Running your own business can be one of the most challenging yet rewarding choices that any Canadian can make. It’s always a big step to leap from the security of working for someone else to being your own boss. However, running a business isn’t easy. It takes passion, commitment, planning, and above all, financial resources. That goes beyond just using credit cards or asking to borrow money from friends and family to cover any gaps.
Running a business, even a small business, can require significant resources, such as loans and other financing options. Fortunately, you have more small business loan options than ever before to secure the financial backing you need. Here’s everything you need to know about loans in Canada.
What is a loan & how does it work?
A loan is a structured form of borrowing money, usually conducted by a financial organization, such as a bank. It traditionally means talking to a banking professional and filling out a loan application. If you’re approved, you receive the money with the understanding that the amount will be paid back in agreed-upon amounts, over a set period of time, with the addition of interest.
An interest rate is an additional “cost” that is added to the total of the loan, as a way for the bank to make money on this financial product. So, as a simple example, if you apply for a loan of $10,000 at 2% interest, then the actual total you would pay back on that loan would be $10,200.
Fast Loans: How to get a fast loan
There are many different types of loans that people can get, though some work faster than others. One of the fastest ways to get a loan is through “payday loans.” This type of loan gets its name because the assumption is that a loan will be paid back when the borrower’s next payday arrives. Payday loans are very fast and easy to get; however, they are usually for smaller amounts, and the catch is that they charge higher interest rates and sometimes hidden fees.
It’s important when considering taking out a payday loan, to ensure that the loan can be paid back quickly. Otherwise, interest rates, additional fees, and penalties can quickly raise the total loan amount far beyond what was initially borrowed.
Business Loans: Why a business loan can help
For people who want to borrow more substantial amounts, with more generous timeframes and lower interest rates, a business loan is a better choice. Business loans can help business owners solve common cash flow problems and manage payments with their suppliers. Depending on the type of loan, the amounts can vary for a Canadian small business loan, from a few thousand dollars to several million for larger companies. But if a business loan offers better terms than a payday loan, then why would anyone want to go with a payday loan?
Part of the reason that business loans—or even personal loans issued by a bank—are not as fast or easy to obtain as payday loans is due to “loan protection.” When a bank or other major financial organization receives a loan application from someone looking for business financing, there is more scrutiny involved before approval is granted.
The typical criteria to be approved for a payday loan are usually just providing proof that you have a regular income, your bank account number, and a permanent address.
Is it hard to get a loan from a bank?
Many Canadians who apply for business loans do so through their banks first. Banks offer competitive interest rates and loan products, but they have stricter qualifications that you must meet. To get approved for a business loan from a bank, there’s a lot more consideration and evaluation that’s involved. For one, you’ll need excellent credit in order to qualify. Your personal credit score and credit history will be looked at, which includes any credit card debt or debt consolidation you’re managing. You may also need to provide a business plan that shows how the financing will be used, as well as cash flow predictions, your current income, and even possible collateral that you can put against the loan.
Collateral is a term used for something that you offer to the bank as a contingency for the loan. For example, if you take a loan and put your house up as collateral, then should you fail to pay back the loan, you have given the bank permission to seize your home. Collateral can take the form of property, possessions, like cars or artwork, or other assets, such as investments.
In other words, there’s a strict “investigation” conducted by a bank to ensure that you are not a financial risk and that you are able to pay back the money you are loaned. Banks are extremely risk-averse and try to make sure that any money they lend will be repaid. Because of this, there are many business loan terms available from both traditional and alternative lenders.
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Short-Term Loans: All about loan terms
For people who need a loan quickly but may not necessarily want to fall back on payday loans, a variety of short-term loan solutions exist.
As the name implies, short-term loans are meant to be paid in a shorter period, compared to something like a mortgage loan that may take up to 25 years to pay off. These short-term loans can range in length from six months to a year. Unsurprisingly, short-term loans have higher interest rates than loans with longer payment periods. Moreover, they may not have the same strict requirements as longer-term loans, but they still need to be approved on stricter criteria than a typical payday loan.
Short-term loans can be used for a variety of different business and personal needs. For example, bridge loans are a type of short-term financing that can be used by business owners to finance the repair or purchase of a property in order to add value before moving forward to secure longer-term financing. In other situations, short-term bank loans can be used for emergency repairs or any other unexpected expense that may need a rapid financial response, and you can’t draw on cash reserves or existing assets to finance it.
What credit score is needed for a line of credit in Canada?
One option you might consider is applying for a business line of credit. Applying for a business line of credit involves quite a few steps, including collecting personal information, preparing business documents, and opening a business bank account. Having these items ready when you apply for a line of credit can help shorten the application time. One key factor that’s evaluated when you apply for any line of credit is your credit score.
Your personal credit score is an indicator of how likely you are to repay debts on time. Credit scores in Canada are calculated by two national credit bureaus, Equifax and TransUnion. Your own credit score will typically fall somewhere between 300 to 900. According to Equifax, there are five specific credit score ranges:
- Excellent (760-900)
- Very good (725-759)
- Good (660-724)
- Below Average (560-659)
- Poor (300-559)
Lenders have their own distinct rules and qualification criteria. That said, they usually consider Canadians with credit scores of 660 and above as lower-risk borrowers. You will likely qualify for a line of credit if you have a credit score of 660 or above. If you have a below-average or poor credit score below 660, you’ll have a much harder time qualifying for a line of credit or traditional business loan in Canada.
Lenders may also look at your business credit score. It shows how suitable your business is to receive financial credit based on how financially risky your business is. There are many reasons why business credit is important, so it’s a good idea to understand and monitor your business credit health. Credit agencies such as Equifax Canada and TransUnion Canada produce business credit scores and reports for Canadian business owners. Thinking Capital also provides a free Small Business Grade, in partnership with Equifax. This simple letter score shows you what your business credit health looks like and can empower you to understand and build your business credit health.
Low Credit Loans: Where can I get a loan with low credit?
If you own a business and you need to take out a loan, you might feel that your low credit will hold you back from obtaining the funds you need. Fortunately, thanks to innovative lenders and unique products, this is not the case at all. There are steps you can take to obtain business financing with low credit.
While it’s true that most loans offered by banks and other financial groups try to minimize the risk of default, that doesn’t mean only people with a secure line of credit and perfect credit history qualify for loans. It’s well understood that mistakes can be made over the course of one’s personal and professional life, and those shouldn’t stop people from making improvements.
That is why other financial groups, such as private lenders, exist to help people get business loans. While banks will always look at a credit score, other lenders consider more than just your credit score, including your time in business, your revenue, and your business cash flow. Of course, the interest rates for a loan if you have low credit are likely to be higher because the financial group is taking a bigger risk on a person with low credit. If you take an unsecured personal loan, no collateral is being put up to protect the lender in the case of default.
One good thing about obtaining a loan with low credit is that, when properly managed, they can help improve your financial record. Making payments on time can help improve your credit.
Will a business loan help my credit?
One of the most important things to keep in mind when thinking about getting a business loan is to view the loan not just as a financial resource, but a way to improve your business standing. Any loan or financial product that you successfully manage can help you improve your credit score.
When you pay off installment loans, pay back cash advances, abide by the personal guarantee you issue, or grow an asset financed by the bank, you are helping yourself. All positive financial activities help to establish a credit history, and the more successful transactions that you have, the better your personal credit score becomes.
Building good credit is critical to your financial well-being because a good credit score opens up better loan opportunities, with higher amounts, lower interest rates, and other advantageous terms. A good credit score means you are a “low risk” in terms of loan potential, so while conditions may apply on the terms of the loan, they can be favourable for you, since the bank considers you a good investment.
Find the best financing option for your business
With all the options available to you, finding the right financing option for your business can be tough. Luckily, Thinking Capital has flexible options to suit your needs, whether you have good credit or are working on building up your personal credit score. Applying for financing from Thinking Capital is a quick and painless process. You can simply apply online in under 10 minutes. Once you have completed the application, expect a verification call in as little as 30 minutes. If everything goes well, you can have your upfront capital deposited straight into your business bank account in as little as 24 hours.
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Common reasons for online business loans
Many people believe that small business loans are solely for getting started with a new business. While purchasing or starting a new small business is a great reason to apply for a loan, it isn’t the only one. Take a look at some of the most common reasons to get small business loans, and see if any apply to you:
Extra cash flow to cover expenses
Purchasing or financing company vehicles
Upgrading or repairing your business equipment
Stocking up on inventory or raw materials
Remodeling or renovating your store
Hiring or training new employees for your business
Launching a new marketing or ad campaign
Paying off existing or overdue tax payments
Paying your supplier invoices early or on time
Industries we serve
Thinking Capital is among the pioneers of modern online small business lending, and we’ve helped over 15,000 Canadian businesses from a wide range of industries, including the following:
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