How to get a business loan in Canada

Getting a business loan in Canada is less mysterious than it looks from the outside. There are only a few kinds of lender, they read your file for the same handful of things, and most of what decides the answer is already sitting in your bank statements.

This is the whole route, in the order you will meet it.

1. Know what the money is for

Before you pick a lender, pick a shape. The shape of the money should match the shape of the problem.

• One thing, one price — a second location, a hire, a refit. That is a term loan: a fixed amount on a fixed schedule.
• Uneven months — payroll lands before the receivables do, or a season is coming. That is a line of credit: draw what you need, pay for what you draw.
• A machine or a vehicle — that is equipment financing, where the equipment secures its own loan.
• Something you already own — unpaid invoices, stock, equipment that is paid off. That is asset-based lending.

Getting this wrong is the most expensive mistake on the list. Taking a lump sum to fix a timing problem usually means taking another one in four months.

2. Pick the right door

There are three kinds of place a Canadian business borrows from, and they suit different files.

Your bank. Usually the cheapest money, when you fit. Banks like two or more years of trading, financial statements prepared by an accountant, and often security or a personal guarantee. If that is you, start there.

BDC and government-backed programs. The Business Development Bank of Canada lends to businesses the banks find too small or too young, and the Canada Small Business Financing Program lets banks lend with a federal guarantee behind them. Both are real options, and both move at bank speed.

Alternative lenders. Online and specialist lenders who read your bank statements rather than your financial statements. Faster, more flexible about age and credit, and usually more expensive. The range between the best and the worst of them is wide.

A broker, which is what we are, sits in front of the third group: one application, taken to the lenders we work with, so you are not filling in the same form six times. We are not the lender and the lender makes the decision. There is more on when each door makes sense in bank, BDC or broker.

3. Know what gets read

Every lender reads for the same four things, whatever the form looks like:

1. Revenue and time trading. What lands in the account each month, and for how long it has.
2. How steady it is. A flat line beats a jagged one at the same average.
3. Bounced payments and negative days. A handful is normal. A pattern in the last two months is not.
4. What you already owe. Other loans, advances and equipment payments come straight off what your deposits can carry.

Banks add financial statements, credit history and security to that list. Alternative lenders lean almost entirely on the statements. What an underwriter is looking for walks through the checklist in the order it gets worked.

4. Gather the file

For most alternative lenders, and for us, the standard file is short:

• Six months of statements for the main operating account, as PDFs from the bank — why six
• Incorporation documents and your CRA business number
• Photo ID for whoever is signing
• The names of anyone who owns 25% or more

A bank will also want financial statements, often two years of them, and may ask for a business plan. What to have ready has the detail, and business loan requirements covers what changes the list — including when you will be asked for collateral.

5. Size the ask

Ask for what the thing costs, not the most you might be offered. A lump left sitting in the account is the most expensive money there is, because you pay for all of it.

If you want a sense of the number before you apply, it usually starts from your average monthly deposits. How much can my business borrow shows the arithmetic and the four things that move it, and the business loan calculator runs it on your own figures.

6. Apply once, not six times

Every application to a lender is a separate file, a separate set of questions, and — with some lenders — a separate credit check. Six applications in a fortnight looks like six refusals to the seventh lender.

Apply where your file fits best. If that is a bank, go to the bank. If it is the alternative market, one application through a broker reaches several lenders without you repeating yourself.

7. Compare offers on the total, not the rate

Offers arrive quoted in different ways: an interest rate, a factor rate, a weekly payment. None of them compares directly with the others. Ask every lender for the same three things:

• The total you repay, in dollars
• The payment, and how often it leaves
• The number of payments, and what happens at the end

What working capital costs shows how to put two offers side by side, and reading your offer explains each figure on one of ours.

8. Sign only what you have read

Check what happens if you pay early, what happens if you miss a payment, and whether there is any pressure to renew before the term ends. If an answer is vague, that is the answer.

The short version

Match the product to the problem. Go to the door your file fits. Send six months of real statements. Ask for what the thing costs. Compare on the total in dollars.

If you are not sure which of the four shapes fits, all four, side by side is the place to start. When you are ready, the application saves as you type, and you see the total before you decide anything.