Business Start-up Loans in Canada: How to Get Them

Starting a new business or venture is an exhilarating experience filled with numerous opportunities and challenges. Although many entrepreneurs have the passion and drive to bring their ideas to life, they often face a common obstacle – a lack of capital. This is where business startup loans come in.

These business loans provide entrepreneurs like yourself a financial lifeline that allows you to focus on bringing your ideas and dreams to life instead of worrying about making ends meet.

Today, we’ll cover startup business loans to consider, the benefits of getting this financial lifeline, and more.

Let’s dive in.

What Are Business Startup Loans?

A startup business loan is a type of loan that’s specifically designed for new entrepreneurs. Startup business loans allow you to kickstart your ventures without the worry of finances hanging over your head.

You’ll get access to capital to cover the initial cost of inventory, equipment, marketing, and other operational expenses. We’ll look at the benefits of startup business loans down the line, but you can be sure that this injection of financial capital will allow you to increase your momentum and smoothen the process.

The good thing about Canada is that startup loans aren’t challenging to find, thanks to the various startup funding options available. Here are some to consider.

Startup Business Loan Options to Consider

1. Secured Loans

These types require you to put down some collateral when taking the business loan. For example, if you have a tangible business asset such as machinery, or anything else along those lines, you can put that down as collateral when taking the loan.

This way, the bank or loaning institution will keep the asset for themselves should you default on the loan. We recommend only taking secured loans when you are confident you’ll repay the loan to avoid losing your assets.

The advantage of secured loans over unsecured loans (which we’ll look at below) is that they often come with lower interest rates. Therefore, if you are confident in your loan-repayment strategy and don’t want to pay high-interest rates, we recommend this type of startup business loan.

2. Unsecured Loans

So, what is an unsecured loan? These are startup business loans that don’t require you to put down any collateral. However, you’ll find that they often have high-interest rates attached to them. After all, they are riskier to the lenders.

3. Line of Credit

A line of credit is a type of financial arrangement between the lender and borrower to access a predetermined amount of funds up to a specified credit limit.

So, you, as the borrower, can access these funds as you need to until you reach the limit. Once you repay the borrowed amount, you can then continue borrowing again against the line of credit without having to apply for a new loan.

This type of business loan is great for small businesses with cash flow issues and don’t want to keep taking out new small business loans.

4. Merchant Cash Advance

This form of business financing is suitable for businesses that accept credit card payments. Here, the lender gives you a lump sum amount in exchange for a percentage of your future credit card sales.

This means that you’ll have working capital to use while you build your business, and then you’ll get to pay that once you make some sales. The advantage of this type of financial support is that your payments adjust according to your sales.

This makes this startup business loan option a great choice for small businesses that experience high and low seasons; you won’t worry about making payments during your low season.

5. Equipment Loans

This type of startup business loan is a financing agreement in which you get funds to purchase equipment for your business. This could include machinery, vehicles, furniture, computers, and other equipment you need to run your business.

This is a good financing option when you can’t afford to purchase the equipment. However, ensure that you fully understand the terms of the business loan, including the interest rates, monthly installments, repayment period, and collateral requirements.

An example of such a loan is when the lender pays for 80-90% of the equipment cost, and you are required to finance the remaining percentage. You’ll make monthly payments to the lender until you cover the funded amount, after which you get to own the equipment.

It’s important to note that the terms vary from lender to lender, so we recommend thoroughly reviewing the documentation before signing any papers.

What Are the Eligibility Criteria for Startup Business Loans?

Now that we know the options you have let’s find out how you can prepare yourself to qualify for one of the above loan types.

Here are the factors usually considered for eligibility.

1. Well-Defined Business Plan

Having a business plan that showcases your vision, mission, market analysis, financial projections, and other crucial aspects of your business shows lenders that you are a viable candidate.

You’re more likely to receive a loan if the lender can see you have a good plan for where you are headed, and the chances of success are high. As the saying goes, failing to plan is planning to fail. Therefore, if you have a business plan in place, you’re more likely to succeed and pay back the borrowed money in good time – at least from the view of the lender.

Check out our guide on how to make a business plan and the mistakes to avoid for more insight on the matter.

2. Collateral

We mentioned collateral when we were looking at secured loans. Having collateral allows you to be eligible for various loan types than if you don’t have collateral.

Therefore, if you have some property or other assets at hand, you can use them as collateral to qualify for more loans.

3. Personal Credit Score

Having a good personal credit score is advantageous when applying for a business loan. This is because it tells the lender that you are more likely to repay the business loan.

Although a good personal credit score speaks more to the ability of the business owner to pay back the loan than the business’ capability, it’s still often considered a criterion.

Therefore, small business owners should take their credit scores seriously when working on a viable business to increase their chances of getting a good business loan. Some of the ways you can improve your credit score include clearing your debts, making timely payments on debts, and so on.

4. Industry Experience

Whether or not your business idea is brilliant, demonstrating that you have industry experience will boost your chances of getting a loan from traditional lenders.

Benefits of Startup Business Loans

Here are some of the benefits you and your business will gain from securing business loans.

1. Access to Capital

Whether your personal credit score is high or you have some personal savings or investments stored away, you can always move faster with more capital. In fact, most entrepreneurs take business loans to access financial assets that allow them to increase their growth momentum.

Having more capital allows you to expand your business and increase your revenue while still saving time.

2. Building Credit History

Accessing business loans allows you to build your credit score and get higher and higher loans down the line. This is important because having access to loans can come in handy during emergencies or when you want to expand your business.

If you want to increase your credit score for future business financing, it’s crucial that you repay your loans on time. This will allow you to qualify for higher loans in the future.

3. Flexibility

The advantage of qualifying for business loans is that you get to choose which types of loans suit your business needs most. For example, you can choose between a secured loan, merchant cash advance loan, or equipment loan, depending on what you need.

You could also choose one business loan over another based on the repayment periods, loan amounts, and other factors.

4. Business Growth

A business loan allows you to expand your business in ways you couldn’t if you didn’t have the extra injection of cash. You’ll also be able to seize opportunities you couldn’t if you didn’t have the money.

Final Thoughts

Having access to business start-up loans can propel your business forward in ways that lacking them wouldn’t. There are various startup loan types to choose from depending on your preferences and the type of business you are running. Ensure you thoroughly review the loan terms to ensure you are getting what you want and won’t be caught off-guard by a clause you didn’t read through.

If you are a small business owner and are overwhelmed by all the balls in the air, we recommend getting a small business lawyer to take the weight off your shoulders.

Frequently Asked Questions About Business Start-up Loans

1. What is the largest source of money for a new business?

The source of money for a new business varies depending on certain factors, including the owner’s circumstances, the business model, and more. Nonetheless, some of the popular sources include personal savings, venture capital, business loans, support from friends and family, angel investors, incubator programs, partnerships, small business grants, and so on.

All these sources of money have their advantages and disadvantages, and it’s up to the entrepreneur to choose wisely depending on their circumstances and the terms that come with these funding sources.

2. What is the CEBA loan?

The Canada Emergency Business Account (CEBA) program offered interest-free loans to small businesses and non-profit organizations, and the loans were up to $60,000.

Unfortunately, the application period for this loan ended on June 30, 2021. Nonetheless, the borrowers who are in good standing and repay the balance on or before the 31st of December 2023 will get a loan forgiveness of up to 33% or up to $20,000.

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