How to Build Business Credit and Where to get Business Funding in Canada

Having good business credit is key in helping you grow your business, getting access to capital and having strong relationships with suppliers.

A business that has good credit will have a lot of options when it comes to getting business loans. By building good business credit you’ll improve your borrowing options, get better rates and will have more flexibility in dictating your repayment options with lenders and suppliers.

There are a number of ways that you can build your business credit in Canada, but before we do that, let’s take a look at what business credit is.

What is business credit?

Business credit is an important indicator of the creditworthiness of your business. It shows how financially risky your business is when you are considering applying for financing or capital.  Lenders, suppliers, or vendors will look at your ability to repay debts on time before working with your business.

In Canada, there are two main credit agencies Equifax and TransUnion. Both of them produce business credit scores and reports for Canadian business owners. Each agency uses unique calculation methods and different scores used to display your overall business credit. 

The business credit score of your business will show lenders & suppliers the likelihood of you paying your business-related invoices and bills on time.

How to build good business credit in Canada?

• Generate Revenue and Sales: if you have paying customers, purchase orders and a good cash flow, lenders and suppliers will be more willing to work with you. When they begin to review your business financials and see that there is money coming in consistently, they will feel more confident about extending credit to your business.

• Make sure your business is registered: when you apply for a business loan or financing, most lenders will run a background check on your business to ensure that it’s registered and allowed to legally operate in Canada. This is usually the first thing that a lender or a supplier will take a look at before diving into your business financials, so make sure to register your business!

• Take out a business line of credit or a business credit card, & make payments: One great way to build credit is by taking out a business credit card or line of credit and making timely or early payments. The longer your transaction & repayment history are the more credit worthiness you will build for your business.

• Pay your bills and invoices on time: Late payments can have a negative impact on your business credit report and decrease your business credit score. Even being late by a few days can have negative consequences. On the flip side, if you are paying your bills early or on time the credit score of your business will trend in a positive direction. Make sure that your suppliers or lenders are reporting your good payments to business credit bureaus, otherwise your good payment behaviour won’t be reflected on your business credit report.

• Invest in equipment for your business: when you own assets and have collateral that can be used by lenders to secure a loan, the approvals are typically much easier. Owning your own equipment, will help increase your credit worthiness and open up additional opportunities to get funding from a wider range of lenders, for example asset based lenders.

Now that you know how to build business credit, let’s take a look at how you can get a business loan in Canada.

How to get approved for a business loan in Canada?

Canadians have a lot of options to turn to when looking for a business loan. No matter which option you decide to go with, the lending institution will take a look at the financial health of your business. The criteria for getting approved for a business loan vary based on the lender you choose to go with, however, a few things are pretty common amongst all of them.

Time in business: lenders prefer to give financing to businesses that have been operational for at least 1-2 years. They want to make sure that you are past the proof of concept stage and have paying customers.

Sales: you need to show monthly sales of at least $5,000 – $10,000 in order to be eligible for a business loan in Canada. Seasonal businesses that may peak during the summer or winter months are usually required to have at least $100,000 in annual revenue to be eligible.

Where to get business funding in Canada?

Friends and Family: one of the first places you should turn to are your friends and family. They will likely be the most willing to trust and support you if your business is doing well. They can provide low interest and flexible terms. The downside is that they might have a limited amount of funding that they can help you with. Also, since they are your personal connections paying them back may add more pressure on you and damage personal relationships if you are unable to stick to the terms.

Banks: your local bank could be a great option for getting a business loan. Banks provide business term loans, lines of credit, and business credit cards to their clients and usually offer some of the best rates you can find. Banks can also provide personal service, and if you already have a business account with them, gathering the right documents for approval may be easier. Getting approved for a business loan from a bank can take a bit of time (usually 2 weeks – 1 month) and the criteria for being approved are fairly strict. You must be in business for at least 2 years and have a strong financial history for your business.

Online: Alternative or online loan providers are a good place to get a business loan if you need the financing quickly. They can provide financing in a few business days and accept a wider range of borrowers. Online lenders offer many types of business loans including: secured and unsecured business loans, lines of credit and merchant cash advance as well as equipment loans. To help you find a list of online lenders, you can use a website like Smarter Loans, which connects borrowers with the most reputable loan providers in Canada. On Smarter Loans you can find business loan providers all over Canada, compare your options and apply online. Keep in mind that online lenders might be quicker in getting you the funding, but they usually have higher interest rates than the banks.

Government Grants & Loans: There are a number of federal and provincial government grants and loan programs available to Canadian businesses. In order to qualify, you must meet certain criteria outlined by the specific program that you are looking to register for, so make sure you do your research before you apply. A good place to start you research at is Canada Small Business Financing Program Loans.

Venture Capitals & Angel Investors: Venture Capitalist firms and Angel investors are a popular way for start-ups to get financing. Usually investment firms will review your business plan, financial history and advisory team before committing any funding. They typically invest money into your business for a percentage or equity stake of your business, meaning they will give you money but will own a portion of your business. Try to look for an investment firm that can give you more than just financial support, look for companies that can help you grow your business by connecting you to new contacts, suppliers, or customers.

Hopefully this provides you some introductory information for you. Building a business is no small task.  But with good information and credit habits, you will sure be on the right path.

Ready to start your business? Ownr has helped over 16,000+ entrepreneurs hit the ground running quickly – and affordably. If you have questions about how to register or incorporate your business, give us a call at 1-800-766-6302, Monday through Friday from 9 am to 5 pm EST, or email us [email protected]