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Published September 9, 2022

How Business Loans Work in Canada

A business loan can help you maintain or grow your company. Common business loan options include startup financing, commercial real estate loans and equipment financing loans.

While a good idea and an entrepreneurial spirit are wonderful assets, cash flow is often the main ingredient a business needs to get off on the right foot and keep growing.

Business loans are one way companies can get access to the capital they need to expand, cover day-to-day operating costs, buy competitors and more.

Knowing common types of business loans in Canada and how they work can help you choose the right product for your business’ needs.

What is a business loan?

A business loan is typically a lump sum of money you borrow from a financial institution (or, in some cases, a government agency) for business-related purposes, such as paying for startup costs, buying supplies, conducting research and development, or expanding your operations.

The interest rate and term will vary, based on the business loan you choose. As with any kind of type of loan, you’re required to pay back the funds with interest on an agreed-upon schedule.

A business can also borrow money via a line of credit, through which money is borrowed, repaid, and borrowed again over a period of time.

Common types of business loans in Canada

Business loans come in many forms, including:

Startup financing

Entrepreneurs who are just starting out may have a difficult time securing a loan because they don’t have strong profits or a track record of performance. Some loans are designed specifically to help companies at the startup stage of operations.

Small-business loan

There’s a huge variety of small-business loans available in Canada with a large spectrum of maximum loan amounts and eligibility requirements. Some lenders may require the company to be operating for a set period of time, like at least 24 months, or have a certain average monthly revenue.

Commercial real estate loan

These loans allow real estate developers to access capital to buy more properties, pay for construction on new sites or upgrade facilities.

Working capital loan

These loans are intended to help businesses grow and explore new revenue streams without risking their own daily cash resources.

Business acquisition loan

This type of loan provides companies with funds to acquire other businesses, such as competitors or companies that will allow them to expand their product and services more quickly.

Equipment purchase loan

Funds can be used to upgrade industrial equipment and modernize manufacturing operations, for example.

Technology purchase loan

Funds can be used to help companies upgrade hardware, like servers or computers, as well as software. These loans can even be used to help cover the cost of digital marketing efforts or IT services.

Purchase order loan

This type of loan helps companies pay for large inventory orders and pursue new entrepreneurial opportunities.

How business loans work

A business loan may be a lump sum or a line of credit provided for a certain repayment term.

Interest rates may be variable or fixed and can vary based on several factors, including the lender, type of loan and the economic situation. The principal amount plus interest must be repaid according to the schedule detailed in the business loan agreement.

The terms of the loan will depend on the lender but important factors to consider include additional fees, flexible repayment options, the length of the repayment term, the interest rate, and any collateral requirements or financial reporting obligations.

Some lenders may specialize in small-business loans or focus on certain types of companies like commercial real estate. Others may offer loans only to enterprises that have been established for a set time period or are already generating profits.

Make sure your business meets a lender’s requirements before applying for a loan.

Do you need a business loan?

A business loan is a potentially long-term debt that could have significant detrimental financial consequences if you can’t manage to make payments on time. It’s important to carefully assess if a business loan is the right choice for you.

First, analyze your company’s needs to determine whether you need a loan and have a clear plan as to how you will use the funds. If your business is doing well and shows promise, a business loan could offer the extra boost to grow your company into a more profitable venture.

Being clear on why you want the money will also help give you a better idea of how much you’ll need to borrow. If the loan is needed for an expansion or buying new technology, consider how long it will take for that change to show a return on your investment. If it takes too long before you start seeing increased revenue, the loan payments may become hard to manage.

Some financial institutions have advisors who can help guide you through the process of deciding whether to apply for a business loan. Also look for mentorship programs that connect you with a mentor who can help you navigate important business situations.

How to get a business loan in Canada

Where to find business loans

Many banks, online financial institutions and credit unions offer loans and lines of credits specifically intended for businesses.

For companies that don’t qualify for a traditional loan with a bank, the Business Development Bank of Canada, or BDC, may be a good option. Owned by the Canadian government, BDC’s business loan interest rates tend to be higher than those offered by the country’s big banks, but can nonetheless be more favourable than those charged by some alternative lenders.

Business loan eligibility requirements

Once you’ve found the right loan provider, it’s wise to read the eligibility requirements carefully as they can vary significantly between lenders.

Applying for a business loan will generally require you to provide key documents, including:

  • Proof of incorporation.
  • A business plan.
  • Financial documents, such as tax assessments for the owners and the business and bank statements.
  • Net worth documents for all owners.
  • Insurance policies related to the business.

Business loan alternatives

If you don’t qualify for a traditional business loan from a bank or are seeking an interest-free infusion of cash, you can look into entrepreneur assistance programs.

Assistance programs for entrepreneurs in Canada

The Canadian government, as well as provincial and regional authorities, has an impressive array of business grants and financing options, ranging from interest-free financing to support for integrating new technologies to loans that help young professionals develop a viable side hustle. There are even loans, grants and subsidies to support businesses in specific regions or industries.

Specific funding is available for women entrepreneurs, Indigenous entrepreneurs, Black business owners and newcomers to Canada. Additionally, the BDC offers a loan of up to $60,000 to entrepreneurs between the ages of 18 to 39 to help them launch or expand a business.

  • Frequently asked questions about business loans

    • What happens if you default on a business loan?

      If a business can’t afford to repay a debt — also known as default — the owner and any partners may suffer personal financial consequences. The exact outcome of a business loan default depends on the type of loan, the lender and in what manner it’s guaranteed. Some business loans are guaranteed by the federal government, which could minimize personal consequences in the event of default.

    • How much can I borrow with a business loan?

      The amount you can borrow with a business loan will vary by lender, as well as your personal and professional financial profile. Loans made by the Canada Small Business Financing program, which are partially guaranteed by the government, are capped at $1 million, depending on how the funds will be used.

About the Author

Sandra MacGregor

Sandra MacGregor has been writing about personal finance, investing and credit cards for over a decade. Her work has appeared in a variety of publications like the New York Times, the UK Telegraph, the Washington Post, Forbes.com and the Toronto Star. You can follow her on Twitter at @MacgregorWrites.

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