Business loans: what a commercial file has to show

What a business loan is

A business loan is credit advanced for a commercial purpose: buying a business, funding equipment or inventory, covering a leasehold build-out, bridging a seasonal gap, or refinancing an obligation the business already carries. The borrower may be a corporation, a partnership or a sole proprietor, and the money may be secured against business assets or advanced on an unsecured basis.

In Canada, lending is licensed provincially, so the regulator and the rules differ by province and territory, and which lenders can work with you depends on where you operate. The distinction that matters most is what the decision rests on. A personal loan is underwritten on your income and your personal credit file. A business loan is underwritten on the business. If you want to know how to acquire a business loan, the practical answer is that you are assembling two files: the trading record of the business, and the personal file of anyone asked to guarantee. The weaker of the two usually sets the ceiling. loanmoose.ca is not a lender, does not make loans, does not set rates and does not make credit decisions.

Who it suits

• Businesses with filed statements or tax filings that show revenue, margin and a direction of travel, rather than only a projection.
• Owners who can write down the commercial purpose of the borrowing and explain how it is repaid out of operating cash flow.
• Buyers using a business purchase loan to acquire an existing operation, a client book or a departing partner's share, where the target has its own records.
• Sole proprietors and incorporated owners who keep business bank accounts separate from personal ones, so deposits and outflows can be read on their own.
• Businesses whose current payments are already serviceable and who are not borrowing mainly to cover a shortfall in the existing obligation.
• Owners prepared to give a personal guarantee and to report periodically on performance, which is common even where nothing is pledged.

What a lender checks

Income comes first, but not the number you would put on a personal application. A lender reads revenue quality: who pays you, how concentrated those customers are, how long they have paid, and whether margin holds after the owner's own compensation is added back. Filed statements, tax filings and business bank statements carry more weight than a forecast, because they can be traced. A large share of revenue from one customer reads differently from the same revenue spread across many.

Existing payments come next. The lender lists every obligation the business and its guarantors already carry, then asks whether cash flow covers them with room left over. Where real property secures the borrowing, federally regulated mortgage lenders generally work to a total debt service ratio ceiling of about 44%, and qualify an uninsured mortgage at the greater of the contract rate plus 2 percentage points and 5.25%, under OSFI Guideline B-20. Insured mortgages and provincially regulated lenders are not all subject to B-20, so that test does not apply uniformly.

Your credit file is read for pattern, not just for a score. Canada has two national credit reporting bureaus, Equifax Canada and TransUnion Canada, and a free copy of your credit report is available from each. Adverse items have defined lives: a consumer proposal stays on a credit report for 3 years after completion, or 6 years from filing, whichever comes first, and a first bankruptcy stays for 6 years after discharge. Where a proposal or bankruptcy is in play, only a licensed insolvency trustee can administer one, and trustees are regulated by the Office of the Superintendent of Bankruptcy Canada.

Security decides how much recourse the lender has if things go wrong. An unsecured facility leaves less to fall back on, so more weight falls on cash flow, records and covenants. Where real property is pledged, a home equity line of credit at federally regulated lenders is generally limited to 65% of appraised property value, with total secured lending usually capped at 80%. That is a limit on how much of the value can be borrowed against, not a statement about what any lender will offer you.

What it costs to carry

Interest is the price of the money itself, and it is not quoted in isolation. Compounding frequency changes what you pay: Canadian fixed-rate mortgages are compounded semi-annually by law, while other facilities compound on whatever schedule the contract sets, and the same stated rate costs more when it compounds more often. Term length, whether the facility is drawn in one advance or in tranches, and whether the balance amortizes or rolls over all change the arithmetic.

Fees sit on top: arrangement or origination charges, standby fees on an unused portion of a line, renewal and discharge costs, and third-party work such as an appraisal, a search or legal review of security. Insurance is a third component. Some facilities require insurance tied to the borrowing or to the asset, and it is a real cost of carrying the loan rather than a formality.

The distinction to hold onto is between the headline rate and the total cost of borrowing. The headline rate prices the money. The total cost adds fees, required insurance, compounding, the term and any prepayment or exit charge, so a facility quoted slightly lower can cost more once the rest is included. As an outer boundary, the Criminal Code criminal rate of interest is 35% per year under s. 347, so no legitimate commercial facility prices above that. For context on where pricing starts from, the Bank of Canada publishes a policy interest rate, a prime rate, conventional mortgage rates and Government of Canada benchmark bond yields; these are benchmarks, not offers. What any given business pays depends on its file, its security and its lender, so the right answer depends on individual circumstances.

How it compares with the alternatives

Short-term payday-style credit is a consumer product, not a commercial one, and it carries its own federal rules: where a province operates a licensed payday lending regime, the federal Payday Lending Regulations cap the cost of borrowing at $14 per $100 advanced, some provinces set a lower cap and the lower cap applies, and Quebec does not license the model at all. A payday loan is generally up to $1,500 for a term of 62 days or less, which is a different instrument from a business loan and should not be treated as a substitute for one.

Before you sign

1. Work out the total cost of borrowing, not the rate alone: interest, every fee, any required insurance, renewal and discharge costs, and the compounding schedule across the full term.
2. Identify exactly what is pledged and what a personal guarantee exposes you to, including what happens to that exposure if the business is later sold or restructured.
3. Test the payment against a weak month, not an average one, and confirm whether the facility is committed for a term or repayable on demand.
4. Confirm the lender is licensed for your province or territory, and know where a complaint goes: complaints about federally regulated financial institutions go to the Financial Consumer Agency of Canada, while provinces license and supervise most other lenders.
5. Read the exit before the entry. Check prepayment penalties, discharge terms and renewal conditions, and if this is a purchase, verify the seller's numbers with your own adviser rather than relying on the listing summary.

loanmoose.ca is a matching and comparison service. It is not a lender, does not make loans, does not set rates and does not make credit decisions, and it does not promise approval to anyone.