on borrowing an approved lump sum and repaying it, plus interest, over a set period of time via regular repayments. Most of the time, the loan funds can be used for any legitimate business purpose. Eligibility requirements for these loans are strict, as are the rules around the loan.

Data source: Government of Canada, 2022

2. Online Business Loans

An online business loan is structurally the same as a traditional business loan; the only real difference is that an online loan is easier to apply for than a loan from a bank or credit union, as the entire process can be completed online, and approval happens faster. Because of lower overheads, some online loan companies offer lower interest rates than the big banks too. However, the reliability and reputability of online companies can vary.

For more on this topic, read our blog piece on Online Funding.

3. Small Business Loans

Small business loans work just like other business loans (i.e. you borrow a lump sum and then repay it over time at a certain interest rate), but because Canada is home to many small businesses, there are a plethora of loans geared specifically to the needs of this demographic. For example, many small business loans do not require a long business history, and can have competitive interest rates and flexible terms; however the borrowing amounts are usually smaller than with a standard business loan. 

4. Asset-Backed Financing

While the loans discussed above are all typically unsecured, asset-backed financing provides a route to funding based on ownership of equipment, real estate, inventory, vehicles, machinery or other assets held on a company’s balance sheet. The theory is that by providing collateral, the risk of lending is lower (as the collateral can be seized in the event of failure to repay the loan), so lenders are more likely to approve funding. The cost of borrowing can also be lower. As with other loan types, the funds raised in this way can be used for almost any business need.

5. Lines of Credit

All of the above options rely on a business knowing exactly how much it needs to borrow, and repaying it in set amounts over a set period. But if you want access to variable amounts, then a line of credit can help. A line of credit is a type of loan that allows you to borrow any amount of money, up to a pre-set limit. Only what you actually borrow is subject to interest charges, and once you have repaid outstanding balances, you can then re-use the line. This makes a line of credit extremely flexible; however interest rates are usually higher than with a standard loan, and your credit limit will depend on your circumstances.

6. Business Credit Cards

A business credit card is effectively a line of credit; the card will have a pre-set limit, and you only pay interest on what you actually spend. Business credit cards can have high credit limits and many perks, but their interest rates are typically very high, and the best deals are reserved for larger, more established businesses. In addition, not every business will qualify for every business credit card.

7. Merchant Cash Advances

A merchant cash advance (MCA) is another popular option for business financing, especially for businesses generating steady sales and revenue. An MCA is not a loan; it is an immediate advance of your future revenues and/or credit card sales, today, at a cost. An MCA lender purchases your future receivables at a discount, so that you can monetize those funds immediately to grow your business and revenues. A business can borrow a lump sum based on anticipated future sales, and then make regular payments until the whole amount is paid back. Merchant cash advances can be extremely convenient, but have limited borrowing amounts and can be expensive.

To learn more about MCAs and how they stack up against other financing methods, read an in-depth analysis here.

8. Purchase Order Financing

Purchase order (PO) financing is similar to an MCA, in that a business receives a cash advance based on future sales. However, unlike MCAs, this relies on orders already in hand rather than simply anticipated, and there is no need for their eventual payment method to be credit card. 

The lender pays borrowed funds directly to your supplier, rather than to you, so that they can produce and deliver the goods. The customer receiving the goods pays the PO lender, and then your company receives the balance. This more complicated arrangement allows companies that provide goods to take on orders they couldn’t otherwise fulfill, and is easier to qualify for than a loan; however it can be expensive.

9. Invoice Financing

A similar arrangement to MCAs can happen for orders that you have already fulfilled but that have yet to be paid for; this is known as invoice financing (or factoring), and is helpful if you are in need of short term cash while your customers pay what they owe. Essentially, this is a type of asset-backed loan, where the collateral used is unpaid invoices. The cost of this type of funding depends on how long it takes your customers to pay you, so it can get expensive over time.

10. Grants

Some businesses may be eligible for one or more grants; these can be available from federal, provincial or local government, or from organizations dedicated to assisting businesses in certain industries or with certain characteristics. For example, small businesses, minority-owned businesses, women-led businesses, businesses focusing on specific underserved communities and so on are all potentially eligible for grant funding. The benefit of grant funding is that it does not need to be paid back. The downside is lack of availability, stiff competition for funding, and usually difficult application processes.

The Canadian government has a free search tool to help you discover if there is a grant you might be eligible for.

11. Private Investors

Some businesses may be able to secure funding via private investment; this essentially relies on one or more wealthy individuals choosing to invest in your business, in return for a stake in the company or a slice of the profits. Working with private investors comes with its own set of challenges and benefits; the amount of money available can be large and the restrictions few, but investors may want a lot in return.

To learn more about finding potential investors, check out our blog post on this topic, here.

12. Crowdfunding

Lastly, businesses may be able to get the cash they need via crowdfunding. This relies on bringing many disparate people together, each of whom contributes a small sum, and usually who expects something in return (e.g. the product you’re trying to create). This form of funding is popular in the arts and for small one-off projects, and in 2023 over $20 million is expected to be raised in this way. It is however inherently uncertain.

Pros and Cons of Each Type of Financing

Traditional bank loanCheaper than many other optionsBorrowing amount can be largeLong repayment possibleCollateral often not neededFixed repayment amounts allow for budgetingHigh approval threshold (e.g. credit score, income)Missed payments can incur penalties and harm your creditCan take time to apply/approve/receive funds
Online loanQuick to apply for and to receive fundsCheaper than some other optionsCollateral usually not neededFixed repayment amounts allow for budgetingMissed payments can incur penalties and harm your creditSome online companies are less reputable
Small business loanGeared towards small business needsFlexible termsEasier to apply for than other loansSmaller borrowing amounts than standard loansMissed payments can incur penalties and harm your credit
Asset-backed financingCompetitive interest ratesLarge borrowing sums availableEasier to qualify for than unsecured loansWill lose asset in event of loan default
Line of creditVery flexible borrowing amounts and repaymentsReusable over timeCredit history neededCredit limit depends on credit score/incomeCan be more expensive than a traditional loan
Business credit cardMany offer attractive rewardsExtremely flexibleMultiple cards can be held by key employeesProvides immediate access to cashHigh interest ratesSome cards have large annual feesNot available to all businesses
Merchant cash advanceConvenientEasy to accessRepayment amount depends on business successSmaller borrowing amounts than traditional loansRequires income from credit card paymentsCan be expensive
Purchase order financingConvenientEasy to accessRelies on orders in handRepayment can be delayed by customer late paymentControl of payment processes ceded to lenderCan be expensive
Invoice financingFunding can be accessed quickly and easilyRelies on having unpaid invoicesBorrowing amount capped by invoicesExpense determined by customer repayment timeline
GrantNo repayment requiredProvides credibilityOften comes with non-financial benefits e.g. visibility, mentoringLimited fundsStrong competition for fundingPotential restrictions on use of fundsDifficult application processes
Private investorNo financial cost to your businessEnhances credibilityPotential access to large sumsOften comes with mentoringMust relinquish some control of your businessMay be restrictions on how the funding is used
CrowdfundingHelps build a loyal customer baseCan be quickNo guarantee how much you’ll raiseRequires intensive marketing

For more help in making your Canadian business flourish, check out what BizFund can do for you.