Unsecured Business Loans in Canada: How They Work and When to Use One

Canadian businesses are having very different conversations about collateral than they did a decade ago, likely because of the shifting nature of business. For example, traditional brick-and-mortar businesses often have ovens, vehicles, and other assets a lender can secure against. On the flip side, a consultant, online retailer, marketing agency, or seasonal service clinic might not have any assets to secure. 

Additionally, even a business with assets today may not be able to tie them up if it needs flexibility for a leasehold improvement loan, equipment financing, or even future bank credit. That’s why unsecured business loans are garnering so much attention. However… and we cannot stress this enough… they are not offering ‘risk-free’ money. 

After all, when collateral is off the table, the lender still needs another reason to trust the deal, and that reason is usually revenue. So, with this in mind, let’s have a closer look at unsecured business loans in Canada. Our team has put together this guide to inform you about the most important considerations when taking out unsecured business loans. 

What Is an Unsecured Business Loan? 

To put it simply, unsecured business loans are those that don’t require the borrower to pledge a specific asset, like their equipment, property, inventory, or vehicles, as collateral. With this type of financing, a lender will base your approval on business performance, credit strength, cash flow, time in business, and repayment capacity. 

However, we want you to know that the word ‘unsecured’ can be a little misleading. Just because you are offering up no collateral doesn’t mean the lender has no protection at all. In many situations, a lender could require a personal guarantee or a general security agreement. Additionally, they could even need a blanket lien over business assets. 

So, although unsecured means there is no single asset being valued and held as your fallback, a lender isn’t just taking your word for it when you say you will pay back any funds you borrow. 

Your Main No-Collateral Funding Options

Although it might seem like it at first, not every collateral-free option works the same way. And when you really sit to think about it, this makes sense. So, it’s important to compare options because not every unsecured small business loan available will meet your needs. That’s why we’re helping you understand the big picture by sharing a look at different funding options, what they are, what the lenders look at, and who they suit below: 

What This Table Means

From the above, you can see that there is a spectrum, and this matters because ‘no collateral’ is not a single product but a category of funding options. This means that for some, a line of credit may be cheaper and more flexible for covering recurring cash flow gaps, but for others, it’s too difficult to secure without an appropriate financial history. 

On the other hand, others may find a short-term loan more suitable for a planned purchase but not good enough for long-term goals. Then there are those who love how quickly they can secure a merchant cash advance. Yet, others may find the repayment cost too steep because it’s based on future sales rather than a standard interest schedule. 

Of course, these are just examples, but they give you insights into how you would need to weigh and compare your options. If you do that, you can ensure you’re making the best financial decision possible for your business. 

What Lenders Look At When Collateral Is Off the Table

A lender cannot lean on collateral; they need to see how hardy your business truly is, and this usually means they will look at four things:

Revenue Stability

The first thing is revenue stability and trend. They will want to see whether deposits are consistent and whether your company’s sales are growing or shrinking. 

In addition, they will want to see whether your revenue depends too heavily on a single customer. Usually, if you can prove a steady flow of money, it can look better than a month that was really good, followed by a slow stretch. 

Time in Business

The second thing they will look at is your time in business. Typically, a business with two years of operating history provides a lender with more evidence than one that has only been open for six months. 

According to industry experts like Stripe, many unsecured business loan lenders look for at least one to two years in business. However, if you have a younger company, you may still qualify if you can provide a guarantee or demonstrate impressive revenue. 

Personal Credit and Guarantee

The third thing most look for is personal credit and a guarantee. Usually, with small businesses, it’s not unusual for the owner’s credit profile to be used if the corporation is young or lightly capitalized. In these instances, you may even be asked to personally guarantee the repayment. 

Industry Risk Profile

Last but not least, a lender will likely look at your industry risk profile. Unfortunately, lenders look at industries differently. For example, a lender might view a professional services firm with recurring retainers more favorably than a restaurant, seasonal retailer, or contractor who waits on invoice payments. 

So, this might mean you could find it harder to qualify for select unsecured business loans than others, but it’s not impossible to qualify. You’ll just need to keep in mind that the offer may come with a smaller amount, a shorter term, or even…a higher rate. 

The Personal Guarantee Question 

The personal guarantee is the part many borrowers skim past and worry about later, but that’s the wrong approach because personal guarantees are serious. When you agree to a personal guarantee, you’re promising to take responsibility and repay the debt yourself if the business cannot. So, while the loan may not require a specific asset as collateral, it’s altogether possible for a lender to pursue repayment beyond the business itself. 

However, this doesn’t mean the lender can casually withdraw funds from your account after one missed payment. In most situations, collection depends on the loan agreement, the default process, and the lender’s legal rights. So, as you can now see for yourself, the line between business debt and personal responsibility is much thinner than you might expect. 

With this in mind, we urge you to look closely at what you’re personally guaranteeing before signing and when that guarantee ends. Also, you should consider whether your choice to personally guarantee could negatively affect your ability to apply for future borrowing.

For this reason, make sure to look at phrases like “joint and several liability,” “unlimited guarantee,” “continuing guarantee,” or “all present and future indebtedness” before signing. These deserve extra attention because they can make your responsibility exponential and far beyond the loan you thought you were signing for. 

Additionally, don’t forget to ask questions. You could ask whether the guarantee can be capped at a percentage of the loan or reduced after a repayment milestone. You could also ask if it can be limited to specific owners or removed once the business has better credit. 

Typical Costs and Terms in Canada 

So what’s an unsecured loan going to cost you? That’s a question that’s often on the minds of those considering unsecured business loans, and the answer is tricky because it depends. This is because estimated pricing depends heavily on revenue. It also depends on credit strength, time in business, and industry risk, as we said previously. 

However, to give you a typical range, you could expect unsecured term loans to sit around 8% and 25%+ APR, depending on the lender and your circumstances. Usually, applicants who more closely meet the requirements qualify at the lower end. In contrast, those with weaker credit profiles or volatile revenue are on the higher end. 

Then, when it comes to lines of credit, they are often priced at prime plus a margin. Typically, the range is between prime + 1.5% to prime + 13%. But again, this will depend on your business and the lender. Additionally, you could also try for a merchant cash advance, which is a type of unsecured loan. An MCA uses factor rates, and these are commonly around 1.1 and 1.5. 

Should you be uncomfortable with any of the three choices, there is also revenue-based financing to consider. With this form of lending, you’ll repay financing with a percentage of sales. This is often between 3% and 15%, depending on the structure of your loan agreement. 

We also recommend you look beyond the advertised rate. You need to ask for the total repayment amount, term length, payment frequency, fees, and whether early repayment reduces cost. This can give you a much better picture of what’s worth it and what’s not. 

Who Unsecured Lending Suits Best 

Unsecured lending tends to suit businesses that don’t want to pledge specific assets and those seeking a practical solution with a transparent repayment path. 

So, this means that asset-light service businesses, seasonal businesses with busy periods, online sellers, and revenue-driven businesses benefit most often. Here’s a look at the specific types of businesses: 

• Bookkeeping firms
• Digital agencies
• Consulting practices
• Marketing studios
• Landscapers
• Tourism operators
• Catering companies
• e-Commerce stores

Who Should Look Elsewhere: When Secured Financing Is the Better Path

Unfortunately, unsecured business loans aren’t the best solution for everyone. In some situations, secured financing is a better fit. This is especially true for those who need a larger amount or a longer repayment period. They also tend to suit companies looking for the lowest available rate. 

Choosing the Right Collateral-Free Path

When it comes time to decide on financing, the decision can be difficult. Hopefully, you have a better idea of unsecured business loans in Canada and what they entail. If you would like to learn more about merchant cash advances, you can speak with us at Bizfund. We offer merchant cash advances up to $300,000, and funding is often released within 24 to 48 hours. Contact us today to apply and start making your business’s future brighter.