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How to Qualify for a Small Business Loan

In December of 2018, StatCan determined that banks authorized a whopping $238 billion in loans to small and medium enterprises. That’s a lot of money loaned out to businesses! However, this number also suggests that many financial institutions across Canada are happy to provide small business loans to companies of all types. If you’re a small or medium business owner looking to secure a loan, then this is good news for you!

Here’s how to qualify for a small business loan and the typical business loan terms business owners need to watch out for when completing the loan application process.

Back: How to Get Funding for Your Small Business

Next: A Guide to the Top Canadian Small Business Loans

What is a Business Loan?

A business loan refers to a financial loan a business uses for operational purposes. Typically, this type of loan is provided to companies by banks or third-party lenders or creditors. To receive small business funding, you will first have to have your loan application approved. When a business receives a loan, it becomes a debt that they must pay back to the lender.

A small business loan in Canada can make all the difference whether or not a company stays in business or folds within the year. Such loans can be granted as one lump sum of money or offered as a line of credit.

According to a survey on small businesses’ borrowing activity as conducted by Innovation Science and Economic Development Canada (ISED), small businesses possess a high rate of approval for loans. This organization charted the trends surrounding small business loans throughout Canada from 2009 to 2018. It determined that the request rate for loans has steadily increased in this timeframe.

Why do businesses apply for a loan in the first place?

ISED determined that many of the loans secured by small businesses in 2018 were mainly used for one of two purposes: to cover the cost of day-to-day operating expenses or to purchase fixed assets for the business.

In recent years, many small business owners are turning to loan applications to access debt financing, too. In 2009 there was a 14% request rate of small business loans for the purpose of debt financing. By 2018, that number grew to over 27% of loan requests intended for debt financing. When it comes to debt financing, banks aren’t the only ones that offer debt solutions, as various companies on the market provide business and corporate debt restructuring.

How Your Industry Affects Business Loans

When it comes to securing a Canadian small business loan, certain industries, with their products or services, will find it easier or harder to gain credit approval. What we mean by this is that specific industries possess outstanding credit or outstanding balance of loan repayments.

The real estate and rental and leasing industry had the largest loan credit of any industry within Canada in 2019. The second largest industry with the greatest business loan debt is the wholesale and retail trade. Conversely, the finance and insurance industry experienced a decrease in outstanding loans.

This means that if your business falls within the real estate and lending, or wholesale and retail industry, it may be harder to gain approval for a loan. This is due to the large outstanding creditors already in place. However, if your small business works in finance or insurance, you could have an easier time securing credit for your operations.

Who Provides Canadian Small Business Loans?

Small and medium businesses have a high approval rate for bank loans, according to the Canadian Bankers Association. The loan approval rate for these enterprises sat at 89% of all small and medium businesses in Canada that applied. That’s good news for business owners. But what financial institutions are providing these financial credits to companies across Canada?

Domestic banks are the leading providers of these types of loans. In recent years, banks have begun offering more flexible products, with a simplified credit application process to help these small and business businesses as much as possible.

Banks also partner with the federal government, known as the Canada Small Business Financing Program. This loan program allows banks and creditors to share the risk of lending with the federal Government of Canada. In doing this, the government helps stimulate job and wealth creation.

Canadian financial institutions are not the only ones who can supply small business owners with a loan. There are also credit unions and third-party lenders and creditors that work with businesses in this regard.

What You’ll Need for a Small Business Loan in Canada

To secure a Canadian small business loan, you will need to provide the financial institution or creditor with specific documents and information before your loan application can be approved.

Business loan requirements will typically include:

  • Good credit rating
  • An annual income
  • Steady cash flow
  • Collateral
  • Small debt load

Good credit rating

A business loan is much like a personal loan in that the borrower must have a decent credit score and credit history to qualify. A credit rating uses various factors to measure the creditworthiness of a person or business. Business credit scores factor in your number of trade experiences, payment and credit history, and outstanding balances when rating your company. Just like a personal credit score, the business score ranges from 0 to 100. Businesses should aim for the highest rating they can, as the closer to 100 you are, the better your credit.

Worried your business credit score won’t hold up to the loan application process? Make these five ways to improve your business credit score a priority before applying and you could have a greater chance at securing funding. Improving your credit report means improving your chances of getting approved and securing business funding.

An annual income

Banks and online lenders need to know your business is generating income, so you have the means to pay back the loan you received from them. This means that annual revenue or income is a mandatory requirement to obtain financial aid.

If you do not have a steady yearly income as a small business owner, it will be harder to show the bank you can repay their credit and therefore get a loan in the first place. Whether qualifying for a loan through a bank or creditor, you can show them your business’s income statement to illustrate your past and present yearly income.

Steady cash flow

Cash flow, like income, illustrates to the bankers and creditors that your business has the funds to repay the loan in question. Business loans requirements cover cash flow, as this is the money available to you within the business at any given time. Banks want to know how quickly you could liquidate your assets to pay back the loan. To illustrate your current cash flow standing, you can show the banker or creditor your business’s cash flow statement and bank statements.


Oftentimes banks require businesses to offer up collateral when receiving a loan. Collateral refers to the assets of a business that are pledged by the borrower to the lender, in return for a financial loan. If the borrower fails to pay back the loan, the lender can legally seize these collateralized assets.

However, in recent years, lenders and creditors have been easing back on collateral requirements. In 2017, approximately 64% of small businesses pledged collateral for their loans. That number dropped to 55% in 2018, illustrating an easing of non-price conditions for borrowing. Find out more about the ways to secure a business loan without offering collateral.

Small debt load

A debt load is the total amount of money that you or your business owes another. If you or your company already carries a large debt load, a bank is less likely to approve your business loan application. In contrast, if you possess a small debt load, a financial institution is more likely to approve your application.

To determine your debt load and whether or not this load is more than you can afford, you will need to calculate your debt/income ratio. Compare the amount you owe against the amount you earn in a given period to evaluate your current debt load.

Typical Business Loan Terms

Before you qualify and receive a loan, your business will need to agree to the financial institution or third-party creditors’ terms of use. These terms stipulate the loan amount, payment conditions, and attached interest rates.

A business loan will typically possess one of three types of payment terms- short term, long term, and no-term. A short-term loan provides a business with a smaller loan amount that must be paid back within a year. In contrast, long term loans provide companies with a larger sum of money, meant to be paid back over a longer period greater than a year.

Both long term and short term loans will require you to pay back the loan with interest. Some short term loan types will carry a greater interest rate than long term loans. However, long term loans make businesses pay interest over a longer period of time.

Third-party and online lenders sometimes offer a third option of a no-term loan. What this means is that there is no fixed repayment period. A sum of money is deposited into your business account. Then a small percentage of your sales each day is used to pay back the amount little by little. As it is based on the percentage each day, these amounts will fluctuate with your sales, meaning on a slow day, you pay less back, compared to a high sales day.

Now that you know specific business loans requirements and understand how to apply for a small business loan, it’s the perfect time to do some research on the best small business loans out there. Check out this guide to the top Canadian small business loans to help your business decide which loan is right for them.

Financial Reporting Software and Loans

Small business loans in Canada are available for your company should you need it. Knowing there are ways to secure credit can make the process less stressful when getting approved. Of course, you will need the right documentation to do so, which quality accounting software can help with.

Millions of businesses across Canada turn to QuickBooks Online to help them generate financial statements and run reports to display accurate bank account information for creditors and bankers. Don’t leave your loan to chance. Create a business plan and start using QuickBooks to improve your loan approval rate to secure the finances your business needs today!

Back: How to Get Funding for Your Small Business

Next: A Guide to the Top Canadian Small Business Loans

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