Business loan requirements in Canada, and whether you need collateral

Most lists of business loan requirements are either too short to use or too long to believe. The honest version has a core that almost every lender asks for, and a few extras that depend on who is lending and what the money is for.

The core: what nearly every lender asks for

A registered business. Incorporated federally or provincially, active and in good standing. Most business lenders in Canada work with incorporated companies; a sole proprietorship has a narrower set of options.

Bank statements. Usually the last six months for the main operating account, as PDFs downloaded from the bank. This is the document that decides the most, because it shows what actually lands and what actually leaves. Why it is six.

Proof of who you are. Photo ID for the person signing, and the names of anyone who owns 25% or more of the company. Every lender has to know who it is lending to.

Incorporation documents. Articles or a certificate of incorporation, and your CRA business number. Which document that is depends on your province — each province page names it.

A number and a reason. How much, and one line on what for. Not binding, but it tells a lender which product fits.

What changes the list

Who is lending. A bank typically adds accountant-prepared financial statements (often two years), personal and business tax returns, and sometimes a business plan with projections. Alternative lenders usually read the bank statements instead of those.

What it is for. Equipment financing wants the quote or invoice for the machine. Asset-based lending wants an accounts-receivable aging or an inventory list. A term loan for general use wants neither.

How much. Larger amounts bring more questions, more documents, and more often a request for security.

How long you have been trading. Younger businesses are asked more about the owners, because there is less history in the business itself to read.

Do you need collateral for a business loan?

Not always. It depends on the product.

Unsecured means no specific asset is pledged against the loan. Many term loans and revenue-based lines of credit from alternative lenders are written this way, sized against your deposits rather than against something you own.

Secured means an asset stands behind the loan — equipment, receivables, inventory, property. The lender registers its interest in that asset and relies on it if the loan is not repaid. Security usually makes money cheaper, because the lender's risk is lower.

Two things are worth knowing either way:

• A personal guarantee is common even when nothing is pledged. It means the owner promises to repay if the company cannot. It is not the same as pledging your house, and the agreement will say plainly what it covers. Read that part.
• A general security agreement is often registered on business loans, secured or not. It gives the lender a claim on business assets in general rather than one specific item. It is normal — but it does affect what the next lender can take as security, so it is worth knowing it is there.

Which products usually need security

• Equipment financing — the equipment itself is the security. Nothing else is usually needed.
• Asset-based lending — secured by the receivables, stock or equipment it is advanced against. That is the point of it.
• Term loans — usually nothing specific pledged; a personal guarantee is common.
• Revenue-based line of credit — sized against revenue rather than assets.
• Bank loans — often secured, and often want a guarantee as well.

What is not a requirement

A business plan, for most alternative lenders. The statements say more than projections would.

A perfect credit score. It matters more at a bank than elsewhere, and it is rarely the only thing read. Business loans with bad credit covers what it changes and what it does not.

Profit on paper. Many businesses show little taxable profit and still carry a payment comfortably. Deposits are what get read.

The quickest way through it

Have the core ready before you start: statements, incorporation papers, ID, owners. What to have ready is the checklist, and how to get a business loan in Canada is the whole route from there.