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16 Sep

How Business Financing Works in Canada: A Beginner’s Guide

Mortgage Tips

Posted by: Gavin Toor

If you’re planning to buy a business, expand operations, or improve cash flow, understanding how business financing in Canada works is essential. Unlike residential mortgages, business loans are customized to the company’s financials, industry, and growth plans.

In this guide, we’ll cover the basics of how business financing works, the types of loans available, and what lenders look for when approving funding.

🔹 What Is Business Financing?

Business financing refers to borrowing or raising capital to fund operations, acquisitions, or expansion. Financing can be debt (loans you repay) or equity (investors who take ownership).

👉 The right structure depends on your business goals, industry, and stage of growth.

🔹 Types of Business Financing in Canada

1. Term Loans

  • Work like a mortgage: a lump sum borrowed, repaid in installments with interest.

  • Common for equipment, acquisitions, or property purchases.

  • Learn more: BDC Business Loans.

2. Business Lines of Credit

  • Flexible borrowing for short-term needs such as payroll, inventory, or receivables.

  • Interest only on the portion used.

  • Great for managing cash flow financing.

3. Government-Backed Programs

  • Canada Small Business Financing Program (CSBFP) helps finance:

    • Real estate purchases

    • Equipment

    • Leasehold improvements

  • ⚠️ Does not cover goodwill or shares.

  • Resource: Government of Canada – CSBFP.

4. BDC (Business Development Bank of Canada)

  • Specializes in business acquisition financing and growth loans.

  • Can finance goodwill and intangibles that banks won’t touch.

  • Higher rates, but more flexible than traditional lenders.

5. Vendor Take-Back (VTB) Financing

  • In acquisitions, the seller finances part of the price.

  • Reduces upfront cash requirements and complements bank or BDC financing.

6. Private Lenders & Investors

  • Short-term, higher-cost funding (often 10%+).

  • Useful as a bridge until long-term financing is secured.

🔹 How Lenders Evaluate Business Loan Applications

When you apply for business financing in Canada, lenders focus on five key factors:

  1. Cash Flow – Measured by EBITDA (earnings before interest, taxes, depreciation, and amortization) or NIAT (net income after tax).

  2. Collateral – Equipment, property, or personal assets.

  3. Industry Risk – Certain industries (e.g., restaurants, trucking) are harder to finance than stable ones (healthcare, professional services).

  4. Management Experience – Your track record in running or scaling businesses.

  5. Equity Injection – Most lenders require 25–50% down on acquisitions.

🔹 Key Ratios Lenders Use

  • Debt Service Coverage Ratio (DSCR): Cash flow ÷ debt payments. Lenders usually want 1.25x or higher.

  • Leverage Ratios: Debt compared to EBITDA or equity.

  • Liquidity Ratios: Ability to meet short-term obligations (e.g., current ratio).

🔹 Final Thoughts

Business financing in Canada is about more than just interest rates. The right structure balances affordability, flexibility, and long-term growth potential.

✅ Remember:

  • Banks provide lower-cost financing but are conservative.

  • BDC and government programs offer flexibility.

  • Vendor take-back financing can bridge gaps.

Whether you’re looking to buy a business in Canada, expand an existing one, or improve cash flow, the right financing plan can help you grow with confidence.

📚 Helpful Resources

🚀 Ready to Explore Business Financing Options?

Every business is unique — and so are its financing needs. As a mortgage broker with accounting expertise, I help entrepreneurs structure deals that balance cash flow, tax efficiency, and lender requirements.

📞 Call me directly at 604-835-4999
📧 Email me at gavintoormortgages@gmail.com
🌐 Visit gavintoormortgages.com

Let’s discuss how to structure financing that supports your business goals — whether you’re buying, expanding, or restructuring.