Best Options for Funding Your Business in Canada

Financing an enterprise –  whether it’s a start-up or a business you purchased with the hope of further expansion – can be challenging, especially if you’ve never tried to raise capital before. 

In the following article, you can read about  your best options for funding a small business in Canada, how to qualify for a loan (should you choose that route), and tips for determining how much to borrow.

Funding Sources for Your Canadian Business

Financial Institutions (Traditional Bank Loans)

If you are considering getting a traditional bank loan, you’ll need to provide most of the items documented in the next section, with financial records going back 2-3 years. For new businesses and those with limited assets, banks may require personal guarantees or personal assets to be used as collateral instead of business assets. 

Canadian banks also offer term business loans and working capital loans. As the name suggests, the latter is designed to help meet short-term operational needs. On the other hand, term business loans are for big expenses like adding a new line of merchandise or purchasing equipment.

Unless it is complicated or gets flagged by the risk department, Canadian banks usually process business loans within two weeks. Like home mortgage loans, business loans have different structures, terms, and interest rates that must be factored into any decision.

The Business Development Bank of Canada (BDC)

The BDC is a government-owned bank devoted exclusively to funding entrepreneurs. Small business owners who are just starting out – i.e., in operation less than a year – can receive up to CAD 100,000  in as little as 48 hours by filling out an application on the BDC’s website.

The BDC offers larger loans for businesses that have been up and running longer than a year. For instance, if your business has been operating between 12 and 24 months, you can receive up to CAD 250,000. You can also receive commercial real estate loans, loans to purchase an existing business, and working capital loans.   

Canada Small Business Financing Program (CSBFP)

Canada has a number of government programs and grants available to those seeking support for their small businesses. They offer funding and advisory support for innovation, research and development, and commercialization projects.

The country also has its own business financing program, the CSBFP, which allows business owners to get bank loans with government co-sponsorship. The CSBFP helps small businesses and startups with gross annual revenues of CAD 10M or less. 

You can borrow up to a million dollars, but there are some stipulations – no more than CAD 500,000  can go toward material improvements, such as real estate or equipment, and no more than CAD 500,000  may be allocated to intangible assets or working capital. The program also offers a business line of credit up to CAD 150,00. 

Although the government helps subsidize CSBFP loans, you must apply for them through a bank or credit union that participates in the program.

Futurpreneur Canada

As the name implies, this nonprofit lending and business advisory organization caters to future business leaders rather than established entrepreneurs. Any aspiring business owner between the ages of eighteen and thirty-nine can receive up to CAD 60,000  and two years of mentorship. 

Futurpreneur Canada has partnered with the BDC to extend the funding on its collateral-free loans; the nonprofit contributes the initial CAD 20,000, and BDC may provide additional funding up to CAD 40,000.  

Although it is a national organization, Futurpreneur is not the only nonprofit in Canada to provide small business loans and advisory assistance. An organization called MentorWorks provides a government funding directory that lists a number of opportunities you can filter by province and the type of funding available.  

Investors 

If you have an idea that aligns with the values or interests of a wealthy entrepreneur, or a business that is poised for rapid growth, you may be able to get funding from either an angel investor or a venture capitalist. 

Investors do not lend money. Rather, they take a gamble by purchasing a share in your company, betting that your business will perform well. Angel investors use their own money to fund businesses in the early stages. Venture capitalists, on the other hand, invest their clients’ money, usually in established businesses that are already profitable.

One way to connect with investors is through one of Canada’s start-up accelerators, which may offer office space, mentoring, and networking, in addition to funding. 

Crowdfunding

Crowdfunding means taking your business ideas directly to the public to generate enough buzz to raise the funds you need to expand or start your business. Although risky, there is the potential to raise significant funds through clever self-marketing – if you have a solid business proposition.

Several platforms are designed to host crowdfunding campaigns – Kickstarter is probably the best known. On the platform, you pitch your business plan, set target investment goals, and decide whether to ask for donations or give investors a stake in your company. 

Friends and Family

If you don’t qualify for traditional lending, borrowing from family or friends can be a viable option. If you decide to go this route, make sure to give your friend or family member a detailed business plan that outlines the risks and rewards of operating your business. You should draw up an agreement clearly stating the loan terms and explain your contingency plan for repaying them should the business fail to generate enough income. 

Qualifying for a Loan 

Should you decide to pursue a loan, you’ll need to prove that your loan is worthy of the risk. To do so, you should be ready to present some, most, or all of the following to lending institutions and investors:

A Business Plan

In addition to stating your objectives, a market analysis, and the organizational structure of your enterprise, your business plan should contain detailed financial information, including cash flow projections based on your current earnings. Because you are seeking capital, the financial section should also spell out exactly how you plan to use the funds.

Proof of Collateral 

When you secure a personal home mortgage, your home is collateral – should you fail to make timely payments, the bank can initiate foreclosure. The same principle is true when qualifying for a business loan. The lender may conduct a loan-to-value analysis to see if the collateral you offer – real estate, buildings, inventory, equipment, and so on – is enough to meet their requirements. If you have invested significant capital in the business, lenders may look at you more favorably as a loan recipient.

Your Personal and Business Credit 

Not only do you have a personal credit score, but your business also has a credit profile. These figures play a big role in whether you qualify for a traditional loan because they provide an objective snapshot of how you handle credit over time. Most banks will not lend money to individuals whose personal credit score is under 700. Contact the Office of Human Affairs to get a free copy of your personal credit report. You can order a copy of your business credit profile from any business credit bureau. 

Personal Financial Information

Just as your personal credit score gives insight into how you will handle credit as a small business owner, so does personal financial information help lenders have faith in your ability to balance a budget and build assets. You may be asked to present tax forms, bank statements, and other financial documents.

Information from Business Partners and References

Some lenders will request the professional resumes of anyone listed as a principal in the business to see if they had business dealings with any of these individuals in the past. Lenders may also request trade references to further vet your creditworthiness.  

How Much Should I Borrow?

As a small business owner, you want to hit that “sweet spot” between borrowing more than you can afford and not borrowing enough. If you borrow too much, you could be denied the loan or even lose your business. Borrow too little, and you might not have enough money to realize your vision. 

Some questions to ask yourself when deciding on how much to borrow:

• What am I going to use the money for? Once you know where the money is going, you can pinpoint the cost and use that to estimate the loan amount.
• What is the current financial state of my business? If you are already making steep payments on other debt, you need to decide how much extra debt to take on. 
• What is the growth potential? Do you have a realistic idea of how you’ll use this loan to meet long-term business goals? Can a 7-year plan be scaled down to a 3-year plan?
• What is the loan’s total cost? Don’t forget to include fees and closing costs when you do this calculation.  

Each of these listed funding options carries different requirements, benefits, and considerations, and it’s up to you to decide which option is best suited for you and your business needs. By understanding the available funding sources and carefully evaluating the financial aspects, you can make an informed decision and increase your chances of obtaining the necessary funds to support your business goals in Canada.