How to get a business loan in Canada
Getting a business loan can help you get a new company off the ground or propel an established business to new heights of growth and profitability. But before you can access funds to grow your company, you’ll need to convince a bank to lend you the money.
Three steps are important for preparing a successful loan request, according to Andy Mittra, Director, Corporate Financing at BDC.
First, ask yourself why you need the loan. Next, find the right loan to match your needs. And finally, craft a solid loan application using the right documents and preparations.
“Knowing why you need the loan helps you figure out what type of loan to get, how much to ask for and the ideal terms and conditions for your business,” Mittra says.
“All this will increase the likelihood of success when you apply for a loan and help you develop a long-term relationship with a financial partner.”
1. Why do I want a business loan?
The first step is to be clear on why you want a business loan. Bankers offer many types of loans to businesses. The right one for you depends on your specific needs.
Different loans are available for everything from starting a new business to scaling up a tech company, investing in equipment, technology or a building, and acquiring another company.
Prioritizing your needs allows you to determine which types of loans are most suitable and how to make your case to a bank.
How much financing should I ask for?
Being clear on your needs is also essential for figuring how much financing to seek. It’s important not to take on more debt than you can afford, but it can be just as important not to underestimate your financing needs and borrow too little. That could leave you facing a cash crunch when you can least afford it.
Calculate how much you need by reviewing or updating your cash flow projection. This allows you to anticipate gaps in your working capital in the coming 12 months, including during any periods of heavy cash outflows due to planned investments. Plan your financing request to ensure you have enough cash on hand throughout the year.
2. Which type of business loan is best suited to my needs?
Types of loans
The next step is to decide which type of loan is best suited to your business.
Businesses with at least 12 months of revenues can apply for start-up financing. This type of loan can be used to:
- buy assets
- pay start-up fees
- buy a franchise
- create a website
- hire an expert advisor
- replenish working capital
Businesses with less than 12 months of revenue history may be eligible for financing from BDC partners such as:
Whether you’re an earlier-stage scale-up or an established business, tech firms can secure financing tailored to the technology industry. Projects can include:
- developing new products
- hiring more staff
- investing in customer acquisition
- acquiring another business
- expanding into new markets
Established companies seeking smaller amounts can apply for a small business loan. Such financing is often available quickly via an online application and can be used to:
- buy equipment, software or hardware
- upgrade a website
- purchase inventory
- pay suppliers or employees
Commercial real estate
A commercial real estate loan can allow you to:
- buy land or buildings
- pay for construction of a new facility
- expand or renovate existing premises
- replenish working capital depleted by real estate costs
A working capital loan allows companies to make investments without putting everyday cash at risk. Projects can include:
- complementing your line of credit
- launching growth projects
- improving profitability
Business purchase or transfer financing is available to:
- secure funds for a business acquisition, management buyout, family succession or vendor take-back
- acquire land or other assets of an existing business
Equipment purchase financing can help you:
- increase your capacity with new machinery or equipment
- improve efficiency by modernizing operations
- complement your line of credit if working capital is depleted by equipment costs
Purchase order financing lets you fulfill large orders and take on new business opportunities. This allows you to:
- accept larger contracts and purchase required inventory
- expand into new markets
- pay suppliers upfront
Technology financing is for all types of companies and not just technology companies. It can let your business:
- buy hardware or software
- invest in digital marketing
- hire an expert advisor to help with IT planning or online sales
Growth & Transition Capital
Quickly growing mid-market and high revenue businesses can seek Growth & Transition Capital. These solutions allow your business to raise capital when you have insufficient tangible assets to pledge for security and don’t want to dilute ownership. This type of financing offers specialized loans that support growth while not diluting owner equity. Options include:
- mezzanine financing
- cash flow financing
- quasi-equity financing
Companies seeking to commercialize and expand intellectual property assets can seek intellectual property-backed financing. This can take the form of a traditional loan, quasi-equity or equity financing.
Cleantech businesses with ambitions to scale can seek specialized cleantech financing.
Women entrepreneurs can seek financing through a variety of partners and programs dedicated to providing financing and other support to women-led businesses.
Indigenous entrepreneurs can apply for specialized loans that can be used for:
- acquiring assets
- covering start-up costs
- starting an export project
- rebuilding working capital
Black entrepreneurs can obtain a loan from tailored programs suitable for start-ups and existing businesses.
What loan terms and conditions are best for my business?
Loan terms and conditions vary greatly depending on the financial institution and type of loan.
“It’s common to focus on the interest rate, but other elements can be just as important,” Mittra says. “You should shop around for the right terms and conditions.”
Look into these terms and conditions.
- Interest rate
This will determine the amount of money that will need to be repaid every month. While your interest rate is obviously very important, other factors need to be given due consideration as well because they could ease pressure on your business in the event of financial challenges.
- Amortization period
Loan terms are very important. Longer repayment terms do mean higher borrowing costs over the long term, but they also lower monthly payments. This in turn can help reduce the strain on your cash flow.
- Lender’s flexibility
Ask your banker what would happen if you were unable to make scheduled loan repayments. For example, would your bank let you temporarily suspend your principal repayments?
- Percentage of project cost that will be financed
This will affect how big of a personal investment you need to make and whether it makes sense to also work with a second bank.
- Debt covenants
Covenants are promises that borrowers make to lenders as part of their loan agreements. When a borrower breaks a covenant, the loan may technically be in default because its terms are not being met. In such a situation the bank may require that the entire loan be paid back.
- Collateral and other guarantee requirements
Most lenders in the market are lending based on an asset. For example, they’ll look at a potential building acquisition, evaluate its value and loan you a percentage of the assessed value. Other lenders, like BDC, also lend money based on cash flow. They’ll look at your revenues and expenses and then—based on your profits—give you a loan without requiring collateral. This allows you to borrow additional money to grow your company.
- Financial reporting requirements
Most loan terms have financial reporting obligations requiring that financial statements and reports must be provided to the bank on an annual basis. Smaller loans typically have less demanding reporting requirements.
You can also ask your business contacts about their experiences with different banks. Find out about the bank’s:
- quality of service
- willingness to negotiate
- advisory and other services
- ability to offer access to networks and procurement opportunities
- specialization with your industry or the type of loan you’re seeking
- diversity financing record
3. What are the requirements to get a business loan?
It’s important to do some homework in order to craft a winning loan request. The first step is to gather documents the banker will use to assess your request.
What documents do I need to prepare to apply for a business loan?
A solid business plan is key for a successful loan application. The plan should include:
- Financial statements: Banks typically review financial statements to understand a company’s financial health, profitability and capacity to repay debt. For larger loans, statements are needed for the past two years along with interim statements comparing the latest period with the same period in the previous year.
If you don’t have financial statements, tax returns may suffice in some cases, such as for smaller loans.
- Financial projections: Banks typically require a monthly cash flow forecast for the remainder of the current year and the following 12 months. In some cases, two years of projections may be requested.
Be sure to use realistic numbers in projections. “Overly optimistic figures undermine your credibility and could make it harder to obtain future loans if they don’t pan out,” Mittra says.
You may be asked for two sets of financial projections—one based on receiving the loan and a second one showing your forecast if you don’t get the loan.
- How you’ll use the loan: Give details about the project or plans for using the financing and exactly how it will help your business.
- Company details: Give information about your company’s history, current operations, strategy and management team experience.
- Marketing and production plans: Banks want to know about your market, competitive advantage and operational capacity to handle projected sales.
- Supporting documents: You can strengthen your loan application by including supporting documents, such as:
- market studies
- documents to support financial data
- client testimonials
- positive media stories about your business
The bank may also request other documents depending on the type or size of loan or business. Here are some of the documents you could be asked for.
|Explanation and details
|Purchase offer or sale agreement for a business, real estate or equipment
|Draft agreements may be acceptable.
|Ownership chart showing share percentage of beneficial owners
|Due diligence is typically done on every owner possessing more than 25% of shares or having control in the business.
|Trust agreement if beneficial owners include trusts
|The trust agreement and copies of tax filings of the trust are typically requested for the last three years.
|Source of accumulated wealth and fund availability for downpayment
|Bankers may need to understand how wealth accumulated in the business and where personal funds came from.
|Environmental assessment report
|For projects with a possible environmental component, an assessment report may be requested during the bank’s due diligence. The report would ideally be prepared by bank-approved environmental vendors.
|Detailed construction cost estimate/budget
|Typically requested for construction and renovation projects.
|Quote or invoice/budget for equipment
|May be requested depending on the equipment acquisition timeline and type of equipment.
|Line of credit agreement
|May be requested if you have a line of credit with a chartered bank or other lenders.
|Accounts receivable and payable aging reports
|These reports showing the duration of outstanding accounts receivable and payable may be requested if they aren’t included in year-end and interim financial statements.
|List of trucks and trailers in fleet
|May be requested for trucking transactions.
|May be requested for financing of automobile inventory.
|Appraisal report (hotels and investment properties)
|An appraisal prepared within the past six months may be requested for hotels and investment properties. Hotel appraisals are typically needed from a bank-approved appraisal firm.
|Leases are typically requested when the loan applicant primarily derives their income from commercial leases.
How should I prepare to meet with the bank?
- Identify your investment and collateral. Depending on the type of loan, the bank may want to see what you are investing and offering as collateral.
- Check your credit history. Banks may look at your personal credit score and the credit bureau report on your company. Reviewing your credit history ahead of time will help you avoid surprises and be ready for questions.
- Be credible and informed. A banker will consider how you present yourself, your experience, training and background. Knowing your facts and figures and concisely stating your case will help you establish your credibility.
It’s also useful to know your financial ratios. These are key indicators of your company’s financial health that bankers use to evaluate loan requests. Loan agreements also often include a requirement to maintain certain ratio levels.
FAQs for how to get a business loan
How do I calculate how much I can borrow for a business loan?
You can use a business loan calculator to determine your monthly payments, the interest cost for financing your project and an amortization schedule.
Then, enter the amounts on your cash flow forecast to see the impact of the loan and projected sales growth from your project.
A rule of thumb is that your borrowing capacity is guided by your net income plus depreciation, less the annual amount of repayments of existing term debt. Any unused room in your borrowing capacity is available to cover new debt service.
You may be surprised at the amount you can afford to borrow. “Newer businesses tend to overestimate their ability to take on a loan,” Mittra says. “On the other hand, more mature businesses often underestimate how much they can afford to borrow.”
How much revenue do I need to be making to get a business loan?
There’s no fixed amount of revenue needed to get a business loan. Banks usually want to see a history of profitability.
What credit score is needed to get a business loan?
There’s no specific credit score needed to get a business loan. For some loans, the credit score isn’t considered. For others, a good credit score is helpful, but it is still possible to obtain a loan with a suboptimal credit score. Bankers may also consider other aspects, such as financial projections and collateral.
What can be financed with a business loan?
Business loans can be used for many different purposes, such as:
- buying technology, equipment or machinery
- acquiring another company or a franchise
- investing in a market expansion or new product
- replenishing working capital
- creating or upgrading a website
- improving operational efficiency
- developing a strategic plan
- purchasing or renovating a building
- hiring sales and marketing staff
My business is in apartment buildings and rental. Am I eligible for a business loan?
BDC doesn’t finance residential real estate projects. But you may be able to obtain such financing from other financial institutions.
If the source of my rental income is commercial, can I borrow money from BDC?
Yes, in this case you can get a commercial real estate loan.
Do I need financial statements prepared by an accountant to apply for a business loan?
Accountant-prepared year-end financial statements are usually needed to apply for larger business loans. A bank may also ask for interim statements prepared internally to understand the more recent financial situation. If statements aren’t available, tax returns may suffice in the case of a smaller loan.
Do I need to include financial projections when I apply for a business loan?
Financial projections are usually required, especially for larger loans.
Do I need a line of credit before I apply for a business loan?
A line of credit isn’t necessarily required. It depends on the situation.
Will I need to provide a personal guarantee to get a business loan?
A personal guarantee is required for most types of loans. In some cases, real estate loans don’t require a personal guarantee.
Do I need to invest money alongside the bank for my project?
It depends on the situation.
Can an LLC borrow money?
For more advice on approaching a banker and writing a business plan, check out these free tools from BDC: