Small Business Startup Loans in Canada
As a small business starting up in Canada, it is extremely difficult to start a proper business without having the capital to back you up. Most business owners will take advantage of a small business startup loan in some way.
The added capital can give you the boost your small business needs to succeed. So, if you need a startup loan for your small business, there are a few key loan options to consider.
- Using your personal loans, lines of credit, credit cards, or even a mortgage
- Taking out a business loan (not personal)
- Working with an investor or business partner (with the needed startup capital)
- Using small business loan options provided by the Canadian government
Most business owners start with a small business loan as it helps with the initial expenses that your business has. As the costs of starting a small business are slowly going up, the more capital you have available, the easier it will be to control your business.
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What is a Small Business Startup Loan?
A small business startup loan is simply the capital provided to a business owner in order to start their small business and to cover the various costs they may have during the process.
Generally, business loans are provided by bank organizations or the various levels of the Canadian government in the form of government loans.
Traditionally, startups gravitate more towards bank loan options as they are most familiar and often do personal banking with them. While it may seem easier, it can often hurt your business to not shop around for a startup loan.
Banks often have strict terms with their business loans, and the interest rates are not very flexible and are often high for startups.
Government loans, on the other hand, if you can find the right small business startup loan option for your needs, can come in the form of a no-interest loan, a low-interest loan, or a guaranteed government loan that protects your business in case things do not go as planned.
Whatever the case, be sure to do your own research into the terms, repayment options, and interest that come with the loan. Take a minute to review government loan options in the Funding Database.
How Do Small Business Startup Loans Work?
Small business startup loans are no different than borrowing money from any lender.
As you take out an amount to use towards your small business to cover startup costs and operating expenses, the borrowed funds include interest. This interest, plus the original balance, is tied to a repayment plan.
A lender, whether a bank, private loan company, or government agency, will review a number of key factors to determine your business potential.
- Your credit score (not always a determining factor)
- The amount of money you want to borrow
- The purpose of the funds
- Your business plan and overall potential
Using these factors, along with others, the lender will determine your eligibility, interest rate, repayment terms, and loan structure.
For startups without trading history, lenders may focus more on alternative factors.
These factors may place greater emphasis on:
- Your business plan
- Collateral
- Personal guarantees
Your Business Plan
The business plan is the first step you should focus on as a small business startup. A properly developed business plan ensures your idea is well thought out.
A detailed business plan can help secure funding from banks or government lenders.
Banks, government agencies, and private lenders may value a strong business plan more than your credit score if it clearly shows potential.
The Business Plan Tool is a great way to get started with expert guidance.
Small Business Collateral
Collateral is money or assets of value.
Providing collateral creates a guarantee that you have something to give back if things do not go as planned.
Collateral can include vehicles, equipment, machinery, or property, as long as it can be liquidated.
Using collateral shares the risk with the lender and can improve your chances of securing better loan terms.
Personal Guarantees
New businesses often have limited trading history, making it difficult to secure loans.
A personal guarantee provides the lender with security that they may recover funds if the business defaults.
Personal guarantees can impact your personal finances and credit, so be sure to fully understand the risks.
With personal guarantees, you may be responsible for outstanding payments, credit impacts, or collections.
Types of Small Business Loans Available in Canada
Canada is one of the top countries in the world to start a small business and offers many funding options.
Loans are available from government agencies, banks, and private lenders.
- Bank loans
- Private business loans
- Government loans
Bank Business Loans
Many business owners turn to banks for startup loans, but bank loans are often not startup-friendly.
Banks primarily profit from interest, leaving little room to negotiate terms.
This can hurt early cash flow, which is critical during the startup phase.
It is always recommended to consider all loan options before committing.
Private Business Loans
Private business loans are generally more flexible than bank loans.
Options may include traditional loans, revenue-based repayment loans, conditionally repayable loans, or purchase order-based loans.
Interest rates vary depending on your business goals and needs.
Government Loans
The Canadian government offers several loan programs for small business owners.
These include no-interest loans, low-interest loans, guaranteed loans, and conditionally repayable loans.
Government loans often have better terms than bank loans and are worth exploring through the Funding Database.
Who Generally Gets Approved for a Small Business Bank Loan?
To borrow money from a bank, certain qualification factors must be met.
Banks typically lend to legally registered businesses that can demonstrate repayment potential.
They review credit score, income, assets, and collateral to share the risk.
Banks may accommodate lower interest rates if collateral or personal guarantees are provided.
Due to limited trading history, startups may benefit more from government loan programs.
How Much Can My Small Business Borrow?
Knowing exactly how much funding you need is critical.
Loans can range from a few hundred dollars to over a million, depending on eligibility.
Your business plan will help determine your startup costs and borrowing needs.
What Is the Average Interest Rate on a Small Business Startup Loan?
There is no standard interest rate, as each lender evaluates risk differently.
Rates can range from 2% to 20% or more, depending on credit and lender type.
Government loans often offer lower or no interest options.
Average Loan Periods
Loan periods vary by lender and loan type.
Terms can range from 90 days to over 10 years.
Longer terms can be harder to qualify for, while shorter terms carry less risk for lenders.
How to Apply for a Small Business Startup Loan
Before applying, understand your business model and funding needs.
A strong business plan will help outline costs and prevent unnecessary borrowing.
- How will the money be used?
- How much do you truly need?
- What monthly payment can you afford?
Consider all loan options including banks, private lenders, and government agencies.
Your business plan is key to securing funding.
Just Remember
Always do your research. Banks are strict, private lenders can be fast but costly, and government loans take time but offer excellent value.