Small businesses are the backbone of our economy, with 98% of businesses in Canada being small businesses that together employ 68% of Canadian workers. Small business loans enable entrepreneurs to fuel growth, manage cash flow, and expand their operations. Despite the importance of small businesses, access to capital can be a challenge. If you’re a Canadian small business owner looking to borrow money, this guide to small business loans will provide an overview of the different types of loans, how to find the right lender, and advice on how to successfully apply for a small business loan.
As of September 2023
|Lender||Interest Rate||Loan Amount||Min. Months in Business||Min. Revenue||Min. Credit Score|
|Prime to 46.96%||Up to $500k||100 days||$10k/month||-|
|8% - 29%||$5k - $300k||6 Months||$100k/year||600|
|5.49% - 22.79%||$1k - $300k||100 days||$10k/month||416|
|From 6%||$1k - $500k||1 year||$100k/year||600|
|Prime + 3% for Futurpreneur, and BDC Floating Base Rate + 1.65% for BDC||Up to $20k with Futurpreneur, plus up to $40k with BDC||Owner aged 18-39 years old||None||None|
The main types of small business loans in Canada are:
Below, we’ll talk about the differences between these types of loans, what they are used for, and where to find them.
Term loans are a type of financing that provide funds for a predetermined amount of time, such as 1 year or 5 years, which is known as the term. You’ll receive the entire amount of the loan upfront. Loan repayments are equal installments of both interest and principal, which means that the loan would be fully paid off at the end of the term. This type of loan is usually best for large one-time investments, such as new machinery or equipment.
Small business term loans can be secured or unsecured, and can have a fixed interest rate or a variable interest rate. A secured loan means that you’re putting up some of your assets as collateral, which the lender will take if you fail to pay the loan back. In return, you’ll be able to borrow more money at a lower interest rate. Unsecured loans don’t require any collateral and are usually used for shorter terms and smaller amounts. Unsecured loans will have a higher interest rate than secured loans.
A line of credit is a form of revolving credit that allows you to access funds up to a predetermined limit. You can draw on the line of credit as you need it and pay back the amount borrowed with interest over time. It differs from a term loan in that you don’t have to use all the funds at once, and it's best for businesses that have ongoing or seasonal needs, such as to purchase inventory or to meet payroll.
Commercial mortgages, also known as non-residential mortgages, are used to finance the purchase of a business property. Examples of business property include stores, factories, warehouses, and office buildings. Due to the large amount of money typically borrowed with a commercial mortgage, they usually have a longer repayment period than other types of small business loans, ranging up to 25 years or even longer for some mortgage types.
As a recap, here’s what each type of small business loan is typically used for:
|Term Loans||Large one-time investments such as new machinery and equipment|
|Lines of Credit||Ongoing or seasonal needs such as to purchase inventory or to meet payroll|
|Commercial Mortgages||Financing the purchase of a business property such as a factory, warehouse, or office building|
Small business loans can be found from a variety of different sources, including banks, credit unions, and alternative lenders. Each lender will have its own criteria for approving applications, so it is important to shop around to find the best option for your needs. Below, we’ll take a look at some of the most popular small business loan lenders in Canada.
|Lender||Term Length||Loan Amount||Min. Months in Business||Min. Revenue||Min. Credit Score|
|6 - 24 months||$5k - $800k||6 months||$10k/month||-|
|3 - 60 months||Up to $500k||100 days||$10k/month||-|
|6 - 18 months||$5k - $300k||6 Months||$100k/year||600|
|12 - 60 months||$1k - $300k||100 days||$10k/month||416|
|Up to 60 months||$1k - $500k||1 year||$100k/year||600|
|Up to 60 months||Up to $20k with Futurpreneur, plus up to $40k with BDC||Owner aged 18-39 years old||None||None|
Line of Credit
|Lender||Loan Amount||Min. Months in Business||Min. Revenue||Min. Credit Score|
|$7.5k - $125k||6 months||$10k/month||-|
|Up to $300k||6 months||$100k/year||600|
Based in Vancouver, Merchant Growth is an online alternative lender that provides business loans to small businesses in Canada. They offer term financing, line of credit, and even e-commerce financing.
For Merchant Growth’s term loans, you can borrow between $5,000 up to $800,000 for terms ranging between 6 months to 24 months.
For Merchant Growth’s line of credit, you can borrow between $7,500 up to $125,000.
All of Merchant Growth’s small business loans require you to have been in business for at least 6 months, with at least $10,000 per month in revenue.
Loans Canada is a rate comparison website that allows you to compare different types of loans and lenders in Canada, including for small business loans. For term financing, Loans Canada allows you to borrow up to $500k, with requirements being at least $10k per month in revenue and having been in business for at least 100 days. Interest rates vary from Prime up to 46.96%.
OnDeck markets itself as an alternative to the big banks by approving small business loans based on business performance, rather than on the owner's personal credit history. OnDeck has loaned over $13 billion across Canada, the US, and Australia. In Canada, OnDeck operates in all provinces and offers fixed term loans, line of credit, and advances on future debit and credit card receivables.
For term loans, OnDeck loans vary from $5,000 to $300,000 with rates starting from 8% to 29%. Lines of credit can also be up to $300,000. OnDeck requires at least $100,000 annual revenue and 6 months of being in business, with a minimum credit score of 600.
Founded in 2015, Sharpshooter Funding’s slogan, “Funding is for the Boys”, has become their trademark. Sharpshooter Funding markets itself as approving 75% of all applications, with interest rates ranging from 5.49% to 22.79% for loans $1,000 up to $300,000.
Sharpshooter Funding requires a minimum credit score of 416, a nod to its hometown of Toronto. It also requires 100 days of operating history and $10,000 revenue per month.
Lending Loop is a Canadian peer-to-peer lending platform that connects small business owners with individual investors. Small businesses can apply for unsecured loans up to $500,000 and receive funds based on how quickly investors fund the loan. Interest rates start from 6% and require 1 year of business history and at least $100,000 annual revenue. Lending Loop also requires a minimum personal credit score of 600. Investors can invest in Lending Loop's small business loan portfolios, with annual returns estimated at 7.8% for their balanced portfolio. In 2023, Merchant Growth acquired Lending Loop’s term loan side of the business.
Futurpreneur is a non-profit organization that partners with governments to provide assistance for younger Canadians looking to start their own business. This includes pre-launch coaching, financing, and two years of business mentoring.
Since Futurpreneur helps startups, there’s no minimum revenue requirement. Instead, you’ll need to be 18-39 years of age.
You can borrow up to $20,000 with Futurpreneur with an interest rate based on CIBC Prime + 3%. If the prime rate is above 9%, then the interest rate for the loan will only be CIBC Prime.
You can borrow up to an additional $40,000 with BDC, at a rate of BDC Floating Base Rate + 1.65%. Futurpreneur Canada charges a one-time 1% fee on the loan amount. BDC charges a $50 processing fee. For both portions of the loan, the first year is interest-only repayments.
|Prime + 2% to Prime + 11%|
|Prime + 2.9% to Prime + 11.9%|
|Based on Prime|
|Based on Prime|
|Based on Prime|
BMO's Credit Line for Business requires no collateral, with a variable interest rate based on prime. It ranges from Prime + 2% to Prime + 11%. You'll also receive a Mastercard that you can use to make purchases with.
RBC Visa CreditLine for Small Business has a variable interest rate from Prime + 2.9% to Prime + 11.9%. It comes with a Visa credit card that allows you to earn Avion Points, with no annual fee.
Other major banks offer small business lines of credit too. For example, CIBC's business line of credit lets you borrow money if your business has had positive revenue for at least 12 to 24 months. Their line of credit starts from $10,000 and can be either secured or unsecured. Scotiabank's Credit Line for business lets you borrow up to $1 million.
There are other types of small business loans or financing that can help fund your business. This includes merchant cash advance (MCA) and the Canadian Small Business Financing Program (CSBFP).
The Canadian Small Business Financing Program (CSBFP) is run by the federal government and helps small businesses get the financing they need by providing loan guarantees to lenders, with 85% of the loan being guaranteed by the government. Since this reduces the risk for lenders, it makes qualifying for a loan to be much easier.
To be eligible, businesses must have gross annual revenue of $10 million or less, and can't be a farming business.
The maximum amount that can be borrowed is $1 million for term loans and $150,000 for lines of credit.
Specifically for term loans, only up to $500,000 can be used on leasehold improvements, property, or to purchase equipment. Of this amount, only up to $150,000 can be used on working capital and intangible assets.
The Government of Canada sets maximum interest rates on these small business loans. For term loans, the maximum fixed rate is the lender's residential mortgage rate for the same term, plus 3%. For example, if the bank's 5-year fixed mortgage rate was 5%, then the 5-year term loan could have a rate up to 8%.
Term loans with a variable, or floating, interest rate can have a rate up to Prime + 3%.
Lines of credit can have an interest rate of Prime + 5%.
There is a one-time fee that borrowers must pay for this loan, which is 2% of the borrowed amount for term loans and 2% of the line of credit amount.
All of Canada’s major banks offer loans under this program, however, they may have different conditions.
TD's program lets you finance up to 90% of the cost of the assets being financed. TD also requires a personal guarantee of at least 25% of the loan amount.
CIBC has a maximum term of 15 years, with a setup fee ranging between $150 to $1,000 and a renewal fee of $50 to $150. Real property can have an amortization of up to 25 years.
RBC offers an amortization up to 15 years, even for real property, while their line of credit has terms of 5 years that can be renewed.
Scotiabank has amortizations up to 20 years for real property, or up to 15 years for all other loans.
A merchant cash advance lets small businesses borrow money based on their future sales. Instead of a fixed monthly payment, the lender collects a percentage of each sale until the loan is paid off. The repayment rate and term length will depend on the lender, but typically they are short-term loans in a manner of months with very high costs, similar to payday loans for consumers.
There are two key terms in a merchant cash advance: the factor rate and the holdback rate. The factor rate tells you how much you would need to pay back. The holdback rate is the percent of each sale that would be taken to repay the cash advance.
For example, with a factor rate of 1.5, you’ll need to pay back 1.5x the amount of the cash advance. For a $10,000 cash advance, you’ll be repaying $15,000.
With a holdback rate of 20%, each debit and credit card transaction that you receive will have 20% withheld until the $15,000 is fully repaid.
Since merchant cash advances cost a lot more than small business loans, they’re only used for businesses that urgently need funds and can’t qualify for a small business loan from a traditional lender.