How do I apply for a business loan from a bank in Canada?

For a buyer, applying for a bank loan is less a form than a package: a business plan, financial statements, and answers about the business you are buying. Innovation, Science and Economic Development Canada says to present your business plan directly to any bank, credit union or caisse populaire. Each lender then decides for itself, so this guide explains what the public sources say a lender weighs, how security and guarantees work, and how the federal Canada Small Business Financing Program treats an acquisition. It does not say whether a loan is right for you.

Choose the lender and bring a plan

The government’s guidance on finding a loan names banks, credit unions and caisses populaires as the places to take your business plan. Ask each one which loan products it offers for buying a business, and whether it makes loans under the federal small business loans program. BDC, the Business Development Bank of Canada, also lets you apply online for its small business loan, so compare it with what your bank offers. Our comparison of a bank loan against vendor financing shows the main alternative to a bank loan.

What the lender looks at

BDC’s article on loans without collateral says that where there is no security for the loan, bankers also look at company management, the industry, whether the project makes sense, and the owner’s personal credit score and net worth. That list includes you as well as the business, so ask each lender what it will assess. Gather your own financial picture alongside the seller’s information. BDC describes financial statements as formal records that summarize a company’s financial performance for a specific period, and lists the balance sheet, income statement and cash flow statement. Ask the lender which statements, for which periods, it wants to see.

Security and the personal guarantee

BDC notes that banks usually need some kind of guarantee in case a loan cannot be repaid. It lists collateral as a physical asset such as a vehicle, equipment or a building, or items with concrete value such as accounts receivable, inventory, intellectual property or the owner’s personal assets. It also says that without tangible collateral you will generally be required to sign a personal guarantee to obtain a working capital loan. BDC adds that some personal sources of financing do not require collateral, such as a personal line of credit and credit cards, but that the high interest rate on card debt can make that financing prohibitive if the balance is not paid every month. Ask each lender exactly what it would take as security on your loan and whether the guarantee would be unlimited or limited.

Cash flow when there is no security

In its article on loans without collateral, BDC quotes a banker explaining that where there is no security, bankers look at the company’s cash flow and how much they can afford to borrow based on EBITDA or forecast cash flow. If the loan will rest on the business you are buying, ask the lender how it will assess that business’s cash flow after you take over. Ask the seller for the records that support the earnings figure, and ask your accountant to test that figure before the lender does.

The federal program and acquisitions

The Canada Small Business Financing Act defines a loan, including a line of credit, as one that meets the conditions in subsection 4(1) and is made to a borrower that meets the criteria in subsection 4(2), subject to the Act’s deeming rules. The program’s guidelines say lenders are expected to apply the same due diligence as for a conventional term loan or line of credit of the same amount. For buyers, structure matters: the guidelines say that in the acquisition of shares the loan goes to a shareholder to acquire shares, so the acquisition of shares is not eligible for financing. They list goodwill, if part of a going concern purchase, among intangible assets. The guidelines add that since July 4, 2022, a term loan under the program can finance intangible assets and working capital costs. Whether an asset purchase fits is a question for the lender.

Compare the terms, not only the approval

An approval is only the start of the comparison. Ask each lender about its fees, the repayment schedule, any conditions it attaches to the loan and what happens if you want to repay early. Ask how it treats a vendor take-back if the seller is also lending part of the price. Put the answers side by side and give them to your accountant before you accept an offer.

• Write a business plan and bring it to more than one bank, credit union or caisse populaire.
• Ask each lender which statements and which periods it requires.
• Ask what security and personal guarantee it would require on your loan.
• Ask whether your purchase can be structured to fit the federal program, if you want to use it.
• Get the seller’s earnings records tested by your accountant before you apply.