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Business loan eligibility: What you’ll need

Here are the basic elements most banks require in order for you to be approved for a business loan:

A registered business

Before providing you with a business loan, banks will want to see that you’ve registered or incorporated your business. You do not need to incorporate your business to be registered with the government; sole proprietor businesses and partnerships can also register.

Business loans will not be given out to a freelance or independent worker who has no registered business.

Click here to register your business with the government of Canada.

Businesses in Quebec also need to register with Revenu Québec.

BDC only offers loans to companies that are based in Canada. Owners must have reached the age of maturity in the province or territory where they live. The organization must also be a commercial enterprise designed to generate revenues, meaning that not-for-profits are not eligible for loans.

A bank account that matches the name of your business

Whether it’s a business bank account or a personal account, the account needs to match the name of your business.

At least 24 months of operations and generating revenue

For most types of loans, you need to have been in business for 24 months or more. To be eligible for BDC financial support when your business is at the start-up phase, you must demonstrate realistic market and sales potential, possess experience or expertise in your field, provide personal or credit references, demonstrate a reasonable investment of financial resources and provide a solid business plan.

A sound credit score

A bank will look at two things before granting you a business loan:

• your personal credit score
• the credit bureau report on your business

Make sure you have this information before you meet with your banker, and that you’ve reviewed it, so you can be ready for any questions they may have.

Sound financial decisions in your personal life can help your eligibility—the opposite is also the case: “If you’re buying a boat and cars, and you have a lot of debt that you incur every year, that would be a red flag,” says BDC’s Wesly Joseph, who spent several years assessing borrowers both inside and outside BDC. “Whatever tendencies you have on the personal side, you usually bring them to the business side.”

For loans under $350K, having a good personal credit score is the most important requirement for your application.

For those in business for at least 24 months, the whole process for a loan under $100K takes place online. That means the loan request process is very fast and easy, but it also means that having a good credit score is extremely important to you getting a loan.

Company financials

For larger loans, banks will typically want to review your financial statements to evaluate your capacity to repay debt. If those are not available, you’ll need to at least provide your tax returns.

They’ll also ask for financial projections detailing your monthly cash flow forecast for the next 12 months.

Supporting documents

Larger business loan applications require several supporting documents, such as financial statements, financial projections, and marketing and production plans. These all help assure the bank of your company’s viability. More details can be found in our article on getting a business loan in Canada or by contacting us.

You can also consult our list of the most frequently asked questions that BDC receives about small business loans.

How much of a loan can I take out?

When you’re thinking about the size of loan you want to request, think about how much you can afford.

An easy rule of thumb is to think of your net income (which is your net profit, earnings, or bottom line) in relation to the depreciation of your project (which is the asset or project losing value over time).

Borrowing capacity = Net income + depreciation of your project

Lenders will also look at your sales when assessing your eligibility for a loan.

According to Joseph, the size of your loan will depend on the amount of sales you’ve been recording. “Say, you're making $100,000 in sales per year and you have no debts, and you want to take out your first loan. It cannot be more than $100,000.” He says that’s a common formula banks use to measure their risk.

What is the interest rate on a small business loan?

BDC calculates the interest rate on our small business loan as follows:

Current floating base rate + variance based on your personal and business information = interest rate

As a result, the interest rate varies by client.

Loan structures can take many different forms. Other banks’ calculations may differ.

Which bank is best for a business loan?

It’s important to look at what different lenders are willing to offer you, because various banks offer different loan products.

Do your research to find both the bank and the loan that’s right for you.

The first thing you may want to do is reach out to your network of business contacts and ask them about their experiences with a given bank. Ask about:

• the quality of service they received
• any problems they encountered
• what the bank looked for in a loan proposal
• how much the bank was willing to negotiate

Apart from the relational aspects, what factors should you consider when comparing business loans between banks?

1. Your loan term

Loan terms are very important. Longer repayment terms do mean higher borrowing costs over the long term, but also lower monthly repayments so that you can make sure you don’t run into any cash flow problems.

2. What percentage of the project cost is the lender willing to finance?

This will decide how big of a personal investment you need to make and whether it makes sense to work with a second bank.

3. What’s the lender’s flexibility on repayments?

When it comes to your business’s finances, remember that even the best-laid plans can go sideways because of unforeseen developments.

So, ask your banker what would happen if you were unable to make scheduled loan repayments. What options are available to you? For example, would your bank let you temporarily suspend your principal repayments? It’s also important you understand the difference between a term loan and a demand loan.

A term loan is committed capital. This means that your bank can’t decide to pull out of your business or your industry because of a strategic change at the bank. A demand loan is a loan that a lender can require to be repaid in full at any time. At BDC, all loans are non-demand unless there are arrears in payments. We can’t suddenly decide to pull out.

4. What guarantees do you need to provide?

Most lenders in the market are lending based on an asset. They’ll look at a building, for example, evaluate its value and loan you money on a percentage of that assessment. Other lenders, like BDC, will lend you money based on your cash flow. They’ll look at your revenues, your expenses and then—based on your profits—they’ll give you a loan without needing to take on collateral. This will allow you to borrow additional money to grow your company.

5. What is the interest rate being offered to you?

This will determine the amount of money that will need to be repaid every month.

While your interest rate is obviously very important, the other factors discussed above need to be given due consideration, as well, because they could actually save your business if you run into any difficulty.

Can a salaried person apply for a business loan?

A salaried person can apply for a business loan only if they have a registered business. Many people hold on to their jobs while they run fledgling companies. Whether or not a salaried person is running it, Joseph says a lender typically wants to know that enough time is being committed and that the revenue being generated will mitigate risk. “They want to know that the business will be able to support itself.”

How much is a normal business loan?

The minimum loan amount at BDC is $10,000. The maximum amount corresponds with the borrower’s facility to pay back the loan. “It really depends on how much you need in order to help your business move forward, and how much debt your business can take on,” says Joseph.

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