Business loans are advanced to businesses, with funds to be used to finance operations or large capital expenditures that otherwise businesses may be unable to afford. The money can be used to finance the purchase of inventory, machinery, equipment, land, or anything else. Due to regulatory issues and expensive upfront costs, not all companies in Canada have direct access to financing. They have to rely on banks and other financial establishments because of this.
Businesses can choose from an array of financial products, including unsecured business loans, term loans, business lines of credit, and others. Business loans are one type of debt instrument available to business owners, and loans can be unsecured or secured, i.e. backed by collateral.
The qualifying criteria for obtaining a business loan differ across Canadian loan providers. Obviously, banks require less information if a small loan is required. The amount of money to be borrowed is not the only factor. First-time entrepreneurs find it more difficult to obtain financing because they do not have evidence to present to banks, proving they can manage a profitable and successful venture. Because of this, financial institutions have to rely on a different set of factors to assess their creditworthiness. These include the amount of capital a business can provide up front, borrowers’ personal credit, the business plan they present, and more. Having a business plan is particularly important as it shows to banks the feasibility of the business borrowers are expanding or starting. The business plan should be prepared in such a way as to show the financial institution that the loan is a low-risk proposition. The plan should, in fact, answer a number of questions financial providers would ask. How much money does the project require? Startup businesses may want to include a startup capital estimate, making sure it is as accurate as possible. Applicants can list all assets their business requires, including real estates, inventory, office equipment, etc. They may include supplies, money for payroll, miscellaneous assets, manufacturing expenses, and anything else in the list.
The next question is – what is the money to be used for? Applicants have to present a detailed explanation of the designated use of the money requested. It is not enough to mention that the money will go toward business expansion. Financial institutions are interested in how the money will be used. Without this, lenders may think the borrower does not know how to allocate funds or lacks vision of how the project will work. It is recommended to identify major projects and pieces of equipment and machinery the loan will be used for. It is a good idea to do research on these items and how much they will cost.
Small business loans, for example, are often used for the purchase of assets – real estate and equipment, to fund operations, including marketing campaigns and hiring new employees, to pay off other business loans, etc. It is important to explain how the loan will be repaid and what the alternatives are if the loan application is rejected. This is important as to portray a determined and confident personality and a business that has different sources of financing.
Established businesses may want to refer to their pro-formas and financial statements when preparing their business plan. Generally, banks are more likely to advance business loans to business owners who have everything planned and spelled out. Thus, it is important to include as much information as possible, including strategies and advantages, track record, biographies, etc.
The requirements and criteria are different for businesses applying for funds through the Canada Small Business Financing Program. The program is designed to offer financing to Canadian startups and small established businesses with gross revenues of up to $5 million that operate for profit. Not eligible are religious and charitable organizations, not-for-profit organizations, and farming businesses. Farming businesses can apply for business loans with Agriculture and Agri-Food Canada which runs a similar program designed for the farming industry.
Financial establishments in Canada extend loans under the program. Businesses in Alberta, companies in British Columbia, startups in Manitoba, or elsewhere are encouraged to check with banks, and the decision to extend a loan rests with them. Business owners should discuss their financial requirements with a financial officer at their credit union, caisse populaire, or bank in Canada. Financial officers make a decision based on the applicant’s loan application and business proposal. Financial establishment register business loans with Industry Canada once loan applications have been approved.
A number of private-sector lenders participate in the program, including Scotiabank, TD Canada Trust, GE Capital Financial Services, ATB Financial, CIBC, and others. These financial institutions are tasked with the administration of business loans. They are responsible for providing funds, making the loans, registering them, and for all credit decisions.
Loans obtained under the Canada Small Business Financing Program can be used to finance 90 percent of the cost of improving used equipment and buying new equipment, buying leasehold improvements (existing or new), and buying or improving real estate, land, or immovables. To this, small business loans can be used to finance production equipment, land and buildings, and leasehold improvements for franchises. The funds can be used to finance restaurant and hotel equipment, commercial vehicles, software, telecommunications equipment, and computers. The money cannot be used to finance inventories, goodwill, research and development, working capital, or franchise fees. To offer financing under the program, financial institutions have to take security in the real estate or assets to be financed.
Canadian small business secured loans are offered under the CSBFP and independently by private financial providers. Borrowers who apply for a secured small business loan offer collateral in the form of commercial real estate, land, mutual funds, etc. The collateral is an important aspect when applying for a secured loan as it reduces the risk financial institutions take. Most of the time, borrowers are offered competitive interest rates and longer repayment periods.
A well-established business may be offered an unsecured business loan, based on the borrower’s good credit. However, a business owner with poor credit and smaller business may have to offer collateral to secure the loan. In some cases, business owners in this situation can use their accounts receivable as collateral. They can sell their machinery and equipment to a financial institution and lease it back as to obtain cash.
Generally, secured small business loans are offered with variable and fixed rates of interest, depending on the borrower’s financial requirements.
Business loans are offered by a number of financial institutions with branches in Winnipeg, offices in Edmonton, branches in Calgary, Toronto, and elsewhere. The Bank of Montreal is one financial institution that offers BMO installment loan plans and small business installment loans. Business owners can apply for a business installment loan to refinance existing debt, acquire another business, or purchase fixed assets, including machinery and equipment. Borrowers are offered flexible, long-term loans with a fixed interest rate. They can prepay the loan amount without penalty and enjoy a flexible repayment schedule. Borrowers who seek to protect their cash flow can opt for blended payments, which include interest payments and the principal amount. Payments remain fixed over the loan’s term. Borrowers who want to make lower payments can opt for a longer amortization period. For peace of mind and greater security, borrowers can insure the loan by purchasing the BMO commercial loan insurance plan offered by the bank. Small business installment loans are another option to look into. Business owners can choose a fixed interest rate to protect their cash flow from fluctuations in interest rates. The bank also offers small business loans with a variable interest rate. Longer amortization periods are available to borrowers who want to lower their monthly payment amounts. The bank offers disability insurance as well as creditor life insurance. In addition, the Bank of Montreal offers BMO variable rate and fixed rate term loans. Fixed rate term loans are a good solution for businesses that are looking for a loan with predictable payments, longer terms, and protection from high interest rates. Variable-rate term loans are intended for borrowers who want to purchase capital assets and pay less in interest rates when interest rates are going down. When rates begin to go up, borrowers are allowed to fix the rate.
Another financial institution that offers business loans is the Canadian Imperial Bank of Commerce. The bank offers CIBC small business loans, installment loans, and partner capital loans to its clients in Canada. Businesses can apply for a loan by contacting their CIBC business advisor or visiting their nearest branch in Quebec, office in Nova Scotia, branch in Ontario, and elsewhere. Small business loans are a flexible borrowing solution, and borrowers may expect a credit decision within one business day. Borrowers can choose between a variable rate credit line or a fixed rate loan and between a secured or unsecured loan, with funds offered in U.S dollars and Canadian dollars. CIBC small business loans are available to business owners who have 20 percent (or more) ownership in a business. These loans are offered to businesses that need funds to buy equipment and machinery, finance their day-to-day operating needs, or support their seasonal cash flows. Lower interest rates are offered to customers who secure their loans with hypothec, cash or cash equivalent, or their principal residence. CIBC also offers fixed and variable rate installment loans to business owners who seek to invest in their company’s long-term growth. Installment loans are a good solution for borrowers who seek to cover asset acquisition costs, which allows them to free a portion of the working capital. This can go toward additional investments to boost profitability. Borrowers who choose a variable rate installment loan can pay it off at any time. Both fixed rate and variable rate installment loans are repaid in monthly payments, but the bank may tailor the repayment schedule as to meet the borrower’s financial requirements and cash flow needs. Finally, CIBC partner capital loans are offered to companies that are profitable and operating, with their shares having strong trading characteristics. These loans are offered with flexible terms and conditions and can be used to motivate and retain key employers.
TD Bank also offers business loans to business clients who seek to expand, purchase, or improve business assets. These loans are an ideal solution for business owners who want to finance a renewable energy product. TD business loans are offered with floating and fixed interest rates. Borrowers who choose the floating rate option can prepay the loan at any time with no prepayment penalty. Those who go with the fixed rate option can prepay only a portion of the principal a year. Both secured and unsecured loans are offered. The Bank of Nova Scotia also offers Scotiabank business loans to its business customers. Business loans are offered with competitive floating and fixed interest rates and optional life insurance. Applicants for a business loan can visit the bank’s Alberta offices, British Columbia branches, Quebec branches, and offices in other locations.
RBC Royal Bank is another bank to check with if looking for business financing. The bank offers term loans, along with a business loan insurance plan. RBC term loans are ideal for modernizing, installing, or buying fixed assets such as business equipment. The bank offers cost-effective financing to businesses that are looking for ways to achieve their business growth plans. Borrowers can choose either floating rate that will change with the prime rate or fixed rate, which allows customers to lock in at an agreed interest rate. Term loans are intended for the purchase of used and new capital assets. The funds can be used to finance business expansion, to refinance debt, or for business acquisitions. These loans are offered with flexible repayment schedules. Borrowers who opt for a variable rate loan can make a full or partial prepayment without penalty. Persons who choose a fixed rate loan can have their payments blended as to include interest charges and the principal amount. Borrowers are offered a business loan insurance plan, together with financing, but some restrictions may apply.
Bad credit business loans are designed for Canadian businesses that are unlikely to obtain financing from mainstream lenders. Many financial institutions pay attention to the creditworthiness of business owners and not only businesses and their ability to repay the money loaned. Specialty lenders, equipment leasing companies, and community lenders usually focus on a combination of personal and business credit scores.
Bad credit business loans are a good solution for business owners with compromised credit who require working capital but have limited access to standard loans. These are business owners who have been turned down by mainstream lenders. Studies have shown that bank and credit card financing account for around 25 percent of the financing required by first-time entrepreneurs. This means that most of the funds businesses need are provided by other institutions that pay less attention to credit rating. Naturally, there are lending programs and credit cards available to persons with bad credit, but they are offered with a higher interest rate. The higher rate compensates for the high credit risk associated with subprime borrowers. One option for startup entrepreneurs with poor credit is to ask family and friends for a loan. In fact, over half of all businesses get financial help from relatives and friends at some point in time. Another option is to check with nonbank web-based companies and microlenders that offer financing to first-time entrepreneurs. They usually offer microloans up to $25,000 and are a good option for persons with poor credit. Payments are reported to the credit agencies, thus helping to improve the borrower’s credit score. Obviously, these loans come with high interest rates, but borrowers who are accustomed to using high-interest credit cards may find interest rates affordable. It should be noted that while credit cards allow partial payments, installment loans are less flexible with regard to prepayments and making partial payments.
Some small microlenders do not have internet presence, and it is more difficult to find them. Business owners may want to look for community-based nonprofit organizations that run programs for business owners with bad credit.
Financial institutions in Canada tend to be quite conservative when it comes to lending money to persons with poor credit and no or little history of running their own business. One way to get around this is to ask an outside investor to secure the business loan. The guarantor will put his personal assets as collateral either because he believes in the borrower’s business model or because they work together or have a personal relationship. Guarantors are responsible for repayment in case the borrower cannot afford to repay the outstanding balance. Borrowers are advised to get a written agreement specifying their obligations in case of default. Some guarantors want equity in the borrower’s business (they are referred to as angel investors in this case).