Canada Small Business Financing Program Loans vs. Alternative Lenders in Canada

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There are many small business funding options available to businesses in Canada, including government-funded programs, bank loans, and alternative lending. Each type of funding has unique application requirements, qualification criteria, and ideal uses.

Canada Small Business Financing Program loans are one of the most preferred forms of small business funding in Canada, often with the lowest fees and best terms, but these loans are not always the best option for small business funding in Canada.

With so many options available, understanding which type of funding is best for your business can be challenging, especially if you’re busy focusing on operating your business and adjusting to a constantly changing business landscape.

In this post, we’ll compare CSBF loans to alternative lenders in Canada to help you determine which source of funding suits your needs, including funding amounts, terms, and uses, rates and fees, and who should apply.

Let’s jump in.

At A Glance: Canada Small Business Financing Loans vs. Alternative funding

Canada Small Business Financing LoansAlternative Funding
Loan AmountUp to $1MUp to $500,000
Loan Type Guaranteed term loanSeveral types of funding are available, including merchant cash advances, invoice factoring, alternative business loans, and business lines of credit
Term LengthsUp to 15 yearsTypically less than 3 years
Fees2% registration fee on all loans

Variable interest rates up to prime lending rate + 3%

Fixed interest rates up to lender’s single family residential mortgage rate + 3%

Additional fees applied by lender
Based on a factor rate, typically around 1.5
Application ProcessCan take weeks for banks to process, with significant financial documentation requirementsStreamlined online application with funds deposited in as little as one business day
QualificationsStrong personal creditFlexible requirements with more focus on business potential than financial history
RepaymentMinimum monthly payment that covers interest and principalDepends on loan type
Ideal UsesPurchasing land or real estate, equipment, or improving leased propertyWorking capital to fund growth strategies or cover unplanned expenses

Canada Small Business Financing Loan Program

What are Canada Small Business Financing Program loans?

Canada Small Business Financing Program loans are not actually provided by the federal government. These loans are provided by private lenders, including most commercial banks, but are guaranteed by the federal government up to 85%, similar to Small Business Administration loans in the USA.

When you apply for a Canada Small Business Financing Program loan, you’ll apply for your funding directly through a partnering financial institution, such as RBC, BMO, or Scotiabank. These partnering commercial lenders will disburse the funds and are solely responsible for approving your loan application. If your application is approved, the financial institution will deposit the funds and register the loan with Innovation, Science, and Economic Development Canada.

Funding amounts, terms, and uses

Up to $1M in funding is available through the Canada Small Business Financing Program, but funds can only be used for specific purposes, including:

  • Purchasing or improving land or buildings used for commercial purposes, typically with 15 year terms
  • Purchasing or improving new or used equipment, typically with 10 year terms
  • Purchasing new or existing leasehold improvements, such as renovations to a leased property by a tenant, typically with 7 year terms

Past purchases made within the last 6 months are eligible for financing, but no more than $350,000 can be used for purchasing leasehold agreements, improving leased property, or purchasing or improving new or used equipment.

Funds cannot be used for goodwill, working capital, inventory, franchise fees, or research and development.

Who is eligible for Canada Small Business Financing Program loans?

Canada Small Business Financing Program loans are available to most established small businesses and startups with gross annual revenues of $10M or less, including corporations, sole proprietors, partnerships, and co-operatives. Farming businesses are not eligible.

Applicants must have a strong financial and credit history and be prepared to submit a detailed loan proposal that outlines how much money they are seeking, how they intend to use the loan, and how they plan to pay it back. Collateral or a personal guarantee may be required, potentially up to 25% of the loan amount.

Canada Small Business Financing Program rates and fees

Rates and fees for loans approved under the Canada Small Business Financing Program are determined by the partnering financial institution.

Multiple rate structures are available, including fixed and floating interest rates depending on the loan amount, as well as your business’s creditworthiness and risk assessment. The Canada Small Business Financing Program stipulates maximum interest rates lenders can charge:

  • Maximum fixed interest rate: The lender’s single family residential mortgage rate + 3%
  • Maximum floating interest rate: Prime lending rate + 3%

All Canada Small Business Financing Program loans are also subject to a registration fee equalling 2% of the loan amount. The borrower must pay this fee to the lender, but it can be financed as part of the loan. Other fees, such as documentation preparation and application fees, may also apply depending on the lender

Who should apply for Canada Small Business Financing Program loans?

Canada Small Business Financing Program loans are ideal for:

  • New businesses looking for financial support to start or grow their business
  • Established businesses experiencing issues with cash flow as a result of a large investment
  • Businesses seeking larger loans to purchase or improve new or used equipment, land or buildings, or existing leasehold property
  • Businesses with strong financial histories

Alternative Lenders in Canada

What is alternative lending?

“Alternative lending” is an umbrella term that describes any lending that occurs outside of a traditional financial institution like a bank or a credit union.

These lenders emerged after the 2008 recession in response to a greater need for accessible small business funding. Using new technologies to support the underwriting process, alternative lenders can approve more applications and provide funding to business owners who would not usually be approved by traditional lenders.

There are multiple types of alternative lenders, including direct online lenders like Greenbox Capital®, private lenders, marketplace lenders, and crowdfunding. Direct online lenders offer financing directly to small business owners using a fast and easy online application, and with simpler and more flexible underwriting requirements, loans from these lenders can be approved in as little as one business day.

Direct online lenders offer financing options similar to traditional lenders, including collateral real estate loans, lines of credit, and alternative small business loans, but these lenders typically specialize in non-loan forms of financing such as:

  • Merchant cash advances: A non-loan form of financing known as an asset purchase or a purchase of future receivables. With a merchant cash advance, a lender will purchase a portion of your business’s future revenue in exchange for cash up front. You’ll receive an advance of working capital when you need it, and your lender will receive a portion of your daily or weekly debit and credit card sales until the advance has been repaid. Learn more about merchant cash advances.
  • Invoice factoring: A non-loan form of financing known as accounts receivable financing. Instead of receiving a lump sum that will be repaid over a certain term, a business will sell their unpaid invoices to a lender, called a “factor”. The factor owns the invoices and will advance the money your clients already owe you, typically between 70-90% of the invoice’s value, with the remainder of the invoice’s value paid out to you once your client pays (minus any lender fees). Learn more about invoice factoring.

Alternative lenders also typically offer loans for smaller amounts and shorter terms than Canada Small Business Financing Program loans and other traditional small business funding options in Canada.

Funding amounts, terms, and uses

Alternative lenders offer funding up to $500,000, typically with shorter term lengths around 1-3 years.

There are no restrictions on how funds are used, but alternative funding is typically best used to support growth initiatives that will increase revenue, such as:

  • Investing in marketing and advertising
  • Purchasing inventory, fixtures, technology, or raw materials
  • Hiring new staff
  • Remodeling your space

Alternative funding is also ideal for use as working capital, as well as responding to unplanned expenses.

Who is eligible for alternative funding?

By evaluating the future potential of a business instead of focusing entirely on credit score and financial history, alternative lenders in Canada make funding available to more businesses, including those who would not typically be approved by traditional lenders, such as:

Personal and business credit and financial histories will still be considered when evaluating your loan application, but they will be factored in alongside other criteria like your daily sales and business reputation. Collateral is typically not required to secure alternative funding.

Rates and fees

Fees for alternative lending options are often based on a factor rate instead of a traditional interest rate. Unlike interest rates, which are percentage rates that compound as you pay off your loan, factor rates are simple decimal figures that show how much “extra” you owe on the original amount of the loan. For example, if you borrow $10,000 at a factor rate of 1.3, you’ll owe $13,000. Learn more about factor rates vs. interest rates.

Because alternative funding has shorter terms and is typically easier to qualify for, rates are often higher than Canada Small Business Financing Program loans and other forms of traditional funding. However, it’s a common misconception that alternative funding always has higher rates and fees—ultimately, your rates and fees will depend on your business’s risk assessment and how quickly you are able to repay the advance. The stronger your business’s financial history, the lower your rate should be.

Who should apply for alternative funding in Canada?

Alternative funding is ideal for:

  • Businesses seeking flexible working capital funding with no restrictions for use
  • Businesses that need fast funding to support their growth or take advantage of a short-lived opportunities to grow
  • Businesses that process a lot of debit and credit card transactions
  • B2C businesses that need smaller amounts of funding
  • Businesses with lower credit scores
  • Business owners that do not have collateral, such as real estate and other major assets

Alternative Funding for Small Businesses in Canada

The Canada Small Business Financing Program typically offers the lowest rates and most favourable loan terms for small business funding in Canada, but these loans also have the strictest approval requirements and many deserving small businesses are excluded.

With flexible approval requirements, 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. No collateral is required and 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 alternative funding
Jordan Fein
Author: Jordan Fein
Contributor and expert in finance and loans, business and economics