5 Small Business Financing Options in Canada

Omar Visram
5 Small Business Financing Options in Canada

Whether your small business is just starting up or is fully operational, there are many reasons why it could require external financing. You might, for example, be looking to:

  • Create adequate working capital
  • Purchase a large asset
  • Finance your business for the next stage of growth

But while tech startups can turn to angel investors or venture capitalists for help, businesses like restaurants and retail stores are typically cut off from funding sources.

Fortunately, you can explore plenty of other avenues to raise capital for your business. 

Here are five small business financing options in Canada. We'll start with alternative financing and other sources of business funding and finish with a common source of business financing: bank loans.

Alternative Financing

You could consider alternative financing if your business doesn’t qualify for a bank loan. Although fees and interest rates tend to be much higher, repayment terms are usually short and often include early-payment discounts.

Merchant cash advances, for example, are similar to loans in that you receive and repay a lump sum of money. Unlike a loan, however, you must commit to paying a fixed percentage of your daily debit and credit card revenues until the advance (plus a sizeable fee) is repaid in full.

Merchant cash advances can be a good option for:

  • Restaurant owners (who typically struggle to secure traditional loans)
  • Businesses with cash flow issues stemming from long or unpredictable slow periods
  • Applicants with poor personal credit

While this type of financing can be approved relatively quickly (within a few hours or days), you’ll need to show adequate cash flow through your merchant account. 

Equipment Financing

If you need to raise capital for your business so you can invest in the right machinery (and stay competitive), equipment financing might be an option.

This type of loan lets you:

  • Purchase the business-specific equipment you need (whether it’s a transport vehicle or restaurant equipment)
  • Avoid laying out a large amount of money all at once 
  • Free up capital that can be invested in other business areas

With fixed, long-term, interest-plus-principal payments, equipment financing spreads out the cost of expensive assets across their useful life, making the equipment you need more accessible.

Government Funding

There are two types of government funding your small business could qualify for:

  • Business grants & tax exemption programs. Available to a wide range of companies, government grants usually target a particular purpose. Examples include support for specific business areas (like recruitment tools for startups), teams (like women-owned businesses), and companies pursuing technology-driven innovation (see Canada’s IRAP program). A big advantage of this type of funding is that it doesn’t need to be paid back, doesn’t require you to share equity, and can endorse your business expertise while helping you secure future funding.
  • Financing programs. Much like SBA loans in the US, the Canada Small Business Financing Program makes it easier for businesses to borrow funds from a financial institution by sharing loan risk with the lender. While financial institutions are responsible for delivering the program and approving the loans, if your gross annual revenue is $10M or less, you can apply for this government financing to purchase or improve commercial land, buildings, equipment, or leasehold renovations.

Friends or Family 

When you need to raise a sizeable sum of money, but your business lacks collateral and a decent credit score, borrowing from friends or family may be the best option.

If you do choose this financing option to raise capital for your business, make sure you prepare by:

  • Discussing a reasonable interest rate
  • Organizing an official repayment arrangement
  • Clarifying the borrowing and repayment terms for everyone involved

Finally, don’t let your personal relationship with a lender prevent you from signing a legal contract with them. 

Bank Loans

Bank loans are the most common source of financing for small and medium-sized enterprises. The biggest advantage of a bank loan is that, unlike venture capital, it lets you inject cash into your business without surrendering ownership control.

Other bank loan benefits include:

  • Better interest rates (versus other types of lenders)
  • Tax-deductible interest payments
  • A range of service and repayment options that make it easier to find the most cost-effective solution

On the downside, small business loans can sometimes be tough to secure—especially if you lack a proper business plan or have yet to establish business credit and a history of profitability. The application process can also be lengthy (taking from weeks to months), and if your business is unproven, you might not get approved for the full amount you need.

Still, ensuring your business has accurate, up-to-date financial statements before you apply is a good first step to showing bank lenders you can make monthly loan payments.

Which Business Loan Do You Need?

There are various types of business loans that companies in Canada can access to help keep businesses running smoothly and additionally fund their growth strategies. These include short-term and operating loans, loans for equipment purchases, working capital or commercial real estate. These loans can either be secured or unsecured. Secured loans are loans that require some sort of collateral, often in the form of an asset (home, car or other valuable item) that the lender can seize in the event the loan isn't repaid. An unsecured loan, however, is different in that collateral isn't required, but the lender would typically assess whether the borrower is worthy of receiving the loan. In both cases, the lender would undergo a risk assessment process to identify whether the borrower is worthy of credit.

Documents for a Loan Application and Lender Interview

There are various steps to go through in securing a small business loan, and getting business documents together is certainly a big part of it. The following documents are commonly required for a small business loan application and interview process: financial statements, financial projections, tax returns, business plans, competitor assessments and company history documents. The lender will typically go through a know-your-customer (KYC) process, which might also involve a credit check or asking for a credit report. It's important to start the loan application process very thoroughly and diligently, making sure you have all the paperwork and documentation you need to start the process with the lender. Having your documents in order will also help you when it comes time for the lender interview, as you will have any information they may ask for at your fingertips. Some small businesses may work with a controller or external business advisor to help them collect the documentation they need for the loan application process.

How to Secure a Bank Loan

We’ve helped small businesses prepare for securing their first loan and learned a lot along the way. The main lesson is that having solid answers to the following questions will significantly help as you meet with prospective lenders.

How do you plan to grow your business? What is your business's current financial situation? How will you repay your loan? This article reviews what you’ll need to prepare when meeting potential lenders.

Nobody will lend you money if you don’t have a clearly outlined plan for growth. Lenders want to see how you’ll use your loan to grow your business. While having more money is always nice, it is common for business owners to assume that a loan on its own will improve their current business operations. Additional money does not make your business more efficient. However, investing in new equipment, services, or upgrades to equipment and property to reduce costs will.

If you’re not sure where you’ll be investing the money, what your return will be, or how you’ll repay your loan, you must design a more robust growth plan before you apply for a loan. Lenders want to see how the loan will help grow your business. The more detailed your plan, the better.

Know Your Current Financial Situation - Inside and Out

Whether or not you’re a financial person, you must understand your current financial statements when meeting with a lender. Maintaining your bookkeeping to ensure your financial records are accurate and current is an essential first step. We recommend meeting with your bookkeeper, accountant, or any financial advisors before you apply for your loan so they can walk you through the basics of your business' financial situation. Have your bookkeeper review and explain any financial weak spots in your business. Be prepared to explain how you intend to improve financial weak spots once you meet prospective lenders.

This means understanding your expenses and whether there is room for more efficiency, where your revenues come from, and other financials such as taxes and obligations such as credit card debt and loans. Lenders do not feel assured when borrowers do not have a firm grasp of their financial picture.

Know Your Ask

Know why you need to borrow this money and how much you will need. Asking for too much makes you look risky and out of touch with reality, but asking for too little is also a red flag. Potential lenders will notice this and dismiss your application. Lenders want borrowers with a firm grip on the dollar value of their needs and plans. It's very important not to take on too much debt (that you will eventually have to repay), but asking for too little could put you in a tough position down the road when you're facing a cash crunch. We recommend meeting with your bookkeeper, accountant or any financial advisors before you request your loan. They can help you review your cash flow projections and have visibility to the working capital you will need to get through the year and achieve your goals.

Plan How You’ll Repay Your Loan

Accurate financial data is vital to prove to a lender that you are a desirable borrower and to show how you’ll be able to pay it back. You should take the time to work with your bookkeeper or accountant to develop a credible, detailed plan to repay the loan.

An accurate and detailed review of your current expenses ensures that your loan application is attractive. Don’t forget to pay careful attention to fees. When considering how you’ll repay, you must account for interest rates and potential administrative costs. Please note that unsecured loans have higher interest rates—lenders charge higher interest rates to compensate for this risk.

Administrative Concerns

Find Your Ideal Lender

There are pros and cons associated with different types of small business loans. A loan from a banking institution is probably your first choice because it’s a trusted establishment with whom you likely already have a history. However, traditional bank lending can be difficult for small business owners. Banks don’t have much appetite for lending to small businesses because of the lack of security in their investment.

You may have the option of putting up a personal asset, such as your home, as collateral, but this approach can create risks for small business owners. Business owners often view their personal assets as their safety net and want to keep them out of the business.  

It often makes sense to seek other lending solutions, such as online lenders or FinTech Startups. With fast, easy application processes and transparent interest rate structures, online lenders make it easy for small business owners to secure the capital they need to get their projects moving. They’ll base their decision to approve your loan on your financial statements and growth story. Best of all, they’re fast. With approvals and loans granted quickly, there’s no waiting around to see where you stand

Consider Loan Terms and Conditions

As the old saying goes, "make sure to read the fine print." The terms and conditions of your business loan are no different! These are very important aspects to understand before you move forward and commit to the lender. As mentioned above, there are various types of small business loans, and they can come from different lenders. Loan terms and conditions vary significantly depending on the type of loan and whether it's from a banking institution or a private lender. Many borrowers focus on the interest rate (and that is certainly a significant factor), but other aspects of the loan conditions are just as important. The amortization period, for example, is a big one. Longer repayment terms mean lower monthly payments (which can help with your cash flow) but come with higher borrowing costs in the long term. It's also important to understand how flexible the lender would be if you're unable to make your loan payments. Additionally, consider whether the lender requires collateral (a high-value asset such as your home) or the loan is unsecured. Some loans come with financial reporting requirements, which typically involve presenting financial statements and reports annually.

Approved? Congratulations!

The excitement is palpable when you are approved for your first small business loan. With an influx of money, it’s easy—and tempting—to spend money freely! It's important to have the right technology in place to carefully monitor the coming and going funds. We love working with QuickBooks Online accounting software because it allows us to help clients track where their funds are going and stick to their initial financial plan.

Not Approved? No Worries! Be Persistent.

Not all lenders will be your perfect match, and not all small businesses will be approved for loans on their first time up to bat. Most importantly, continue to work with your bookkeeping and accounting team to solidify your financial statements and improve your business plans. Growth takes time, hard work and persistence. You can consider other opportunities for financial growth or tax incentives, such as grants, Scientific Research Experimental Development Tax Incentives (SRED) or Industrial Research Assistance Programs (IRAP). Most importantly, continue to work with your bookkeeping and accounting team to solidify your financial statements and improve your business plans. Growth takes time, hard work and persistence.

If you’re looking to prepare your financial statements to meet with financial lenders such as your bank or online lenders, Enkel can help you prepare. Contact our team to discuss how we can help you provide simple, accurate financial data to prepare you for securing your small business loan.

Clean Books Support Financing Success

While it can feel like a daunting process, getting the external financing you need could be the engine that drives you to greater business success. However, before choosing the best path to raise capital for your business, ensure your bookkeeping is in order.

Clean, accurate books let you:

  • See exactly how much money your business requires
  • Generate the up-to-date financial statements most lenders need
  • Demonstrate credibility, professionalism, and the ability to meet your financial obligations

If you need help getting or keeping your books organized, Enkel can help. We provide accurate monthly bookkeeping services to small and medium-sized businesses across Canada. 

Contact us today and find out how we can help get your business financing ready. 

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