You’ve been preparing for months to launch your new business. You have a genius idea, you’ve drafted a business plan, and you’re itching to get started. 

There’s only one problem. You need funds to buy the equipment you need, hire and train the right people, and promote your product or service to attract customers.

You can ask friends and family to give you the money. Or, apply for a government grant. But there’s a third option: applying for a loan.

A small business loan is a sum of money provided to a new or existing company to fund various aspects of conducting business. There are a variety of options to learn about.

As of December 2017, 1.15 million (97.9% of all employer businesses in Canada) were small businesses, 21,926 (1.9%) were medium-sized businesses. 

Those businesses combined account for slightly more than 50% of the value added to the country’s output.

That’s why banks and the Canadian government are very interested in helping SMEs thrive.

Asking for money, without knowing what’s expected of you can be intimidating. Let’s review your options and help you identify the right loan opportunity to fund your small business. Want to learn more tools to start your business? Read our authoritative checklist for starting a business in Canada. 

Small business loan benefits and challenges

Deciding how to finance your small business through a loan can be a challenging task for many entrepreneurs. There are many equity and debt funding options that can be used to get started, and all of them have pros and cons. 

Consider the following list when deciding if a particular loan is right for you.

Small business loan benefits 

Retaining equity

Your goal should always be to maintain as much equity as possible in your company. After all, it’s your blood, sweat, and tears that will build it. A major perk of getting capital via a loan is you don’t have to give away part of your company ownership, as is required with equity financing.

Autonomy

Small business loans generally allow you to call the shots. Your lender will ask what you plan on doing with the money. However, they won’t always be concerned with the specific details of how the loan is being used.

Preferable terms

Small business loans tend to offer more preferable terms, like a lower interest rate and higher business credit limit. Other financing tools, such as credit cards, will often have high-interest rates and a lower credit limit, which can limit flexibility and long-term payoffs.

Small business loan challenges

Personal guarantee

If your company has a poor or limited financial history, a bank or government official may ask you to put a personal guarantee on your loan. This personal guarantee is collateral in the form of a car, real estate or other valuable assets you own. If you default on the loan, you may lose this asset.

Credit history

If your business credit history isn’t in good standing, it could limit your available loan options. For example, you may not be eligible for preferable terms of the loan of your choice.

Higher debt-to-equity ratio

Having a small business loan means you’ll have a higher amount of debt on your balance sheet, which will increase your debt-to-equity ratio. It’s a measure of your company’s financial leverage.

Economy impact

Getting a small business loan can be influenced by the state of the economy, which is something over which you don’t have any control. So, if the economy is in a credit crisis, and there is a reduction in the availability of loans and credit, banks may be very cautious in lending to a small business owner. There’s always a high risk associated with startups.

What types of small business loans are available?

There are a variety of loans to choose from. However, most fall into the categories we’ve outlined below.

Government small business loans 

There are a variety of loans Canadian businesses can apply for through federal and provincial governments. However, the most important is the Canada Small Business Financing Program. It was created to help small businesses get easier access to loans by sharing the risks with lenders.

What is the Canada Small Business Financing Program?

Through the CSBFP, the Government of Canada agrees to share the risks of lending to start-ups and small businesses with a lender. It’s run through traditional banks, trade unions, and caisses populaires (credit unions in Quebec). The government acts as a guarantor of the loans made. 

According to Industry Canada, over the past ten years, small businesses have received over $9.6 billion in asset-based financing representing over 63,000 loans made.

Are you eligible?

If your start-up or small business generates annual sales of less than $10 million, you might qualify for this government loan. However, farming businesses, not-for-profits, charitable organizations, and religious organizations aren’t eligible for the program. Likewise, CSBFP funds cannot be used to finance goodwill, working capital, inventory, franchise fees, or research and development.

You can borrow up to $1 million to finance various eligible expenses, including the land, buildings, and equipment you use to operate your business. Other common expenses covered are commercial vehicles, machinery, and computer and telecommunications software. 

Making tenant leasehold improvements on buildings are also eligible. However, the limit is $350,000. The cost to buy a franchise might also be covered by the program.

How does it work?

Go through the loan process with your usual bank. They’ll work with you to determine if the CSBFP is right for you and which assets may be eligible. It’s the bank’s job to register the loan with the Canadian government to ensure it’s covered.

CSBFP advantages for small businesses

Before you proceed, it’s essential to know it can’t automatically get you a better interest rate or better terms on your loan. The program does set limits on the interest rates that banks may charge you. However, these rates are negotiated on a case-by-case basis. 

However, since the risk associated with the loan is shared with the Government of Canada, it predisposes the bank to give you better terms. Use your negotiation skills to use this knowledge to your advantage.

The main benefit of the program is that it gives you, as a startup or small business, access to the capital you might not otherwise have.

Traditional bank and online loans

Traditional loans from financial institutions are a reliable and cost-efficient source of funding, and most banks offer several programs and options. Term, or installment, loans are repaid over a specified period, usually in monthly payments. 

Unfortunately, small businesses often lack the credit history and collateral to qualify for these loans, especially in the startup phase. In those cases, personal loans are another option for new small business owners with excellent credit. 

For example, you can take out a personal line of credit, or borrow against credit cards. Just be aware of long-term interest and tax implications beforehand. Your bank will look at your credit score, history of repayment, and business plan (more on that later). 

You can also apply for a loan through independent online lenders such as iCapital or Thinking Capital. These lenders will loan you up to several hundred thousand dollars or more, depending on your application (which we’ll cover shortly). They also offer fixed and flexible repayment options, with small business owners in mind.

Lending Loop is the first regulated peer-to-peer loan platform for Canadian small businesses. All Canadians are welcome to contribute a minimum of $25 to invest in small businesses. After submitting an online application, and your firm is reviewed and given a loan grade from A to E, individuals can decide whether they want to contribute to the growth of your business. Borrowers make fixed monthly payments and investors make interest off those investments as the principal is repaid.

Keep in mind; there are challenges associated with these opportunities.

Challenges

If you opt for a traditional or online loan, it’s crucial to scrutinize the terms. These can vary dramatically between banks and lenders, and you may be able to find a better deal by shopping around. As you’re looking at different loans, pay particular attention to the:

• Interest rate
• Application fees
• Repayment period
• Usage restrictions
• Late payment fees
• Personal liability

Also, banks typically don’t like to make loans of under $50,000 because the costs to service the loans outweigh the profits. That’s where microloans come in handy.

Microloans 

Microloans were designed to provide access to smaller amounts of funding, helping business owners create jobs in their communities. 

The definition may vary a bit based on the organization making the microloan. However, most microloans are:

• Very small loans ($500-$150,000)
• Short-term loans
• Designed for businesses with little or no credit history, low-cost startup businesses, sole proprietors or businesses with very few employees

They can be used for working capital, inventory, fixtures/furnishings, and equipment or machinery for your business. 

Microloans are often used to help disadvantaged populations, such as minorities, women or companies providing employment in impoverished areas. Such entrepreneurs may find it difficult to get bank loans or other traditional sources of business financing.

Benefits

The primary benefit is accessing smaller amounts of financing than most banks are willing to offer. 

Another major benefit—for those just starting out, with no experience in management or entrepreneurship—is that microlenders may provide additional assistance to support the loan. Many microlenders even require you to take courses on topics such as business plan writing, accounting, marketing, and other business basics before they’ll even consider your application. 

While banks often focus solely on the numbers, microlenders are often more willing to consider the big picture and how your business growth plans will benefit your community.

Challenges

The most significant limitation is the size of the loan you can access through this channel. As with other loans, you must scrutinize the payment terms for each option.

Be aware that the interest rate for microloans may be higher than the rates offered by banks for bigger loans.

You must also already have a good credit score rating to access most of these opportunities.

Where to get microloans

The Business Development Bank of Canada (BDC) 

BDC offers online loans up to $100K for small businesses seeking funds in a hurry. You complete your application process online, and there is no fee to do so. If approved, you can access your funds within 24 to 48 hours, and you can defer repayment for up to six months. The repayment period is up to five years as well. 

BDC also has a loan program for newcomers to Canada with limited or no credit rating. The Newcomer Entrepreneur Loan enables those who meet all of their criteria to access up to $50K.

Futurepreneur Canada offers a similar program, in partnership with BDC, which provides Canadian newcomers up to $45,000 in financing.

Black Business Initiative (BBI)

Small term loans of $25,000 and microloans of $5000 are available to new or existing Black Nova Scotian-owned businesses through the BBI. Ownership must be 33% black and must be a registered proprietorship, partnerships or limited company. Applicants must also have a viable business plan, with two-year cash flow projections, the ability to repay the loan and a suitable management strategy.

Lendified

Like BDC, you apply online through Lendified , which offers loans up to $150K. You will get a quote back from them that’s tailored to your specific business. If approved, you can access the loan as quickly as 48 hours. Repayment terms can be as long as twenty-four months, with bi-weekly payments.

Kiva Zip

Kiva Zip is a peer-to-peer lending platform that enables entrepreneurs to obtain microloans from individual lenders. It’s a spinoff of Kiva, a global micro-lending organization that lets individuals make $25 loans to entrepreneurs in the developing world.

You must first make a microloan yourself on the site. Then get your friends and family to lend you money to prove your creditworthiness.Once those hurdles are cleared, your business is posted on the Kiva Zip site, where more than one million lenders can see your profile.

There are also many microlenders focusing on specific provinces, regions or communities. Your local municipality, chamber of commerce, or economic development organization can also help you find microloan sources. Some examples include:

• Alterna Savings; Community Micro Loan Program (Toronto)
• Centre for Entrepreneurship Education and Development (CEED)
• Enterprise Fredericton
• Enterprise Saint John
• Montreal Community Loan Association
• Western Economic Diversification Canada

Finding the right loan for your business

Now that you know the different types of loans available let’s look at some category-specific loans you can access, based on your individual needs.

For startups

In addition to the microloans mentioned above, and the CFBSP, many startups use credit cards or personal lines of credit in the beginning. You might also want to explore crowdfunding opportunities (platforms that enable anyone from around the world to contribute money to fund your business) through sites like Kickstarter and IndieGoGo. 

To grow your existing business

Once you’ve been in business for a while and can show that you have solid sales growth projections and cash flow, it’s easier to apply for traditional loans. This is the point at which a detailed and well-written business plan can help you qualify for bank and government loans.

For business owners with bad credit

Having bad credit is a definite obstacle for qualifying for a loan. However, you can still find funding through many microloan sources. Here’s an excellent list of options to investigate across Canada.

For women

The Canadian federal government recently launched a Women Entrepreneurship Strategy (WES) , committing $2-billion in investments to help double the number of women-owned businesses by 2025. Female entrepreneurs should, therefore, investigate funding and support options through the program. Likewise, here’s a useful list of other federal funding options for Canadian women entrepreneurs.

For veterans

Prince’s Operation Entrepreneur is a national program for transitioning Canadian Armed Forces members interested in starting their own business. They offer education, tools, and resources to help you succeed as an entrepreneur. 

For agriculture

The Canadian Agricultural Loans Act guarantees agricultural loans to aspiring farmers. We’ve summarized several Canadian agricultural loan options for you to review.

For First Nation or Indigenous citizens of Canada

In addition to several provincial and industry-specific loan opportunities, the Business Development Bank of Canada has created specific programs, with a loan amount of up to $250,000 just for Indigenous people in Canada. Loans can be used to begin exporting or boost your working capital. These loans have flexible repayment terms, and BDC gives a portion of the interest you pay back to your community. 

For construction

The BDC and CSBFP are likely your first options for seeking loans. There are also several federal and provincial tax credits you can apply for. Take, for instance, the Apprenticeship Job Creation Tax Credit, which covers 10% of trainee salaries and wages per year with a $2,000 maximum credit. 

For fisheries

Commercial fishing businesses can get assistance through east-coast provincial Fisheries Loan Guarantee Programs. The Fisheries and Aquaculture Development Board backs these loan guarantees, and covers the cost of fishing licenses, boats, equipment, and refinance loans.

A fishery loan guarantee is a promise by the board to take over part or all of the debt if you default on your loan. Applications for the loan guarantee program are available at most banks and financial institutions, or you can find it online at the Agriculture Development Board.

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How to get a business loan in Canada

Now that you understand which loans to choose from, here are the steps you must follow for a small business loan application in Canada:

1. Identifying the right business loan for you

Review all of your options, including the traditional bank, government, microloan and online options outlined above. 

Additionally, research specific loans that might be a good fit for your geographic location, industry or business growth stage.

Do your homework, and make sure you understand the individual loan terms before moving forward. Some loans are more flexible on the repayment schedule than others. So be sure to ask about that upfront before you begin the application process.

Then, review all of the qualification requirements to determine if it’s worth your time to apply.

2. Qualifying for a business loan

To qualify for a business loan, you’ll often need:

• A well-written business plan
• A good credit score
• Professional references
• Solid financial projections, cash flow statements, and sales reports
• Personally guarantee the loan and offer personal or business assets (like a car or equipment) as collateral

Here’s how to prepare each of those items:

How to apply for a traditional bank or government loan

It’s critical to supply potential lenders, such as banks, with the appropriate documentation to allow them to make an informed decision. 

The requirements will vary depending on the nature and history of your business. However, here are the essential ones to include in your application:

First, put together a loan application proposal

For the best chance of success in obtaining a loan, you need a well-conceived loan proposal. Lenders want to be confident your business is a sound investment with a strong long-term outlook.

To address the key concerns of your lender, your proposal should include some critical documents for answering the following questions:

• How much money does your business need to borrow?
• How will the loan proceeds be used?
• How will the business repay the loan?
• What makes your business a reliable candidate for a loan?
• What will your business do if it can’t repay the loan?

Within this proposal, you must state your loan purpose. Lenders want to see that you have put careful thought into determining the amount of money your business needs to borrow and how that money will be used. 

Many banks also offer small business loan calculator to understand how much you can borrow based on interest rates and repayment schedules.

When describing the loan purpose, be specific in how your business will use the capital and how its use will create the capacity to increase revenues.

Then, prepare a detailed business plan

Your business plan forms the core of your loan proposal because it provides the proof a lender needs to know your business can succeed. Your business plan should clearly state your business’s mission, core values, and primary goals. 

A complete business plan should include an executive summary, company description, a marketing and competitive analysis, a sales strategy, management profiles, and financial projections.

Your marketing analysis should outline your current marketplace, describing the trends, target market, competition, and opportunities. You must provide details on your strategies for capitalizing on that information and capturing market share. 

Your sales plan should include your sales objectives for meeting annual revenue goals and the specific strategies for turning your target market into customers. 

Here’s a handy template you can use to cover all of your bases: Download the template, here.  

Put together your financial statements

Lenders want to look back at your financial history to gauge your management capabilities and look at your future business prospects. Although each lender might have different requirements, most will require a three-year projection for your income statement, balance sheet, and cash flow statement. 

For startups, an opening day balance sheet, first- and second-year projections, and initial startup costs should be provided. While it may be difficult to project future results, lenders expect you to have a reasonable idea of the necessary capital and cash flow for your business. 

These statements should be detailed, and show an analysis of how the cost of goods, gross margin, overhead and net profit have changed over time, and what those changes mean for the company moving forward. 

Build this forecast from the bottom up, not the top-down, through simple multiplication. For example, know the time and cost of driving customer purchases and the gross profit on each sale. Understand the lifetime value (LTV) of a customer. Show where the leverage for increasing profit is and how the company will make money as the business grows in size.

If you aren’t 100% confident in preparing these documents, you may want to enlist the help of a business accounting expert or use QuickBooks Online to generate financial statements. 

Finally, make a loan guarantee

If your business lacks a solid credit history or collateral, some lenders might require a personal guarantee on the loan. Lenders look first to the business for collateral. If it’s not sufficient, they’ll look next to the business owner’s equity position. 

A loan guarantee document should list all forms of collateral, both business and personal. When a personal loan guarantee is required, lenders may also need a personal financial statement and three years of tax returns from the business owner.

If you bring it up first to the bank, it shows that you’re willing to stand behind the risk the bank is assuming. If appropriate, remind the bankers of a personal track record of previous loan repayments, both private or corporate, to this or other banks. Again, any past track record of repayment will make the bank’s decision easier.

Beyond all of the numbers and analysis, lenders look to the loan proposal and how it is presented as a gauge of your competence and confidence in managing your business to success. Try to present it in as professional a manner as possible.

How to qualify for a microloan

Even though obtaining a microloan is generally much easier than getting approved for a traditional bank loan, you’ll still need to do the following:

First, as with any other business, write a business plan. Lenders want to see what you plan to do with the money as well as your future plans for your business.

Second, improve your personal credit rating. If your credit rating isn’t top-notch, take steps to boost it before applying for a microloan.

• Put skin in the game: Microlenders expect you to invest your own money in your business, even if it’s a nominal amount. Some also expect you to get financing from friends and family before applying for a loan.
• Be prepared to put up collateral or offer a personal guarantee.
• Take business training from the microlender (if required before the application process).

By taking steps to investigate your microloan options, writing a thorough business plan and completing all of the requirements before applying for a microloan, you’ll significantly boost your chances of getting the capital you need.

3. Applying for a business loan

When you’re ready to begin applying for a small business loan, there are several tactics you can use to increase your chances.

Microloans, the CSBFP, and other online loan sources may be a little easier to apply for. Still, it doesn’t hurt to follow traditional bank loan advice when applying for any loan.

A common adage is that banks only give money to companies that don’t need it. Canadian banks are especially guilty of this because the low-interest banks charge means they can’t take much risk when it comes to lending money. They’re not equity investors, like angels and venture capitalists, who expect a huge payday down the line.

A bank’s return is usually limited to single-digit percentage rates, so they’re more selective as to whom they give a loan. With that in mind, here’s how to increase your chances of getting the loans you need.

1. First, build a real relationship

People tend to assist those they already know, like and trust. That’s why real relationships need to be developed over a long period.

It’s especially true with banks. Take time to meet the people at a few institutions, and update them about your business at least twice a year before applying for a loan. 

For online lenders, it doesn’t hurt to make a phone call to ask some questions in advance. The more information you have, the better off you’ll be when you submit your application anyhow. And the lender will now know your name and a little bit about your business. You’re no longer just an anonymous applicant.

Making contact and establishing trust early on makes whatever financial documents and projections that are presented much more believable, too.

2. Know your numbers well

Remember that banks and government officials are data-driven, and numbers help them get comfortable with any risk. They always depend on the past to predict the future.

Understand what is behind each number and any fluctuation in it. Also, be confident and practise your presentation several times in front of an accountant. Have them ask tough questions about the data. Always repeat the words throughout the presentation that “this loan is very low-risk.”

3. Explain how you made your forecasts

Never present aggressive estimates that are hard to believe. If no company has achieved similar results as you are predicting, it’s unlikely you’ll convince bankers that your small business can do it.

Make sure the forecasts are conservative by increasing expected expenses by 25% and reducing forecasted revenue growth by 50%. Under this scenario, can the company still make money and repay the bank? Don’t present anything that can’t be confidently delivered based on current known facts.

4. Show how they get their money back

A bank’s biggest concern is: “How will this company pay the loan back if things don’t go as planned?” Include forecasts for the worst-case scenario and demonstrate how it still works in their favour. Since all banks want to manage downside risk, the bank will particularly pay attention to the worst-case scenario.

Finally, talk to several banks (not just the one where you have a business bank account), since they all have different sets of guidelines for their targeted loan portfolio. Remember that a “no” doesn’t mean that’s the answer forever. It may just be a “no” for now. Ask the banker what exactly has to change in the company to get the loan in the future.

Before you begin the business loan the process

There are pros and cons to all funding options. It’s up to you as a Canadian small business owner to determine the best way to finance your business. The important thing is to consider all of the available options and weigh them. If you’re considering a small business loan, speak to several lenders about their terms, interest rates, and weigh all your options before you make your decision.

Finding the right financing is key to your success, so it’s worth your time to do the research and find the ideal solution for your business type. That way, you can continue to grow and hire staff as needed.

Wherever you ultimately source your funding from QuickBooks Online can help you stay on top of your finances with its robust suite of tools for managing cash flow, project profitability and more.

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