Getting a bank loan in Canada isn’t easy

Canada’s banking industry is dominated by a few major players: There are eight “Schedule I” banks that cover 60% to 70% of Canada’s entire market share. Those banks set the terms for the lending landscape. They call the tune—and almost every Canadian entrepreneur who wants a business loan needs to dance to that tune.

Why is that an obstacle to your ability to secure a loan? Because Canada’s banks want to maximize their profits and minimize their risks. 

If you’re applying for a loan, they’ll want to look at your historical transactions—particularly cash flow through working capital needs—and they have little appetite for taking risks on businesses with no track record.

“If you’re a new business and you go to a Schedule I bank, as a rule of thumb, they’ll most likely ask you for a two-for-one,” says Luc Fournier, regional vice-president for Export Development Canada (EDC)’s bank channel and a 10-year veteran of Canadian commercial banking. “They’re going to say, ‘Show me $2 and I’ll lend you $1,’ which largely defeats the purpose of borrowing money.”

The challenges don’t end there. Most potential borrowers will need to present at least three years’ worth of financial statements to even begin the conversation. So, if you’re new to the scene—even if you have a killer idea, thorough business plan and solid projections—the big banks aren’t going to be there to support all your needs.

In Canada, entrepreneurs must create their own, fully sustainable cash flow before they can even begin to access lending through traditional avenues. In your first three years in business, you’re going to have to use a certain amount of ingenuity to access capital. 

The good news is you have a lot of other options. But it’ll take a little work to find out which of them can lend you the capital you need at a rate you can afford. 

Luckily, at EDC, we know a lot about financing: A core part of our mission is to make it easier for Canadians, like you, to get the resources you need to grow your business.

Think twice about borrowing

This article details a variety of potential solutions if, like many other Canadian businesses, you need a fresh infusion of capital and find traditional banking channels closed to you. But Fournier urges entrepreneurs to push debt financing as far as they can in the evolution of their business plans. Translation: Don’t borrow if you can help it.

His reasons are twofold: 

• Interest rates are driven by the central bank of Canada and you can’t control your cost of borrowing. For example, your lender could notify you tomorrow that the interest rate on your line of credit is going up 1%. This sudden rise could have a massive impact on your bottom line and there would be literally nothing you could do about it.
• An increasingly competitive global environment has resulted in dropping prices in many sectors—and shrinking profit margins. “If your cost of borrowing is increasing on one side, and on the other side, your margins are shrinking as you open up to bigger markets, that’s a recipe for disaster,” Fournier warns.

How can you access capital without taking on debt? “Private equity, venture capital, alternative lenders—also called ‘fintechs’—or angel investors. It can be a lot easier to get started with equity financing,” says Fournier. 

Forecasting your cash flow

Make sure you have a strong grasp of your company’s current cash flow position and how long you can continue to operate and plan for the worst. It’s easy to focus on the day-to-day operations at the expense of medium- to long-term planning, but if disaster strikes, you may find yourself without a contingency plan. Besides, if you’re going to apply for a loan, you have to know how much you’re going to need.

It’s a daunting task. But luckily there are tools available to help. A financial forecast includes five basic components:

1. A sales forecast: Detailed description of how much you’re going to sell in a given period, broken down into revenue streams, costs to the business and gross profit margins.
2. An expense budget: List of both fixed and variable costs—subtracted from gross profit—leaves operating profit. After deducting your debts, taxes and operating expenses, you’ve got your net income.
3. An income statement: Document showing your expenses and revenues, as well as your losses and gains.
4. A cash flow statement: Breakdown of how money circulates through your business, so it’s particularly important for demonstrating that you’re a good risk.
5. A balance sheet: Statement of your business’ net worth, in terms of equity, assets and liabilities.

Forecasting is an essential skillset for any business, as well as being a necessary starting point for accessing more capital. Check out our free guide to financial forecasting for more information.

Government grants and subsidies: Finding free money

The Canadian federal government offers a lot of different funding programs to help support small businesses.

Alternative lenders: Going off the beaten path

The term “alternative lenders” generally refers to financial institutions that don’t offer the full range of services, like Schedule I banks, but are still able to lend money to your business. These loans can take a wide variety of forms:

• Equipment financing: Credit backed by physical collateral owned by your business, like machinery.
• Term loans: Short-term credit offering stable access to funding.
• Peer-to-peer loans: Direct loans from investors to borrowers that take place in an online “loan marketplace”.
• Business Development Bank of Canada (BDC) loans: As a Crown corporation, BDC has a number of programs, including Xpansion loans, to help small businesses access vital funds. See details below.
• Industry Canada loans: This department of the federal government can act as a bridge to make it easier for small businesses to obtain loans from financial institutions.

Factoring: Get paid in a hurry—but at a price

“Factoring” describes when a business sells its receivables to a factoring company to do the actual collecting. In other words, if your business is expecting a major influx of income next year—but you need liquid capital next week—factoring may be the solution for you.

We’ve got your back

Running your small business can be challenging at the best of times—and we aren’t living in the best of times. This is an unprecedented period for Canadian business and it can seem overwhelming to navigate these types of challenges.

But you’re not alone. This article is a first step to help you on your way if you’re struggling to find capital for your business. We’ve included links below for each of the topics we’ve addressed. These links lead to sources we trust that can help you build your knowledge base, so you can make informed decisions about all your options. 

There’s a lot more we can do for you, too. By signing up for a free MyEDC account, you get the expert advice and insights you need to grow your business. With a MyEDC membership, you can:

• Chat with our trade experts on the Export Help Hub to learn how to overcome the most urgent challenges facing your business. 
• Learn what you need to grow from world-class trade professionals in our ongoing series of live and on-demand webinars.
• Assess the benefits and risks of doing business with companies around the world, using EDC Company InSight.
• Develop your trade knowledge and skills at your own pace through the easy-to-understand EDC-FITT Lite Learning Series.
• Get insider perspectives on global trade—and find out what’s coming next—with EDC’s market reports and economic forecasts.

At EDC, we’re prepared to support you every step of the way as you grow your business and expand into international markets. Ready? Let’s get started.