Loans can help new or established businesses reach their next milestone. That said, it's essential that every applicant fully understands what a business loan is and how to choose the right one before signing on the dotted line.
This guide will help SME owners in Canada better understand business loans. It will also contain information about how the Cubeler Business Hub™ improves the financial application process for small and medium-sized enterprises (SMEs) applying for business financing.
What is a Business Loan?
A business loan is a lump sum of money lent by a bank, credit union, alternative lender, or government agency regularly reimbursed until full repayment.
There are three options for loan repayment terms: short-term, medium-term and long-term. Borrowers pay back the principal amount lent to them and the interest (the premium paid to a lender for the lump sum amount received by the borrower).
Conditions, loan amounts, repayment terms, and interest rates vary depending on the type of financing, the financial institution, and your eligibility criteria. The lender determines these conditions before disbursing an amount of money.
Business loans are best suited for significant business-related expenses. Common uses for a business loan include:
Buying land or real estate
Intangible assets and working capital
Making equipment purchases, improvements, or repairs
Loan eligibility is exclusive to businesses incorporated federally (with the Government of Canada) or provincially (for example, with Revenu Quebec if the business is in Quebec).
Common Types of Business Loans in Canada
Various types of loans are available to Canadian businesses and come with different uses depending on the business’s needs.
The primary target for business loans is matured businesses, given the large amount of funding it might involve.
To help start-up access business loans, the government of Canada supports several programs to guarantee financing from financial institutions.
Here are some of the most common types of loans available to Canadian businesses.
Start-up loans are for new businesses that demonstrate specific eligibility criteria, such as good credit history and accurate sale potential.
A working capital loan is used to help businesses finance daily operations.
Equipment Financing Loan
An equipment financing loan is used to purchase, upgrade, or improve equipment.
Purchase Order Financing
Purchase Order Financing is a type of loan businesses can use to purchase materials required to complete outstanding orders or contract fulfilment.
Business Acquisition Loan
A business acquisition loan is used to purchase another company, often a competing business.
Commercial Real Estate Loan
A commercial real estate loan is a long-term loan used to purchase commercial real estate. This type of business loan is suitable for the upgrading or purchase of new real estate for businesses.
How to Apply for a Small Business Loan
Applying for a business loan is often an intimidating and timely process for many small business owners. However, following these four steps can help save a lot of time and frustration.
1. Understand Why You Need a Business Loan
While this step may seem obvious, understanding why you need a business loan is an essential first step.
As mentioned above, many business loans and borrowing products are available, and certain loans are better suited for specific purposes.
Understanding why you need a loan will also help you prepare the proper documents before applying and help you understand if a loan is the best product for your financing needs, as business credit cards and business lines of credit might be more appropriate.
2. Prepare the Required Documents
Assuming your business is registered or incorporated with the Government of Canada (and Revenue Quebec if you live in the province), you can start preparing essential documents.
Some of the most common documents include proof of a bank account in your name or the name of your business, a personal credit score, and a business credit score.
You will also require financial statements from the past two years or a tax return if you still need to get these statements available and financial projections for the next two years.
Some lenders may require a business plan to understand why your business needs financing.
3. Compare Loans
Now that your essential documents are in order, you can start comparing the best loan rates available to businesses in Canada.
When comparing, consider the loan term, interest rate, percentage the financial institution will fund, their flexibility, and any guarantees they require.
When you find a loan that suits your business needs, read the fine print and understand the requirements and conditions of signing up for the loan.
After you've submitted your loan application, a representative will likely reach out to you about whether or not the loan was approved or declined.
Final Thoughts on Getting a Small Business Loan in Canada
Getting a business loan doesn't need to be an intimidating process. While applying for business loans can seem time-consuming, applying for the proper type of capital can help your business take the next big step toward success.
Alternatively, the business financing process can be made simpler with help from Cubeler Business Financing™ to fast-track through the application process and get matched with lenders looking for business to finance.
FAQs about Small Business Financing
Can a new business get a business loan?
A new business can be financed under specific circumstances using the Canadian small business financing program.
The lender will review the business plan to ensure that the borrower has enough experience so that the business can generate sufficient revenue to cover all expenses, including repayment of the loan requested.
Does a business loan affect personal credit score?
For small business loan applications, lenders primarily check the borrower's personal credit. The verification can impact personal credit scores.
In addition, poor performance on business loans will affect the owner's credit score, which is linked to the loan as a guarantor.
Is a business loan better than a line of credit?
Loans and lines of credit both have different purposes. Business loans are appropriate for larger purchases, medium to long-term needs, or any purchase that needs more than 12 months for full repayment.
In contrast, business lines of credit offer ongoing access to capital and are suitable for short-term and revolving needs that can be cleared in a short cycle.