Every year, thousands of businesses in Canada need a business loan, but for new small businesses and even those that have been established for quite some time, the process can be a bit mysterious.
Today at Bizfund, we want to dispel the mystery because getting a business loan in Canada is more accessible now than ever before. This is especially true when you consider that there are quite a few types of business loans available, each with similar processes.
So, stick around to find out how to get a business loan in Canada. We’re taking you step by step and offering advice on how to avoid mistakes, too, so you can make the best financial moves going forward.
Types of Business Loans Available in Canada
Before you take a closer look at how to get a business loan in Canada, it’s best to consider your options. Below, our team shares a few of the loan types available to small businesses. Hopefully, these will give you an indication of which type of financing might suit your needs best:
- Bank loans: If you operate an established business in Canada and have been doing so for some time, you may want to consider traditional bank loans. These are best suited to companies with a stronger credit profile, steady revenue, and a few years in operation.
- Government-backed loans: There are a few loan programs available through the government, but the most well-known and popularly sought is the Canada Small Business Financing Program. With this program, eligible businesses have access to financing through participating financial institutions. However, it’s designed to support companies with annual revenues of up to $10 million, so bear this in mind.
- Online lenders: If you need access to faster financing and want a quicker application period, you could consider a short-term loan through an online lender. These loans often offer flexible approval standards when you compare them to banks, but the costs can be significantly higher.
- Merchant cash advance: For businesses seeking funding tied to future sales rather than traditional fixed-term loans, merchant cash advances should be considered. Although technically not loans, these financing solutions offer shorter application periods, more flexible requirements, and weekly or daily repayment of the borrowed amount.
- Equipment financing: Companies that only need financing to source equipment can explore this option. These loans are useful for machinery and vehicle purchases, since your financing would be directly tied to the assets you finance.
Step 1: Know How Much You Need and Why
Do you know how much funding you need, or are you ‘guestimating? If your answer is the latter, it might be time to sit down with your financials and pin down an amount you need to borrow. Only when you know how much you need and why you need it can you begin properly looking into financing options.
Additionally, knowing what you need funding for makes you look better to lenders. They can see it’s for a clear purpose, such as equipment, inventory, working capital, expansion, or refinancing more expensive debt. And when they can see this purpose, they are more likely to grant you financing if you meet the requirements.
Moreover, this step is important because it can help you prevent over- or under-borrowing, as both scenarios can cause you problems. For example, if you borrow too little, you could end up short on cash before you finish a project. On the other hand, if you borrow too much, you could end up paying fees and interest on money your business never actually needed.
Step 2: Check Your Eligibility
When you know how much you want to borrow and for what purpose, naturally, the next step is checking your eligibility. There are different business loan requirements in Canada depending on the loan type. However, most lenders will look at a mix of your business or personal credit, monthly or annual revenue, time in business, and overall cash flow.
Usually, lenders consider a credit score in the mid-600s a practical starting point. However, stronger profiles often score at or above 700 and are more likely to receive approval. It’s also worth knowing that if your company’s revenue is strong enough, banks may work with lower credit scores. Yet, this is not as common, so don’t get your hopes up.
So what your company should do is access personal and business credit profiles to check scores before pursuing financing. This can help steer you in the right direction. You should also review the bank’s or alternative lenders’ requirements for certain loan programs to ensure you meet the minimum requirements. If you don’t, you could be wasting your time. Sadly, in business, time is money, so you want to avoid this situation.
Step 3: Gather Your Documents
If you meet the minimum requirements, the next step is to gather the necessary documentation. If you gather your documentation before you apply, you can eliminate much of the hassle.
So, try to put together a physical or digital file with your tax returns, financial statements, business registration paperwork, and business bank statements. Usually, this is what most lenders will want to look over before they approve or deny your financing application.
Additionally, you may also want to have accounts receivable reports on hand. Also, your business plan, proof-of-ownership paperwork, and financial projections. These documents can go a long way toward getting you closer to approval. And they may even speed up your application by reducing back-and-forth.
Step 4: Compare Lenders
Unfortunately, not every lender is a fit for every company, so you shouldn’t apply to the first lender you find. Instead, it’s best to be strategic and compare different lenders to ensure you get the right loan. If you do things this way, you can avoid choosing the cheapest option, which is usually not the best fit for your business.
Also, when comparing lenders and reviewing business financing in Canada, be sure to check loan terms, repayment installments, fees, and interest rates. You should also look at collateral requirements (which apply only to select loans) and the total borrowing cost.
These elements are important to compare across lenders. They can help ensure the loan works for you now and in the future.
Step 5: Submit Your Application
When you have compared lenders and know which one you want to use, it’s time to submit an application. It’s important that you complete the application properly, as any small mistake could lead to delays or outright rejections. Usually, the best way to ensure you’re submitting properly is to double-check the details. This means checking over your company’s business details, revenue figures, and supporting documents before you submit.
In addition, we recommend using the prequalification or soft-check approval option first, if available. These checks can be invaluable because they help you understand how likely you are to secure approval. They can also give you an indication of the figure you could get approval for if your application is successful.
Step 6: Receive Approval for Funding and Manage Repayment
Once you receive and accept an offer, review everything and confirm that it aligns with your current and future financial situation. After you do this, you can expect funding to arrive anywhere from the same day to several business days later.
However, from the moment that funding hits your business bank account, you need to treat repayment as part of your cash flow plan. This is a crucial part of managing your repayments and keeping your business in the clear.
To manage your repayments, set reminders, track due dates, and know exactly how the repayment will impact your operating budget. If you get into a good repayment routine from the get-go, you’ll build good credit over time. What’s more, you’ll also foster better professional relationships with lenders, and this can be beneficial in the long run.
Tips for First-Time Borrowers in Canada
Borrowing for the first time for your business can be exciting but also overwhelming. Usually, it’s overwhelming if you’re unsure what qualifies as a good ‘business move.’ That’s why, to help give you a little more peace of mind, we share a few tips for first-time borrowers in Canada below:
Choose the Least Expensive Option
It can be incredibly tempting to take out more than you need, especially if you qualify for more. But this is a mistake you want to avoid. In the long run, taking on unnecessary debt can lead to default on repayments. It can also cause poor credit and, in some cases, the seizure of your equipment or collateral by the bank.
Don’t Focus on Speed Alone
Often, you might find yourself favoring speed over terms because you need fast access to funding. Unfortunately, this can be detrimental to your business. So, it’s usually best to try to balance how quickly you need funding with the most favorable loan terms. If you do this, it can make a huge difference over the life of the loan.
Ensure the Repayment Schedule is Appropriate
Certain repayment schedules work better for some industries than others. For example, weekly or daily repayments can feel manageable at first, but they can create pressure in the long run. This is especially true if your revenue comes in unevenly or seasonally. So you need to consider this before you agree to the loan terms.
Watch for Red Flags
There are quite a few red flags you need to watch out for when trying to secure a business loan. For instance, be careful of unclear pricing, pressure to sign quickly, and aggressive repayment schedules. You should also be wary of terms that are hard to understand in plain language. If a lender exhibits any of these red flags, it might not be a good idea to apply with them.
The Wrap-Up on How to Get a Business Loan in Canada
As you can see, securing financing isn’t that difficult now that you know how to get a business loan in Canada. The steps are simple, and in no time, you’ll achieve your business’s goals. You’ll just want to keep our tips in mind, too.
For those ready to move forward with applications and who feel a merchant cash advance might be in the cards, consider ours at Bizfund. We offer fast funding within two to three business days, and companies can borrow up to $300,000.
Our requirements are also far more flexible than those of traditional lenders. We’ll also be upfront with you about the terms so you know you’re making the right decision. So, if you want to get started, why not apply here today?
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