What determines the interest rate on a business acquisition loan?

Business acquisition loan interest rates are not one published number; as BDC explains below, the major banks may offer different variable rates depending on the customer’s circumstances. BDC explains how a variable rate is built, and the federal Canada Small Business Financing Regulations set limits for loans made under that program. This page covers the mechanism and quotes no rates, since they change.

How a variable rate is built

BDC’s glossary gives the formula: variable rate equals the prime rate plus or minus the bank’s margin. BDC says each financial institution sets its own prime rate by adding a margin to the Bank of Canada’s bank rate, and that there is no rule to determine what that margin is. It adds that the major banks may offer different variable interest rates and loan conditions to their customers, depending on their circumstances.

What shapes the margin

BDC says that before granting a variable-rate loan to an individual or a company, each financial institution looks at various elements to calculate the profit margin it will charge. It says the institution looks at the customer’s profile, credit file and risk rating. Ask each lender which of those elements moved your quote, so you can compare offers like for like.

Loans under the CSBF program

The Canada Small Business Financing Regulations set a maximum annual rate on loans made under the program: for floating rate loans and lines of credit by reference to the lender’s prime lending rate, and for fixed rate loans by reference to the lender’s single family residential mortgage rate. For a loan, they also require the lender and borrower to sign a document that sets out the principal amount, the interest rate, the repayment terms, the payment frequency and the date the first payment is due. Read the current Regulations for the actual limit.

The rate is not the whole price

BDC notes that choosing a loan is about more than just interest rates and that the fine print is just as important. Compare repayment terms, security, personal guarantees and fees as well. For the deductibility side, see Can I deduct interest on a loan to buy a business?.