If you’re starting or expanding your business, you’ll likely need help with financing. Business loans are an excellent way to get the funds you need. But before taking out a loan, it’s worth knowing more about business loans, terms, and requirements. You should also review qualification details and what to consider during your application. Let’s get started!
What Is a Business Loan?
Business loans are provided by financial institutions to companies at any stage to cover operational costs. The tailored product will depend on your business' needs.
Repayment options will vary based on the products best suited to your individual needs. You can use your loan or line of credit for all sorts of needs, from buying assets to expanding your business, creating a website, or paying fees.
There are many different loan options with specific repayment terms and conditions, so it’s always a good idea to analyze and compare them. To ensure you’re making the right choice, it’s best to consult financial experts and specialized advisors.
Feel free to reach out to our friendly business advisors. We’re happy to help provide a tailored solution that best fits your business needs and supports your company's financial health.
What Are Some of the Types of Business Loans?
Before you turn to a financial institution, you should know a bit more about different loan types.
Here are the most common types of loans for businesses in Canada:
Start-up financing loans: This loan type is available to businesses with at least 12 months of steady revenue. It’s great for purchasing assets, paying start-up fees, and covering the costs of intangible assets like intellectual property, patents, trademarks, and software licenses.
Small business loans: These are often easier to qualify for than start-up financing options. Small businesses can apply to get funds for buying equipment, paying for hardware or software, or upgrading the company's inventory.
Working capital loan: If you need additional funds for day-to-day business operations or simply to boost your company's productivity and output, working capital loans are perfect for you. A working capital loan may be offered in the form of a line of credit.
Business credit cards: Business credit cards can help you manage your cash flow and build your credit score while offering the convenience of point-of-sale purchasing. However, they often come with higher interest and lower credit limits than traditional loans. It’s better to only use them for short-term financing with repayment happening within a month coming from the business cash flow.
Line of Credit: A line of credit is a revolving loan that allows you to borrow funds when you need them within a set amount. Your line of credit is attached to your business’s chequing account, so it acts like a safety net to cover any unexpected costs. It’s an excellent financing option for small companies that need working capital or have unpredictable cash flows.
Equipment loans: Equipment financing is a perfect way of making a valuable investment in your machinery or physical assets without hurting your working capital. They are often instalment loans, meaning you'll repay the borrowed amount through fixed monthly payments over a set period. Each payment will include both principal and interest.
Government financing programs: In Canada, small business owners have various financing options available to them, including traditional banks or credit unions and online lenders. Business owners applying through a traditional bank or credit union may have the opportunity to apply for government-backed programs such as the Canada Small Business Financing Program. Each financing option has its own set of requirements, interest rates, and loan amounts.
There are also many subtypes of business loans. For instance, you can apply for a business acquisition loan, commercial real estate funding for buying commercial property, or a loan to finance intangible assets. The choice depends on your company’s needs.
How to Get a Business Loan in Canada
Determining the type of business loans that your company might need is a great first step, but you also need to do a bit more homework before applying for a loan, such as:
Assessing your financing needs. Before you start the application process, it's important to decide why you need the funding. Not only will that affect your choice of loan type, but it will also help you compare loan terms and get the right one for your business needs.
Exploring different loan types. Choosing the right loan type is essential to minimize your debt repayment timelines and build up a solid credit history for your company. For example, if you just need a short-term loan to expand your operations, it's better to get a working capital loan than an instalment loan plan. It has shorter repayment terms and immediately gives you access to lump-sum investment funds. Our advisors can assist you in determining the right loan type that fits your needs.
Checking if you qualify. To successfully qualify for any business loan, you need to have a solid credit history. It's not just the company's rating — lenders will also check your personal credit score to see if you can handle loan payments as the owner. For a preapproval assessment, you can contact us via email or phone, and our business advisors will give you a breakdown of your qualifications with convenient repayment terms.
Comparing the terms. Once you've got an idea of what you are looking for, make sure to compare monthly payments, interest costs, and other terms to get the most convenient financing deal.
Completing the application. That's it! Once you've done the background work, gather the necessary documentation, and an advisor will assist you in the application process.
Which Documents Are Needed for a Business Loan?
Applying for a business loan is not quite the same as for a personal loan. You'll need to gather your company's documentation, including the following items:
Business licence
Trade name registration
Articles of incorporation
Financial statements
Tax returns
Depending on the lender, you may also be required to provide additional documentation. That's why it's crucial to have proper help from financial experts to make the process go smoothly.
If you need any assistance collecting the right papers, you can contact us via email or phone. We’ll gladly help you with the process!
Seven Business Bank Loan Requirements
Whether you're looking for small business loans in Canada, start-up business loan requirements, or a more traditional loan, these are the top seven things you need to know:
1) Business Plan
When you're pursuing a small or start-up business loan, the most important business loan requirement is a business plan. Lenders want to see a detailed plan that outlines your business's goals, strategies, and financial projections. A well-thought-out plan helps lenders assess the risks involved in lending you money.
2) Cash Flow
Cash flow is another critical factor that lenders consider when evaluating an application. They want to see that your business has a proper flow of funds to pay back the loan. A positive flow indicates that your business is profitable and has the ability to repay.
3) Credit Score
Lenders look at both your personal and business credit scores when evaluating a loan application. A high credit score indicates that you have a history of paying your bills on time and are less likely to default. In Canada, a credit score of 650 or higher is generally required to qualify for a business loan.
Payments made regularly through your business bank account also affect the score. If your company covers all expenses in time, you are more likely to qualify.
4) Collateral
Lenders often require collateral as security for the financing plan. Collateral can be in the form of assets such as real estate, equipment, or inventory. If you should default on your loan, the lender can take the collateral to recover their investment.
5) Business Financial Statements
Lenders also require financial statements that show your business's revenue, expenses, and net income. These statements help them evaluate your business's financial health and determine whether or not the business can afford to repay the loan.
6) Interest Rate
The interest rate is the cost of borrowing money and is another critical factor to consider when evaluating business loan requirements. Interest rates can vary depending on the lender, loan amount, your credit score, and the perceived overall risk of the loan to the financing institution.
7) Loan Amounts
The loan amount is the total amount of money that the bank or credit union is willing to lend to you. Amounts can vary depending on the lender, the borrower's qualifications, and the available collateral, as well as available cashflow.
What to Consider Before Getting a Business Loan
Before you apply for a loan, consider some crucial terms that might determine how you repay debt over time. It's not just the interest rate you should be looking at — these factors are just as important:
The effect of loan amortization (the gradual repayment of your loan through regular payments of principal and interest) on your flow of funds
Loan flexibility
Collateral or personal guarantees
Financial reporting requirements
Simply put, you need to consider how the loan will affect your day-to-day business and finances. Would you be better off with a long-term instalment loan with a lower interest rate or a lump sum loan with shorter repayment periods? How much pressure will it put on your daily operations?
These are all the questions you should ask before you apply. Sometimes, the decision to get a loan with a specific lender is all about the details. Some lenders also allow more flexibility than others.
You might need to consider having a personal guarantee or collateral set in motion. Last but not least, consider that throughout the loan term, your lender will require you to submit regular financial reports to monitor your business's financial health. These could include income statements, balance sheets, and tax returns.
Bad Credit?
If you have bad credit, you may still be able to qualify for a business loan. However, you may be required to provide additional collateral, have a supporting individual/company provide a personal guarantee, or pay a higher interest rate.
Takeaways
Getting a business loan doesn’t have to be a challenging process. Understanding the common loan requirements in Canada can help you prepare and increase your chances of getting approved. A solid business plan, positive flow of funds, good credit score, collateral, and financial statements are some of the critical factors that lenders consider when evaluating a loan application.
It's also essential to research different financing options, compare interest rates and loan amounts, and choose the best fit for your business. By doing so, you can access the necessary funds to start or expand your business and achieve your goals.