Term loans
A term loan is the simplest instrument in commercial credit and the one lenders underwrite most carefully, because the repayment has to come out of future cash flow rather than out of an asset they can readily sell.
- Typical size
- $100,000 to $5,000,000 and above
- Typical time
- Four to eight weeks, longer where property or a government guarantee is involved.
- Security
- General security agreement
When it fits.
- Buying a building out, a fit out, or a production line.
- Refinancing several expensive facilities into one schedule.
- A single capital investment with a measurable payback.
- Funding an acquisition alongside seller paper and buyer equity.
When it does not.
- Covering a recurring monthly shortfall. Term debt makes that worse, not better.
- A purchase you might reverse. The prepayment penalty on fixed rate term debt is real money.
- A business under two years old with no asset to charge and no guarantor with net worth.
The detail, if you want it.
Open only what applies to you. Nothing here is required reading before a first call.
How it actually works
Conventional term debt from a bank or credit union runs one to ten years, fixed or floating, priced off prime or a fixed cost of funds. Approval turns on debt service coverage. Most Canadian lenders want to see one and a quarter times coverage after the new payment, calculated on trailing earnings rather than on a projection.
The Canada Small Business Financing Program is a separate route, delivered by the same banks. It carries an eighty five percent government guarantee, which reduces the collateral the lender needs to see. The total borrower cap is $1.15 million. Inside that, equipment and leasehold improvements can go to $500,000, intangible assets and working capital are capped at $150,000, and a separate line of credit adds up to $150,000. Rates are capped at prime plus three percent on a term loan and prime plus five percent on the line. There is a two percent registration fee, which can be financed.
That structure matters when you read the headline numbers. The CSBFP $500,000 figure is for equipment and leasehold improvements, not for spendable cash. If the requirement is cash in the account, the programme contributes at most about $300,000 of it, and it takes weeks.
What a lender will ask for8
- Two to three years of financial statements
- Current year to date interim statements
- Two years of personal and corporate tax returns
- A use of proceeds statement, line by line
- Personal net worth statement and photo identification
- Articles of incorporation and the corporate profile report
- Existing debt schedule, including lease obligations
- Appraisals, quotes or equipment listings supporting the security
And what they will ask you4
- What is debt service coverage after this loan, on trailing numbers?
- What exactly does the money buy, and what does that asset earn?
- Where does the repayment come from if next year is flat?
- What is already registered against these assets, and in what order?
Questions we get about this one3
- What is the real difference between CSBFP and a conventional term loan?
- The government guarantee. It lets a lender advance against an asset they would otherwise discount heavily, so it helps a business with thin collateral. It brings caps, a registration fee, restrictions on what the money can buy, and a slower file.
- What credit profile do I need?
- There is no single number, and no lender publishes one. In practice most Canadian lenders look for a personal score above roughly 650 on the guarantor, no unresolved CRA arrears and no recent consumer proposal. That is observed market practice rather than a published rule, and below it the deal moves toward asset backed or private structures.
- Can I use a term loan for working capital?
- Sometimes, in a limited amount, and it is usually the wrong tool. Term debt has a fixed payment; working capital needs a facility that flexes with the cycle.
Read about this2
- The Canada Small Business Financing Program, explained properly
What is the Canada Small Business Financing Program and what can it actually pay for? - The document checklist for a Canadian commercial loan
What documents do I need for a business loan in Canada?
- Equipment and vehicle financingFinance sized against the asset itself, for machinery, fleet and production systems, including sale and leaseback on equipment you already own.Driven by asset value, commonly $25,000 to $5,000,000
- Acquisition and buyout financingCapital stacks for buying a business, a franchise, or a partner out, built from bank debt, seller paper and buyer equity.Deal dependent, commonly $250,000 to $10,000,000
- Refinancing and debt restructuringConsolidating expensive or badly structured facilities into a schedule the business can actually carry.Matched to the existing debt, commonly $100,000 to $5,000,000
Is term loans the right instrument for your deal?
Tell us the amount and the timing, and we will say which instrument we would reach for.
No lender hears your name until you say so.
A request emailed to twenty lenders leaves twenty records. The next one to see it reads the declines before they read the deal, and a file that looks shopped is priced as one. So the list is built with you, approved by you in writing, and nothing leaves this office before that.
- Call
- 416-841-8468
- Hours
- Weekdays, Toronto time