How to apply for a small business loan in Canada?

We all desire our business to prosper, cash flows enhance, enlarge efficiency, make attractive promotion campaigns, extend the scope of produced goods and services, introduce a new commodity, or someone wants even to start a new company. But it is hard to imagine the introduction of these purposes without the attraction of outer capital. But, getting business financing is not an easy deal. Bankchart.ca assists you to make the necessary steps to select the best business loan.

Summary

  1. Step one. What is a commercial credit? What types of such credits are proposed in Canada?
  2. Step two. How to compare business loans in Canada?
  3. Step three. What is a commercial credit report and how does it influence your chances to get commercial credit?
  4. Step four. How to apply for a commercial credit?
  5. Findings

We all desire our business to prosper, cash flows enhance, enlarge efficiency, make attractive promotion campaigns, extend the scope of produced goods and services,  introduce a new commodity, or someone wants even to start a new company. But it is hard to imagine the introduction of these purposes without the attraction of outer capital. Even the most prosperous firms use credits - because it enables you to speed up growth, even if you have own capital. But, getting business financing is not an easy deal. This is essentially a single project. The authorized staff must settle a composite deal. It is needed to correctly estimate the demand for crediting, select a reliable bank or credit union, consider many price and non-price options of a business loan, make a credit application and provide all the necessary documents, etc. Which credit offer to select from a large list proposed by Canadian banks and credit unions? Should you choose unsecured or secured credit? Which form of loan to select: commercial term credits, business overdrafts, lines of credit or business credit cards? Should you make an application for invoice financing or factoring, commercial cars or equipment crediting, commodities lending, fully-drawn advance, commercial bill of exchange, hire purchase, trade finance or special financial programs for small businesses. What a credit union or a bank to choose? Should it be BMO, TD Bank, Scotiabank, CIBC or a smaller one? What documents to provide with a loan application? Bankchart.ca assists you to make the necessary steps to select the best business loan.

Step one. What is a commercial credit? What types of such credits are proposed in Canada?

A business loan is an amount of funds, provided by a bank or a credit union to a firm or an entrepreneur in the form of a credit line or a term loan for commercial purposes: purchasing a commercial property, growth in working capital, buying cars or equipment and other assets.

By our investigation commercial credits in Canada are offered for the term from one to thirty years by percentage rate from 3,5% to 20% annually depending on the credit rating of the firm, the loan period and availability of collateral, the credit kind, and other parameters. The credit redemption can be in fixed repayments or flexible with variable or fixed interest rates. The maximal amount of financing in Canada vary from 1 000 to 75 000 000 CAD depending on a business loan type.

There are a lot of kinds of business loans depending on the comparing criterion. Thus, depending on a pledge providing, the business credits can be:

Unsecured (size: from 1 000 to 1 mln CAD, period: to 5 years, % rates: 5% - 20 % annually, approval speed: high)  – a company is not to give a pledge for financing to a bank or a credit union. It is comfortable, but it is more difficult to get such credits and they have the greatest percentage rate. The application for unsecured loans generally can be sent online. Also, Canadian banks and credit unions may claim an individual guarantee in such a deal, so the director must redeem all the liabilities if the company goes bankrupt

Secured (size: depending on the collateral value, period: to thirty years, % rates: 3,5% - 7% annually, approval speed: low)  – a firm must provide a pledge, like a car or commodities. Canadian banks and credit unions propose the highest sums against the collateral, but not more than it’s worth.

Depending on the way of the financing granting, there are such types of commercial credits:

Business term loans (size: to 75 mln 000 CAD, period: to thirty years, % rates: 3,5% - 7 %, approval speed: slow)  – are provided on a day-to-day account of a company or directly are transferred to the purveyor (for example, of raw materials) account. Such credits are given for a particular term (from one year to thirty years). The obligor generally redeem the liabilities periodically (like quarterly) by the timetable and the interests are charged on the outstanding value

Lines of credits for businesses (size: to 1,5 mln CAD, period: to 1 year, % rates: to 9%, approval speed: 1-2 days) – are a credit limit within which a company can draw money when it requires. Redemptions of the liabilities are flexible, but such amenities are expensive, the percentage rates here are greater compared to term credits. The firm must zero the credit balance during certain periods, like annually. Servicing commissions can be charged by Canadian banks and credit unions even if the company doesn’t use the credit limit 

Commercial overdrafts (size: to 50 ths CAD, period: to 1 year, % rates: to 9%, approval speed: 1-2 days) – are connected to a company’s transactional account and are resemble credit lines. Such loans assist to fulfill short-term money demands, but they often have extra fees like administrative and servicing commissions

Business credit cards in Canada (size: to 100 ths CAD, period: ongoing, % rates: to 20%, approval speed: to 1 week) – operates as a personal one, but for commercial purposes. Employ rebates from a financial organization's partners for small businesses and free rate periods. But the percentage rates are great and come to twenty percentages annually.

Depending on the credit goal, commercial loans can be:

Commodities crediting (size: to 250 ths CAD, period: to 1 year, % rates: 5% - 9 %, approval speed: to 1 week) – a kind of crediting, when a firm’s cash flows operate as a pledge for the financing. The percentage rate is rather high and often is charged on the outstanding balance

Commercial estate credit - for buying a property, is granted for the maximal term – 30 years under the smallest percentage rates within 4-6% yearly

(Small) business car loans (size: to 1 mln CAD, period: to 5 years, % rates: 4% - 9%, approval speed: 1-2 weeks) – is a secured credit granted for buying new or used vehicles. Some Canadian banks and credit unions can also propose a lease form of crediting

Commercial credits for equipment buying (amount: to 2 mln CAD, period: to 5 years, rates: 3,5% - 7%, approval speed: 1-2 weeks)  – can assist to increase volumes of productions

Start-up financing - is developed for firms on the start or early growth phase in the sum up to 100 ths CAD and can be used as circulating capital, for marketing expenses, to purchase assets or a franchise

Hire purchase (size: to 2 mln CAD, period: to 7 years, % rates: 5% - 15%, approval speed: 1-2 weeks)  – is a kind of crediting for purchasing assets, which will be owned by a lender till the maturity

Invoice financing/factoring definition (size: to 100 ths CAD, terms: 1-6 months, % rates: 3% – 5 %, approval speed: 1-3 days) – financing of  invoices. Firms can get up to 85% of invoices size but are to pay a commission - an interest of the invoice size. Requirements to a firm's practice and to its turnovers can be established by financial organizations

Trade finance enables your firm to buy goods on native and external markets. There are many kinds of trade financing, for example, letters of credit and bank guarantees

Commercial bill of exchange (size: to 500 ths CAD, period: to 2 years, rates: to 2%, approval speed: to 1 week) – helps your company to cover short-dated and seasonal shortages of funds on a small rate

Community loans are provided by special investment or government funds to non-profit organizations for assisting people, who can't receive financing from traditional credit organizations. Depending on the fund the financing size varies from 2 ths to 150 ths CAD

Women's credits - are provided by special financial organizations to assist women to succeed in entrepreneurship

Step two. How to compare business loans in Canada?

Before making a credit application to Canadian banks and credit unions for a business loan, it is essential to estimate what periodical payments your firm will be able to redeem. So, the responsible managers must calculate the firm’s incomes and expenses and determine what credit size, period, and a frequency of redemptions to select. For this, you can use our credit calculator on Bankchart.ca.

To choose the business loan which suits your company the best, it is crucial to consider all price and non-price parameters of commercial credit, such as:

  1. PRICE:

- The level of interest rates: under our investigation their size can range from 4% to 20% yearly and can depend on the type of the loan, its period, initial advance the presence of a pledge and the company’s credit rating

- The level of commissions:

  • One-time fees – by the survey their level can reach 2% of a credit sum and may consist of two and more tariffs, like approval and servicing fees
  • Periodic commissions – like credit facility fee varies from 10 to 20 CAD and can be established in the form of a fixed sum in CAD or a fixed rate
  • Renegotiation fee – often is charged for mortgage credits, for example, if a firm wants to change the frequency of repayment
  • Missed payment fine – if your company breaks the loan redemption schedule the financial organization will charge a penalty
  • Insurance tariff– if you select a secured business credit, the bank or credit union will claim to insurance the pledge
  • Early repayment tariffs – some financial organizations can charge a penalty if your company repays the loan earlier the maturity
  1. NON-PRICE:
  • Credit size – it is essential to get known whether the bank or credit union can fulfill your demands in financing. To receive a greater sum, the firm should provide collateral
  • Maximum period – in accordance with our research can range from 1 to 30 years (for buying a property) and is higher for crediting with collateral, than for unsecured credits
  • Security – Canadian banks and credit unions can claim collateral, such a pledge, for example, can be provided in the form of a purchased commercial car, commodities or a property
  • The frequency of redemption – Canadian banks and credit unions often propose businesses an annually, semi-annually, quarterly, monthly, fortnightly or weekly frequency of the commercial credit repayment
  • The interest kind – the percentage rate can be fixed or variable. The first one often is smaller, but for commercial loans with a variable rate financial organizations usually don’t charge penalties for an early exit. Besides flexible rate often depends on the prime rate and fluctuates with the changes in the Canadian financial market
  • Additional parameters like claims to a firm’s incomes, expenses, and experience of business activities, credit holidays, additional funds possibility, discounts from the bank’s partners - are also important in selecting a business loan

Step three. What is a commercial credit report and how does it influence your chances to get commercial credit?

A credit score is an essential parameter, which affects your chances to get a business loan and the credit conditions, which your firm will receive. For example, a high indicator allows to get financing on the lowest rate and saves your business thousands of CAD. So, what is a commercial credit rating? It is an appraisal from 0 to 100 (300), that estimates your firm’s credit file and calculates how risky it is to provide financing to the firm. In Canada this parameter is estimated considering the next indicators:

Basic information about your firm - its name, location, information about the director and the owners, administrative, structure, etc.

The experience of commercial activity - the more the firm functions, the more knowledge you have and the fewer risks (production, marketing, financial, etc.) are, so the greater will be your company's credit rating

Financial data about your company, for example, the level of its capital, turnovers, revenues, expenses and other cash flows, profitability - affects the score much

Firm’s credit info - judgments and bankruptcy, administrations and court writs against your firm or its managers and owners – lessen the business credit rating

A value pledge and experience in getting financing – a successful receiving and timely redemption of business loans earlier or an application for secured credit - make your credit rating higher

A negative effect on your credit report may have the following factors:

  1. Commercial bankruptcy
  2. Late repayments on previous business credits
  3. Applying for commercial credit to several banks or credit unions simultaneously

If a Canadian bank or credit union refuses to grant financing, the responsible manager should order a copy of the commercial credit file at TransUnion, Equifax, Experian or another credit bureau. In such a way he can to find out a reason for this refusal and to make the necessary actions to make the company’s credit rating enough to receive financing.

Besides, we recommend you to make such steps to increase your firm's credit score:

  1. Always pay the bills from suppliers on time or earlier
  2. Hold higher balances on your business bank cards, because late payments (like for administrative commissions) lessen the firm's credit rating
  3. Review your company’s credit score periodically, for example, quarterly
  4. Choose creditors wisely – some Canadian financial organizations don’t send credit information about their clients to credit bureaus. So you should ask your bank whether it is open for such data providing and if not – considering switching to another financial institution
  5. Be fair when filing up a credit form, because Canadian banks and credit unions quickly can check out the provided information5. Divide your individual and business loans, because it may prevent the firm to construct its own credit rating
  6. Take a little easy loan, like secured overdraft and employ it, at least a little period, to make a credit history. It will help you to take other, larger credit in the future

But you should understand that building a credit rating is not a fast deal and it can take some time, so be patient and finish the job to the end.

Step four. How to apply for a commercial credit?

Most Canadian banks and credit unions take business loans applications at their points of sales but you are able to establish an appointment with a credit specialist online or by telephone. The responsible managers of your firm must provide the next documents to receive financing:

  1. government-issued photo ID
  2. the last tax slips
  3. trade name registration and licenses (if nessesary)

for partnerships also:

  1. partnership declaration
  2. limited liability certificate
  3. other registration documents

for corporations also:

  1. articles of incorporation
  2. firm's charter
  3. corporate profile report
  4. articles of amendment
  5. others

But, not every company can obtain commercial credits. Canadian banks and credit unions often establish restrictions, for example:

  1. like, not more, than two owners or five managers in a firm
  2. to have a constant location in Canada and valid business number
  3. certain turnovers, like not less than 100 ths CAD annually
  4. to have a commercial activity practice, for example, 6 months or more
  5. to have 18 years or to be older (for entrepreneurs)

Pay attention, that considering business credit providing, Canadian banks and credit unions usually take into account the following factors:

  1. the company must be profitable
  2. the credit rating of the firm and its managers and owners
  3. the experience of business activities and volumes of flows
  4. the level of receivables and accounts payable
  5. your firm’s business structure should be constant for the latest time
  6. others

After granting all the documents the bank or credit union generally makes a decision within several days, after which you can count on getting funding. But if your application for commercial credit was dismissed (for example, if you have a bad credit score) - don't give up. Find out the cause of such a renouncement and take the needed actions to make the loan decision positive after several months. Just do not attempt urgently to make applications to other Canadian banks and credit unions, because you probably will get a new failure again. But, it will only worsen the firm's credit score.

If your firm is a start-up or has a poor credit rating, the most opportunities the firm will have by applying for little secured credit, like overdraft with collateral in the form of produced goods or your commercial vehicles

Findings

Before making a loan application to a Canadian bank or a credit union it is important to appraise your firm’s facilities to redeem the loan. For this, the authorized staff must calculate the firm’s incomes and expenses and determine what credit size, period, and a frequency of redemptions to select.

Choosing a financial organization, it is essential to consider price and non-price features of commercial financing, like the size of percentage rates, the level of different fees, the credit size, maximum period, security, the frequency of redemption, the interest kind and other additional parameters.

Most Canadian banks and credit unions take business loans applications at their points of sales but you are able to establish an appointment with a credit specialist online or by telephone. Note, that deciding whether to provide a loan, Canadian banks and credit unions consider the following parameters: basic information about your firm, the experience of commercial activity, financial data about your company, firm’s credit info, a presence of value collateral and experience in getting financing.

 

 

 


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