How to get a business loan in Canada

“Knowing why you need the loan helps you figure out what type of loan to get, how much to ask for and the ideal terms and conditions for your business,” Mittra says.

“All this will increase the likelihood of success when you apply for a loan and help you develop a long-term relationship with a financial partner.”

1. Why do I want a business loan?

The first step is to understand why you want a business loan.

Financial institutions offer different types of loans that suit different needs, such as:

• Buying or building commercial real estate
• Buying materials or equipment
• Increasing working capital
• Expanding into new markets
• Buying a business
• Financing new technologies

Prioritizing your needs allows you to determine which types of loans are most suitable.

How much financing should I ask for?

You must be clear on your needs to determine the amount you should ask for. You should not take on more debt than you can afford. However, you should borrow an amount sufficient to cover your financial needs. Otherwise, you could face a cash shortfall when you can least afford it.

You can use a business loan calculator to determine your monthly payments, the interest cost for financing your project and the amortization schedule.

Then, enter these amounts into your cash flow projections to see the impact of the loan. This allows you to anticipate gaps in your cash flow in the coming 12 months, including any expenses due to planned investments.

Plan your financing request considering your anticipated sales growth and ensure you have enough cash throughout the year.

You may be surprised at the amount you can afford to borrow. “Newer businesses tend to overestimate their ability to take on a loan,” says Mittra. “On the other hand, more mature businesses often underestimate how much they can afford to borrow.”

2. Which type of business loan is best suited to my needs?

The next step is to decide which loan type best suits your business. However, before undertaking this step, ensure you meet the criteria financial institutions require to be eligible for a business loan. At a minimum, you should have:

• A registered or incorporated business
• A commercial vocation
• A bank account that matches the name of your business

There may be other criteria based on the type of loan.

Types of loans

Loans for new businesses

Start-up loans are offered to new businesses that have been in operation for less than 24 months.

New businesses with at least 12 consecutive months of revenues can apply for start-up financing. This type of loan can be used to:

Buy assets

• Pay start-up fees
• Buy a franchise
• Create a website
• Hire an expert advisor
• Replenish working capital

Businesses with less than 12 months of revenue history may be eligible for financing and support offered by BDC partners such as:

• Futurpreneur Canada
• Community Futures Network of Canada

Loans for businesses established for more than 24 months

Several financing products are offered for companies that have been in operation for more than 24 months.

Smaller loans

To borrow less than $100,000, you can apply for small business loans. You can apply online and get your loan quickly. It can be used to:

• Buy equipment, software or hardware
• Upgrade a website
• Purchase inventory
• Pay suppliers
• Pay salaries

Working capital

You can get a working capital loan to drive growth without risking everyday cash. Projects can include:

• Complementing your line of credit
• Launching growth projects
• Improving profitability

Line of credit

You can apply for a line of credit to have short-term cash flow. You can use this as needed by borrowing up to a predetermined amount.

You should only use it for short-term needs, such as settling invoices with suppliers before receiving client payments.

Commercial real estate

To get extra space, you can use a commercial real estate loan to:

• Buy land or buildings
• Pay for the construction of a new facility
• Expand or renovate existing premises
• Replenish working capital depleted by real estate costs

Business acquisition

You can use business purchase or transfer financing to:

• Buy a business
• Sell a business to management or a family succession
• Refinance vendor financing
• Acquire land or assets from another business

Equipment investment

Equipment purchase financing can help you:

• Buy new equipment to support growth
• Modernize your operations to improve your efficiency
• Complement your line of credit if equipment costs deplete working capital

Technology purchase

To invest in tech solutions, you can use a technology equipment loan. This is for all types of businesses. You can use it to:

• Purchase hardware or software
• Invest in digital marketing
• Hire an IT specialist

Purchase orders

You can apply for purchase order financing to fulfill large orders and take on new business opportunities. You can use it to:

• Accept larger contracts and purchase required inventory
• Expand into new markets
• Pay suppliers upfront

Intellectual property

You can seek Intellectual Property-Backed Financing to commercialize or expand your intellectual property assets. This financing can take different forms:

• A traditional loan
• Quasi-equity financing
• Equity financing

Growth and transition capital

If you are at the head of a growing mid-market, high-revenue business, you can seek Growth & Transition Capital.

This solution allows businesses to raise capital when they have insufficient tangible assets to pledge for security and don’t want to dilute ownership. Here are some options:

• Mezzanine financing
• Cash-flow financing
• Quasi-equity financing

Technology companies

Whether you’re an earlier-stage scale-up or an established business, you can secure financing tailored to the technology industry. Projects can include:

• Developing new products
• Hiring more staff
• Investing to attract new clients
• Acquiring another business
• Expanding into new markets
• Deploying AI in your business

Cleantech

To scale as a cleantech business, you can seek specialized financing.

Inclusive entrepreneurship loan

You can access different types of loans as a business owner if you are part of an underserved group. These loans can support you with your projects.

Women entrepreneurs

As a woman entrepreneur, you can get financing through various partners and programs. They provide financing and other support to women-led businesses.

Indigenous entrepreneurs

As the owner of an Indigenous business, you can apply for a specialized loan for start-ups and existing businesses.

Black entrepreneurs

If you are a Black business owner, you can obtain a loan from tailored programs suitable for start-ups and existing businesses.

Loan terms and conditions

Loan terms and conditions vary greatly depending on the financial institution and type of loan.

“It’s common to focus on the interest rate, but other elements can be just as important,” Mittra says. “You should shop around for the right terms and conditions.”

Take the time to learn about the following terms before taking out a loan.

• Interest rate
  The interest rate will determine the monthly amount that must be repaid. While your interest rate is significant, you should consider several other factors that can ease the financial pressure on your business.
•  Amortization period or loan term
  The amortization period is the time required to repay a loan in full, including its principal and interest.
  A more extended amortization period increases the cost of borrowing. However, it also reduces monthly payments, which can reduce the strain on your cash flow.
• Flexibility of repayment options
  Flexible repayment options can help you face the unexpected. What would happen if something out of your control, such as a natural disaster, would impact your business? Or what if you wanted to put aside cash flow to take advantage of a business opportunity or to finance an improvement? Make sure your bank lets you temporarily suspend your principal repayments.
• Percentage of project cost that will be financed
  The percentage of the project cost the financial institution is willing to finance will decide how big of a personal investment you need to make.
• Debt covenants
  A covenant is a promise a borrower makes to the lender as part of a business loan agreement. Make sure you properly understand the covenants in your contract.
  If you break a covenant, the loan may be considered to be in default. In such a situation, the financial institution can apply different measures and even require that the entire loan be paid back.
• Collateral
  Most lenders in the market are lending based on an asset called collateral. For example, they’ll look at the potential purchase of a building, assess its value and loan you a percentage of its estimated value. The lender can seize the building in the event of default.
  Other banking institutions, like BDC, base loans on cash flow. They’ll look at your revenues and expenses and then, based on your profits, give you a loan without requiring collateral. This allows you to borrow additional money to grow your business.
• Financial reporting requirements
  Most loan terms and conditions have financial reporting obligations. You are required to provide financial statements and reports to the bank annually. Small loans typically have less demanding reporting requirements.

This video explains how a bank looks at your business.