What are the Best Unsecured Business Loans in Canada?

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If you’re a small business owner looking to secure a loan, you may be wondering whether secured or unsecured funding is better for your business.

The answer might be fairly simple. If you don’t have any collateral to offer, such as commercial property or heavy machinery, you’ll need unsecured financing. If you do have collateral to offer to secure a loan, you will have more loan options to choose from and may be able to access a secured or unsecured business loan.

Whether secured or unsecured funding is right for your business isn’t quite as simple to determine. Understanding the difference between secured and unsecured loans, the advantages and disadvantages of each, and different lender types will help you choose the best funding for your business.

In this post, we’ll explain the difference between secured and unsecured small business loans, where you can get unsecured business loans in Canada, and four types of unsecured business funding to consider.

Let’s jump in.

What is an Unsecured Business Loan?

Unsecured business loans are loans that do not require a business to pledge some kind of business asset as collateral, such as property, equipment, or machinery. Secured business loans, on the other hand, do require a business to pledge collateral assets to receive funding.

What is collateral? “Collateral” refers to any asset a lender will accept as security for a loan. Securing a loan with collateral reduces the risk to the lender by providing them with assets they can liquidate if you default on your loan. That means the bank will be able to recoup their costs if you are unable to repay your loan. Learn more about small business loan collateral.

Most traditional lenders, including the Canada Small Business Financing Loan Program and the Big Five banks, will require collateral or some form of guarantee to secure a business loan in Canada. Other lenders like alternative online lenders primarily offer “unsecured” small business loans that generally do not require collateral.

Without collateral, lenders will base your approval on your credit history, income, and cash flow projections. The exact criteria and minimum requirements will depend on the type of funding you’re applying for and the type of lender you’re working with.

Since there is more risk to the lender, unsecured business loans often come with other conditions and costs in place of collateral requirements, such as:

  • Higher interest rates or higher fees
  • Shorter loan terms
  • Smaller loan amounts
  • Personal guarantees—this means that if you default, your lender may come after your personal assets.
  • UCC liens—a blanket lien that allows a lender to attach any or all of your business assets if you default. This means your lender could liquidate any assets associated with the lien if you are unable to repay the loan.

GREENBOX TIP: If you default on an unsecured loan, you won’t lose any business assets, but if you provided a personal guarantee, your personal assets could be seized. Check the terms and conditions to confirm what happens in the event of non-payment before you agree to an unsecured loan. Most likely you will incur a fine based on a percentage of your monthly installments. Your credit score will be negatively impacted as a result, which may make it harder to access funding in the future or negotiate favourable payment terms with your vendors.

Where To Get Unsecured Business Loans in Canada

Unsecured business loans in Canada are available from three primary types of lenders:

  1. Banks and traditional lenders: Some Big Five banks will offer unsecured loans, but they will come with higher rates and stricter eligibility criteria, as well as long application timelines, and will very likely require a personal guarantee or UCC lien.
  2. Alternative online lenders: Online lenders like Greenbox Capital® offer a number of unsecured business loans in Canada and have more flexible approval requirements that are often more favourable to businesses with lower credit scores. They also offer faster approval timelines than big banks, with some able to deposit funding in as little as 1 business day.
  3. Peer-to-peer lending: Peer-to-peer lending occurs on online P2P lending platforms, and can help you connect with investors who are looking to invest in a small business. Peer-to-peer lending typically does not require collateral, but approval requirements will depend on the loan amount and terms, as well as the policies of the lending marketplace.
 Traditional LendersAlternative LendersPeer-to-peer Lending
InstitutionsCanada Small Business Financing Program, banks, credit unionsDirect online lenders like Greenbox Capital or OnDeckOnline lending platforms like Funding Circle, Peerform, or Upstart
Loan typesTerm loans, real estate loans, equipment loans, business lines of creditMerchant cash advances, invoice factoring, business lines of credit, alternative term loansTerm loans
Loan amountsUp to $2MUp to $500,000Up to $500,000 depending on the platform and business profile
Term lengthsUp to 25 yearsTypically 1-3 yearsUp to 5 years
FeesTypically lower rates than alternative lenders. Other fees will apply depending on the lender. Rates may be higher depending on your business’s financial history.Range from 3.50% to 35.99% APR
EligibilityOnly businesses with strong financial histories and very high credit scores are approved.Flexible approval requirements that are based on business potential rather than financial history.Approval requirements depend on the lending marketplace.
Time in business2+ years6+ monthsApproval requirements depend on the lending marketplace.
Approval timelineWeeks or monthsAs little as one business dayWithin 5 business days

4 Best Unsecured Business Loans in Canada

Let’s take a closer look at four popular types of unsecured business loans in Canada:

  1. Unsecured lines of credit
  2. Business credit cards
  3. Merchant cash advances
  4. Invoice factoring

1. Unsecured lines of credit

Available from:

  • Banks
  • Alternative lenders

Lines of credit offer the most flexibility by allowing businesses to draw and repay from the line as needed. Lines of credit from traditional lenders may require collateral or a personal guarantee, while alternative lenders typically do not not require these conditions. Regardless of lender, unsecured lines of credit typically have lower credit limits with higher rates than secured credit lines.

There are no restrictions on how unsecured lines of credit are used. Interest rates will vary depending on the type of lender you work with, and may fluctuate based on the federal prime rate.

Unsecured lines of credit are ideal for:

  • Covering unexpected expenses
  • Financing growth initiatives
  • Businesses that want a flexible cushion for cash flow troubles or access to extra working capital to manage unexpected expenses

2. Business credit cards

Available from:

  • Banks

Business credit cards function similarly to lines of credit, but often have much higher rates and lower credit limits—typically up to $50,000 depending on the creditworthiness of your business. There are no restrictions on how credit cards can be used and you can avoid interest altogether if you pay your balance in full each month, but there can be significant charges or fees for missed payments.

GREENBOX TIP: Carrying a high balance on your business credit score can negatively impact your credit score because both business and personal credit bureaus will factor your total credit utilization into your credit score, including business credit card utilization.

Promptly paying credit card bills in full can have a positive impact on your credit score, which is especially important for new businesses or businesses that are working to build their business credit score so they can rely less on personal credit when applying for business funding.

Business credit cards also often feature rewards programs like points, air miles, or cash back. Do your research before you choose a credit card to select the rewards program that will be most beneficial to you.

Business credit cards are ideal for:

  • Covering day to day expenses—credit cards are not typically ideal for funding larger growth initiatives
  • Businesses establishing business credit

3. Merchant cash advances

Available from:

  • Online lenders

Merchant cash advances (MCAs) are technically not a business loan—they’re a form of asset purchase known as a purchase of future receivables. When you receive a merchant cash advance from a lender like Greenbox Capital®, you’ll receive a cash advance up front in exchange for a portion of your business’s future revenue. Your lender will receive a portion of your daily or weekly debit and credit card sales until the advance has been repaid (along with any fees).

MCAs are approved primarily based on your business’s health and potential, with greater focus on your monthly sales and revenue than your credit or financial history. No collateral is required to be approved because the value of your future sales essentially acts as collateral, and there are no restrictions on how merchant cash advance funding can be used.

Merchant cash advances are ideal for:

  • Financing growth initiatives that will increase your revenue (so you can pay off the funding faster), such as marketing plans, purchasing inventory in bulk, or investing in new equipment, hiring, buying tech, etc.
  • Businesses seeking flexible working capital funding
  • Businesses that have a large number of card transactions
  • Businesses with lower credit

Learn more about merchant cash advances and how they can help your business.

4. Invoice factoring

Available from:

  • Some banks
  • Online lenders

Invoice factoring is another non-loan form of unsecured business funding called “accounts receivable financing”.

Instead of providing a business with a lump sum that will be repaid over a certain term or using a percentage of daily or weekly sales, a business will essentially sell their unpaid invoices to a lender, called a “factor”. The factor then “owns” the invoice(s) and will advance the money that your clients already owe you, typically between 70-90% of the invoice’s value. The remainder of the invoice’s value will be paid out to you once your client pays, minus any lender fees.

Similar to other forms of unsecured business loans in Canada, there are no restrictions on how funds received through invoice factoring can be used.

Invoice factoring is ideal for:

  • Accessing working capital by leveraging your unpaid invoices
  • Businesses with large invoice amounts
  • Businesses with long accounts receivable periods

Learn more about invoice factoring.

Is an Unsecured Business Loan Right For You?

Business loans secured with collateral typically offer higher loan amounts, longer terms, and better rates, but these loans often have the strictest approval requirements and many deserving small businesses are excluded.

With flexible approval requirements that typically don’t require collateral, alternative lenders in Canada make more funding available to more small businesses. Multiple types of funding are available depending on your business’s goals and needs, including merchant cash advances, invoice factoring, alternative business loans, lines of credit, and more. With a streamlined online application, funds can be deposited in as little as one business day, making alternative lenders an ideal option for businesses that need smaller loan amounts, can’t offer collateral, have lower credit scores, or need fast funding.

Learn more about unsecured business loans in Canada
Jordan Fein
Author: Jordan Fein
Contributor and expert in finance and loans, business and economics