Picking the right bank for your small business is not a simple task. Learn how to choose the right bank for your SME.
If you’re like most business owners, you’ve already had the experience of looking for a small business loan. Entrepreneurs routinely describe the loan shopping process as time-consuming, intimidating, and maybe even a little discouraging when they don't find a lender who is a good fit right away.
Domestic banks provide nearly 70% of external debt financing to Canadian small to medium enterprises (SMEs). The good news is that according to the Canadian Bankers Association, 89% of SMEs that applied for a loan were approved.
Another factor that positively affects the availability of small business loans is the Federal Government’s Canada Small Business Financing Program, which targets start-ups with revenue under $10 million, and helps Banks to mitigate the risk of these loans.
But while a lot of banking services have undergone a complete digital transformation to become more user-friendly and efficient, the small business financing process has itself been remarkably resistant to change. Approaching individual banks and rate shopping continues to be a time-consuming process, never mind the negative impact credit inquiries can have on your credit rating, which can affect your ability to get a loan later.
Broadly speaking, there are three main groupings of SME lenders (excluding your parents and college friends). They are banks, credit unions, and alternative lenders. Let’s take a quick look at each of the three.
There are five national banks, known as The Big Five, that Canadians should be familiar with (RBC, TD, Scotiabank, BMO, and CIBC). There is also a second tier of smaller banks that includes HSBC Canada, Laurentian Bank, National Bank of Canada, and the Canadian Western Bank. These banks are either regional, or they are branches of foreign banks (schedule 1 and 2 banks).
Banks are Canada’s leading lenders to small businesses and can be a great source for loans.
Credit unions, or Caisses Populaires as they are called in Quebec, are financial institutions like banks except that they are member-owned and are set up as not-for-profit entities that use any operating surpluses to re-invest in the organization.
Credit Unions are typically organized and regulated on a provincial basis. Credit unions are more community oriented and regional than banks. There are around 700 credit unions across the country, with the highest concentrations being in Quebec and Ontario.
Credit Unions are a great place to look for a business loan. Like borrowing from a bank, however, each credit union will have its own criteria and process. So being smaller and local doesn’t always translate into faster and easier.
Alternative lenders (sometimes called non-traditional lenders) take a lot of forms. There are peer-to-peer lending platforms, often referred to as crowdfunding, like Kickstarter. There are non-bank lending platforms like Ondeck, Loans.ca, Driven.ca.
There are also invoice lending companies that lend working capital based on receivables like FundThrough; and there are equipment financing companies that lend for specific business critical equipment, for example, Canadian Equipment Finance and Accord Financial.
When working with alternative lenders, the onus is on you to do your homework, learn the terms and conditions, and have a good understanding of the risk you are taking on. As a broad generalization, alternative lenders are more willing to lend than traditional lenders, and often the cost of credit is higher. So caveat emptor or buyer beware.
The answer is complicated, just like the borrowing process. In truth, it depends a lot on whether you are a start-up or an established business, for how long you want to borrow, and what you want to use the money for. The key to getting the best loan terms is to shop around to understand what’s available.
There are a lot of very reputable and dependable financial institutions out there who are ready and willing to lend to qualified small and medium-sized businesses. So you need to do your homework. That process is time and effort intensive, though. It can take weeks, even months, of meeting with business loan officers and filling out forms to get a good picture of your options.
But that is all about to change. Read on to find out how.
A new way for SMEs to shop for small business loans will launch in Canada this fall with Cubeler’s Canadian Business HubTM, a financing marketplace set to change the way SMEs look for small business loans and credit.
Cubeler uses advanced AI to pre-qualify your SME and match you with offers from leading Canadian lenders – accelerating your access to working capital. With Cubeler, you can get a full view of what credit is available to you, and at what rate, so you can develop strategies based on real-world finances instead of hopeful assumptions.
Sign up now with Cubeler for no-cost access to Cubeler Business Hub's in-depth business intel reports and cutting-edge SME tools.