June 2021

If you own or operate a small business in Canada, one or more of the following scenarios might sound familiar.


Scenario A:

You’re a new entrepreneur, but have a killer idea, strong business plan, detailed forecasts and a qualified accountant. You’ve done your homework, but without working capital you can’t get your business off the ground.


Scenario B:

You’ve been operating your business for more than a year. You’ve improved and streamlined every aspect of your operation and pride yourself on how highly your customers rate your services. Though you’re turning a profit, it’ll be years and years before you can build the capital to expand your business to match your vision.


Scenario C:

You did it! You worked smart and hard—maybe you even got a little lucky. You made the right pitch to the right people, and now you’ve secured a big client who will keep your business busy for years. But now you need capital, fast. Without more material, equipment and staff, you’re going to have a hard time delivering—and you’ll only be paid on delivery.

Thousands of Canadian businesses, like yours, face these sorts of challenges every day. The obvious solution would be to take out a business loan from a major bank. After all, you’re a smart, responsible and hard-working person. You’ve always met your obligations in the past. It seems reasonable that banks would be eager to extend you a business loan.

But you’ll quickly discover that’s not always the case.



Getting a bank loan in Canada isn’t easy

Canada’s banking industry is dominated by a few major players: There are eight “Schedule I” banks that cover 60% to 70% of Canada’s entire market share. Those banks set the terms for the lending landscape. They call the tune—and almost every Canadian entrepreneur who wants a business loan needs to dance to that tune.

What is a Schedule I bank?

A Schedule I bank is completely domestic to Canada, meaning it’s not affiliated with, or owned by, any foreign institution. 

All of the big Canadian banks are classified as Schedule I.  So, if you have a chequing or savings account in Canada, it’s likely with a Schedule I bank. See the full list of Schedule I banks here.

Why is that an obstacle to your ability to secure a loan? Because Canada’s banks want to maximize their profits and minimize their risks. 

If you’re applying for a loan, they’ll want to look at your historical transactions—particularly cash flow through working capital needs—and they have little appetite for taking risks on businesses with no track record.

“If you’re a new business and you go to a Schedule I bank, as a rule of thumb, they’ll most likely ask you for a two-for-one,” says Luc Fournier, regional vice-president for Export Development Canada (EDC)’s bank channel and a 10-year veteran of Canadian commercial banking. “They’re going to say, ‘Show me $2 and I’ll lend you $1,’ which largely defeats the purpose of borrowing money.”

The challenges don’t end there. Most potential borrowers will need to present at least three years’ worth of financial statements to even begin the conversation. So, if you’re new to the scene—even if you have a killer idea, thorough business plan and solid projections—the big banks aren’t going to be there to support all your needs.

In Canada, entrepreneurs must create their own, fully sustainable cash flow before they can even begin to access lending through traditional avenues. In your first three years in business, you’re going to have to use a certain amount of ingenuity to access capital. 

The good news is you have a lot of other options. But it’ll take a little work to find out which of them can lend you the capital you need at a rate you can afford. 

Luckily, at EDC, we know a lot about financing: A core part of our mission is to make it easier for Canadians, like you, to get the resources you need to grow your business.

Skilled young female graphic designer making sketch in notebook for new startup project


Think twice about borrowing

This article details a variety of potential solutions if, like many other Canadian businesses, you need a fresh infusion of capital and find traditional banking channels closed to you. But Fournier urges entrepreneurs to push debt financing as far as they can in the evolution of their business plans. Translation: Don’t borrow if you can help it.

His reasons are twofold: 

  • Interest rates are driven by the central bank of Canada and you can’t control your cost of borrowing. For example, your lender could notify you tomorrow that the interest rate on your line of credit is going up 1%. This sudden rise could have a massive impact on your bottom line and there would be literally nothing you could do about it.
  • An increasingly competitive global environment has resulted in dropping prices in many sectors—and shrinking profit margins. “If your cost of borrowing is increasing on one side, and on the other side, your margins are shrinking as you open up to bigger markets, that’s a recipe for disaster,” Fournier warns.

How can you access capital without taking on debt? “Private equity, venture capital, alternative lenders—also called ‘fintechs’—or angel investors. It can be a lot easier to get started with equity financing,” says Fournier. 

I know the feeling of [equity financing] sucks—entrepreneurs hate to give up ownership of even a fraction of their company,” Fournier continues. “But it’s a step in the right direction and the sale is far from final. If things go well, your investors will want to stick around and even to invest more. And if you play your cards right, you can even buy the equity back from your investors.


Forecasting your cash flow

Make sure you have a strong grasp of your company’s current cash flow position and how long you can continue to operate and plan for the worst. It’s easy to focus on the day-to-day operations at the expense of medium- to long-term planning, but if disaster strikes, you may find yourself without a contingency plan. Besides, if you’re going to apply for a loan, you have to know how much you’re going to need.

It’s a daunting task. But luckily there are tools available to help. A financial forecast includes five basic components:

  1. A sales forecast: Detailed description of how much you’re going to sell in a given period, broken down into revenue streams, costs to the business and gross profit margins.
  2. An expense budget: List of both fixed and variable costs—subtracted from gross profit—leaves operating profit. After deducting your debts, taxes and operating expenses, you’ve got your net income.
  3. An income statement: Document showing your expenses and revenues, as well as your losses and gains.
  4. A cash flow statement: Breakdown of how money circulates through your business, so it’s particularly important for demonstrating that you’re a good risk.
  5. A balance sheet: Statement of your business’ net worth, in terms of equity, assets and liabilities.

Forecasting is an essential skillset for any business, as well as being a necessary starting point for accessing more capital. Check out our free guide to financial forecasting for more information.


Government grants and subsidies: Finding free money

The Canadian federal government offers a lot of different funding programs to help support small businesses.

Benefits and advantages: It’s hard to do better than free. And grants and subsidies don’t share any of the risks of taking on debt.

To find a grant or subsidy for your business, you can start with a government hub site like Innovation Canada. This provides a fairly comprehensive (but not exhaustive) list of government assistance available to small business broken down by province.

Another option is to get your business involved in government activities and programs. For example, you can earn valuable tax credits for your business by participating in the Scientific Research and Experimental Development (SRED) Tax Credit Program, which doesn’t even require a proposal.

Drawbacks and disadvantages: Finding a grant for which your business is eligible could take some digging. There are different levels of assistance available for different geographic regions, so you may not find rich pickings, depending on where you’re located. 

Certain sectors also receive more support than others. For example, if you’re involved in renewable energy somehow, the Canadian government offers many options. But if you’re selling hand-knitted sweaters, you may have a harder time finding funds.

One way to make this hunt easier would be to try the Canada Business App. This free mobile app from Innovation, Science and Economic Development (ISED) Canada is designed specifically to help small business owners navigate all the government help available to them and it’s constantly being updated with the latest news. 

There are also many private businesses that can help you find the right grants and even write your grant applications for you. While this will obviously cost you, it might be worth the investment. 


Alternative lenders: Going off the beaten path

The term “alternative lenders” generally refers to financial institutions that don’t offer the full range of services, like Schedule I banks, but are still able to lend money to your business. These loans can take a wide variety of forms:

  • Equipment financing: Credit backed by physical collateral owned by your business, like machinery.
  • Term loans: Short-term credit offering stable access to funding.
  • Peer-to-peer loans: Direct loans from investors to borrowers that take place in an online “loan marketplace”.
  • Business Development Bank of Canada (BDC) loans: As a Crown corporation, BDC has a number of programs, including Xpansion loans, to help small businesses access vital funds. See details below.
  • Industry Canada loans: This department of the federal government can act as a bridge to make it easier for small businesses to obtain loans from financial institutions.

Benefits and advantages: Alternative lenders often have a greater number of loan options and can extend loans for longer periods. Their loan requirements are usually less demanding, too, so you don’t have to clear as high a bar as you might with conventional banks. And they’re often faster—with the right lender (and the right application) you can potentially access the funds in days or weeks, rather than the months or even years needed by Schedule I banks.

Drawbacks and disadvantages: Greater accessibility comes with higher costs. You’ll probably be charged more fees and higher rates than you would with a conventional bank loan. Be wary of committing to making payments that you may not be able to afford in a year’s time.


Factoring: Get paid in a hurry—but at a price

“Factoring” describes when a business sells its receivables to a factoring company to do the actual collecting. In other words, if your business is expecting a major influx of income next year—but you need liquid capital next week—factoring may be the solution for you.

Benefits and advantages: Factoring can dramatically improve your company’s cash flow in a hurry while avoiding debt. It can also help build your business credit, which can be valuable if you’re a relatively new and small business.

Drawbacks and disadvantages: The main drawbacks of factoring are the costs and paperwork.

  • Let’s deal with the costs first. You sell your outstanding invoice to the factoring company for a negotiated amount on the dollar. For example, if you discount an invoice worth $100,000 to the factors at 90%, you’ll receive $81,000 right away—which is 90% of $90,000.

    The factor holds the remaining 10% as security while they collect the outstanding invoice. You’ll get that 10% when the collection process has been completed—minus the factoring fee, which can run as high as 3% of the total invoice. All this means that accessing the money you’re owed through a factor can cost you thousands of dollars, depending on the size of the invoice.

  • The paperwork can also be a major headache. The factoring company is going to want to see your:

    1. Product order (PO)
    2. Invoices
    3. Shipping slip
    4. Bill of lading (for international orders)
    5. Acknowledgement of payment

And that’s just for starters—in many industries, the list could be substantially longer. Be sure that you have all your ducks in a row before you get involved in factoring. 

Mature female small business owner worker packing parcel


We’ve got your back

Running your small business can be challenging at the best of times—and we aren’t living in the best of times. This is an unprecedented period for Canadian business and it can seem overwhelming to navigate these types of challenges.

But you’re not alone. This article is a first step to help you on your way if you’re struggling to find capital for your business. We’ve included links below for each of the topics we’ve addressed. These links lead to sources we trust that can help you build your knowledge base, so you can make informed decisions about all your options. 

There’s a lot more we can do for you, too. By signing up for a free MyEDC account, you get the expert advice and insights you need to grow your business. With a MyEDC membership, you can:

At EDC, we’re prepared to support you every step of the way as you grow your business and expand into international markets. Ready? Let’s get started.

Trusted resources

Financial forecasting 101
Learn how experts are creating financial forecasts for businesses during COVID-19.

How to forecast your cash flow during COVID-19
Get help in managing risk, maintaining your cash flow and navigating a shaky economy.

Plan your cash flow in the coming year
Learn to make financial projections to better anticipate your cash flow needs.

Plan better using financial models
Find out how modelling can help you allocate scarce resources in the face of uncertainty.

Free and low-cost funding and budget tools
Get affordable—and free—resources to help you manage your business finances.

COVID-19 financial support and resources
Find timely support to help you through the crisis using this curated list of official programs.

Canada Business App
Get simplified access to government services—federal, provincial and local—using this app specifically designed for small business owners.

Government of Canada business grants and financing
Go right to the source for your information—and remember that our Export Help team is ready to help you navigate the process.

Xpansion Loans
Access an easy loan program designed by Business Development Bank of Canada (BDC) to support Canadian growth projects.

Export Guarantee Program
Mitigate the risks of borrowing from a Schedule I bank with EDC’s support.



Date modified: 2021-06-08