5 Small Business Financing Options in Canada

Omar Visram
5 Small Business Financing Options in Canada

Whether you’re just starting up or you’re fully operational, there are many reasons why your small business 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 such funding sources.

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

Here are 5 key small business financing options in Canada.

5 Financing options to raise capital for your business

1. 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 have the capacity to make monthly loan payments. 

2. Alternative Financing

If your business doesn’t qualify for a bank loan, you could consider alternative financing. Although fees and interest rates tend to be 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. 

3. 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 the option for you.

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.

4. 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.

5. 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 way to go.

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

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

Finally, don’t make the mistake of letting your personal relationship with a lender prevent you from signing a legal contract with them. 

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. Before you choose the best path to raise capital for your business, however, make sure 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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