Thinking Capital is now DRIVENtm... Learn more.
Thinking Capital is now DRIVENtm... Learn more.
Thinking Capital is now DRIVENtmLearn more.
Thinking Capital is now DRIVENtmLearn more.
The balance magazine/

Types of small business loans and their terms

Types of small business loans and their terms
September 6, 2021

It’s not unusual for Canadians to look into getting a loan when it comes to funding something expensive. Car loans, student loans, and mortgages are all examples of common loans for many Canadians. Similarly, there are many different types of business loans available in Canada as well.

Some small business owners may seek funding from family, friends, or other personal investors. Others may try to conduct their business “by the bootstraps,” working frugally and using only their own personal income to try and run a business debt-free.

But for many Canadians, a small business loan is the right path to get the money needed to grow their business. If you’re ready to apply for a loan, you’ll have to think about the type of business loans that’s right for you. Specifically, you’ll have to think about which “loan terms” you’re comfortable with. Different types of loans have different loan terms. Here’s a breakdown of a few different types of loans, along with the terms associated with them.

Loan Types

The Unsecured Loan

Unsecured business loans are a popular option for Canadian small business owners. This is because there is no collateral involved in obtaining an unsecured loan. You aren’t required to put up an asset for collateral, such as property or a stake in your company, to qualify for this type of loan.

The terms of an unsecured loan are ideal for small business owners, but they come with certain qualifications. This is because lenders assume more risk by offering unsecured loans with no collateral. While all business loans require certain qualifications to be met, such as having a business bank account, unsecured loans have their own specific criteria.

The critical qualifying factors here are your credit score and credit history. If you have higher personal credit and business credit scores, you’ll have a greater chance of qualifying for this type of loan. This is just one of many reasons why your business credit health is important. If your credit score is poor, qualifying may be much more difficult. You may need to take some time to build your business credit score. Don’t worry though, as there are other methods of obtaining business financing with bad credit.

The Secured Loan

A secured business loan requires you to put up some form of collateral against the loan. If you repay your loan on time, your collateral will be released. If you default on your payments, however, your lender may take action to possess your collateral and sell it to the highest bidder in order to recoup their losses.

Secured loans often don’t require the same high credit scores as unsecured loans, and interest rates are sometimes lower, because the risk to the lender is decreased by the collateral. This collateral could be inventory, equipment, property, or even equity in your business. There are several types of secured loans based on the collateral you put up. These include business equity loans, equipment loans, and secured lines of credit.

You have to think very carefully before submitting a secured loan application, as you’ll run the risk of losing your collateral if you’re not able to adhere to the repayment schedule.

Loan Terms

There are many factors to consider when applying for a loan. These include fixed rates versus flexible rates, daily payments versus monthly payments, and the actual loan amount. One key area to consider is how long you want to structure your payments for. If you have a one year term, a four-year term, or even a 25-year term, this is the allotted time you have to pay back the loan and how that repayment schedule has been structured. There are many different term loan options available based on what repayment schedules you are best able to manage.

Short Term

A short-term loan is a loan that is designed to be repaid in a short period of time, including the interest owed. Typical durations for a short-term loan are a year or even less. In some cases, the loan terms and amounts involved may even be small enough that you are expected to pay back the loan in one lump sum, though it’s also possible to structure and schedule out payments over a period of months. Short-term loans are often unsecured.

Long Term

Long-term small business loans are, on the other hand, designed to run for more extended periods of time, and include repayment schedules to address principal and interest. Generally, the duration of a long-term small business loan is greater than a year. Because a lot of interest is paid on these loans over a longer period of time, the quoted interest rates on these loans can sometimes be lower than short-term small business loans.

No Term

Some alternative lending options don’t have fixed repayment terms. For example, a merchant cash advance provides you with a lump sum cash advance, deposited straight into your business bank account. No collateral is required and there is no fixed repayment schedule. Instead, a small percentage of your business’s daily credit card and debit card sales will be used to pay back your cash advance. The amount you pay each day will fluctuate based on your daily sales. If business is slow, your daily payment amounts will be lower. If business is booming, your daily payment amounts will be higher. This would allow you to fully repay the total amount of your cash advance quickly. This is a great option for small business owners who like more flexibility when managing their business cash flow.

Plan Carefully

If you’re looking around for an online loan, a small business loan, or other small business financing options, make sure to research your options carefully. Look at the situation you have and what loan terms are the right fit for you, based on your cash flow needs.

Ready to grow your business and find new customers our there ready to try your product? Find out more about our small business loans.

More resources

Advice and research for Canadian small businesses from our expert team

We've got you

We're here to make life easier for Canadian small to medium businesses like yours. How can we help you today?