Small Business Loans and Financing in Canada

I've had the experience of several times having to finance or get a loan for my small business in Canada and wanted to pass on some of my experiences. At the end of the article, I'm going to give my personal feedback on the loans I received.Here, in order of most likely to least likely (in my opinion), are the places to get money for your small business:

  1. Personal savings, credit cards, and lines of credit
  2. Family and friends
  3. Micro finance loans
  4. Government sponsored start-up loans and programs
  5. Crowd-sourced financing
  6. Credit Union Bank Loans
  7. Regular Bank Loans

I purposely left out angel investors and venture financing. If you are going that route, your business model is one that can scale quickly, efficiently, and profitably. Venture financing is looking at many, many times the return on their investment and is an entirely different game.One of the biggest things to determine is how much money you need. Different business loan and financing options are better for different amounts that you need.

Personal savings, credit cards, and lines of credit

This may sound obvious, but your best source of business financing is yourself. In fact, many people will be suspicious of financing you if you don't have your own 'skin' in the game. If you are not risking anything, why should others risk something?

Pros Cons
It's your money, so as long as you have it, it's yours to take If the money is your savings, you are removing your safety net if something goes wrong and you need money for personal or business matters
Getting credit for yourself is much easier than getting credit for a business If the money is from credit cards, the interest rate is really high. This means you are paying close to 20% in annual interest to finance your business.

Family and friends

This is by far the most reliable and easiest source to get money from. You don't need to have a business plan, terms are flexible (if you're having a bad month/year, they are much more likely to be forgiving than a bank).

Pros Cons
Easy to get money Emotions tied to money
Terms are good - meaning little to no interest and can payback when you have the money They may want input into how you run your business
Don't need a plan, or anything really, all you need to do is ask Unless you have wealthy family and friends, there is only so much money you can get

Micro finance loans

These are small loans from a few hundred dollars to a few thousand. In BC, credit unions offer these types of loans at http://www.beremarkable.com/.I'm sure there are other banks in different areas of Canada who have similar loans available.There is also Community Lend, where the loans come from private citizens, not banks. It works like an auction process where you advertise yourself and your needs and lenders bid on how much they are willing to lend to you and at what interest rate. As of November 2011, Community Lend operates in BC, Ontario, and Quebec.I'm not an expert in micro loans or micro financing, but it seems they are designed for people who have trouble getting access to credit from banks, either because they are new to the country or they don't have the best credit rating.

Pros Cons
If you are new or don't have a good credit rating you may still be able to get a loan The loans aren't usually for big amounts
You are judged on your character and idea more than on how much money you have For the Be Remarkable loan, you have to be 18-29 years old and live in BC

Government sponsored start-up loans and programs

If you fit the criteria, these types of business loans and programs are an excellent way to get start-up funding. These government sponsored loans don't use the usual bank criteria (credit history and personal wealth) to get you money.These are a few of the top places I would go (and have gone) if getting a loan / assistance for a small amount of money ($5,000 to $50,000)

Self Employment Program

If you are receiving EI (employment insurance) and are looking to start-up a business, I'd highly recommend trying to get into a self employment program. They give you free business training and continue to give you your EI benefits for a full year from when you enter the program while allowing you to keep all the profits from your business.These types of programs are available all across Canada. Search for something like "self employment program" and the name your province and you should be able to find the links to the appropriate places.

CYBF - Canadian Youth Business Foundation

If you are 18-34, the Canadian Youth Business Foundation is the best place to get a loan from. They have good rates, are attuned to the needs of a start up small business, offer mentors, and honestly, are one of the only places that will give you money based on your idea (and not on how much money you have in your bank).

BDC - Business Development Bank of Canada

The BDC is owned by the Government of Canada. They are more likely to have flexible terms and finance you in the first place than would traditional banks.

Pros Cons
Will actually give you loans based solely on your idea / business plan May have to do classes or reporting on your finances
They offer flexible repayment terms and decent interest rates The amounts are usually from $10,000 to $50,000
Don't necessarily need to have a lot of money / stellar credit rating to get a loan Requires a business plan

Crowd-sourced financing

The biggest name that I know of in crowd-sourced financing is Kickstarter. Using the word financing might not even be the best choice of words with Kickstarter. See, Kickstarter helps raise funds for projects that are mainly creative in nature (music, film, art, technology, design, food, publishing), but the money given is not a loan or investment.Instead, you have a project on Kickstarter, and if enough money is raised, then you go ahead with the project and get the money to do it (and deliver whatever you promised to the funders). If you don't raise enough money, the project dies and no money is exchanged.The great thing about this type of funding is that the getting money from people is solely based on your pitch, your idea, your business. If enough people give you enough money, your good.You can also google crowd funding to see more options. I did and came up with a decent wikipedia entry and a roundup of 13 crowd funding sites.

Pros Cons
It's all about the pitch. If people like it, people give you money If you don't have a way to market your pitch (big social network), it may get lost in the crowd
This is great for projects that wouldn't traditionally get funded With some funding models, it is either you raise all the money or get none

Credit Union Bank Loans

If you are looking for funding around $35,000 or less, credit unions have small business financing options that are less stringent (easier to get) than regular bank loans. This is a direct quote from the Vancity website:

We can approve a business loan based on your entrepreneurial drive, the strength of your idea and the potential of your business plan, instead of just your credit history and collateral.

I'm talking purely from a BC perspective, where we have credit unions like Vancity that offer small business loan programs. I don't know if this is the case in other areas around Canada.

Pros Cons
Less stringent requirements Only up to $35,000
The opportunity to get extra loans of up to $70,000 if your are doing well (Vancity) Requires a business plan

Regular Bank Loans

This is probably the place people think about first when trying to finance their business. This is probably the worst place to look for funding a start-up business. If you are already established and have a good profit track record, then bank loans are a definite considerations.What the banks are mainly looking at is your ability to repay the loan, and they judge this based on your assets or your history of profits and cash-flow. For a cash-strapped start-up business, this usually means not you.It's kind of funny, but if you have money, they will lend you money. If you don't, then they won't. This type of money is more suitable for businesses that are established and are looking to grow.

Pros Cons
Can get access to $50,000+ amounts of money Can only get money if you already have money
Don't have to give up a part of your company to get the money (as you would if you got investors) Need a full business plan (even though in some ways it's a minor consideration because what they really care about is your financials) and have to personally guarantee the loan

Other Small Business Loan and Financing Considerations

One tidbit of information I wanted to get out there is that a lot of bank loans require a personal guarantee, even if it is for a incorporated business. Therefore, choosing an incorporation for limited liability reasons in terms of taking out loans is not really an advantage for small businesses. If your business goes bankrupt, they will still come after you for the money.

Extra Resources

Small Business BC has a pretty comprehensive overview of financinng. Looking at the PDF is a quick way to see a number of programs out there.You can also google several terms around small business financing, loans, grants and Canada (or your local region) and I'm certain you will pull up more resources. If you find yourself in a special category, like being a young person, aboriginal person, female, have a disability, etc... there are special programs out there that you can take advantage of, so it definitely pays to do some research.

My Personal Financing Stories

I've run numerous small businesses. I'd narrow it down to four, since one of them was a neighbourhood service when I was a teenager.Here's the quick stories of how I financed each venture:

College Pro Painters

My brother essentially gave me everything I needed to run this biz. While this was technically my own business, it was under my brother's franchise. I had to book my own jobs, hire my own staff, do the books, and manage my own crews, but this was always under the direction of my brother and all the investment in equipment was provided by my brother.

Intergalactic Multimedia

This was a video production company that started out to specialize in production DVD yearbooks and Graduation videos to high school students.For the first year, before I even really started the company, I largely self-financed this. Saved up on money and bought gear as I could afford. I then partnered up with my brother (the same brother who I did the painting with) and he put in an investment equal to what I had invested ($10,000 to $15,000).We got funding in two ways:

  1. We both entered self-employment programs as we both (fortunately or unfortunately) had lost our jobs due to a lay off and a business closure. This was pretty good because the self-employment programs allow you to keep all your profits while still receiving EI benefits for a full year. If you are eligible for such a program, it'd be a good move to apply to get into one.
  2. We received a loan from the Canadian Youth Business Foundation. This was good not only because they were the only people who would loan us money, but they also gave us a mentor as well.

I have to emphasize that small businesses almost always never make money in the first year or have money available to pay an owner (because you are re-investing the money). Doing a self-employment programs allows EI to cover your basic costs of living while you can focus on your business. It is kind of paying you to start a business, which is probably the best kind of business deal you can find.

Sliced Tomatoes

This business started off as a business plan entry into a business plan competition at UBC. My partners and I received 2nd place.This business needed financing of over $100,000, so doing this with only personal financing was out of the option.We got funding in the various ways:

  1. Personal - personal assets and money
  2. Family - as investments and loans
  3. Government loans / programs - CYBF and BDC
  4. Credit unions - credit card, line of credit, and loan through the Small Business Financing Program (which could kind of be categorized in the government category as it is a government backed loan). Also to note is that the credit cards and line of credit were done in the names of the founders, not the business, so these were technically personal loans

This financing was a bit of a game to get sorted out. It was like playing with a house of cards. If one source would have fallen through, then the deal would have been off. Somehow we were able to manage get all the money in place. After that initial round of financing, we leaned on family and ourselves to get us through tough financial times, until we eventually closed the business.

Small Biz Doer

This business started in the wake of the closure of Sliced Tomatoes. This was completely started by either borrowing stuff (that brother again) and purchasing out right - or temporarily putting on credit cards - new pieces of equipment.After all the financing of Sliced Tomatoes, I was both unwilling and probably unable to get any money from outside sources. This business didn't need a lot of financing, and was purposely set up that way, so this worked out.

Your Thoughts?

Is there anything I said that was inaccurate or that you disagreed with. Did you want some more details on a specific item? Leave a comment below and I'll do my best to answer.