How business financing works

Every kind of business financing, and who lends it

15 kinds of financing, three tiers of lender, and what each one really costs. Written for owners who have been offered something and want to know what they are looking at before they sign it. Last checked 22 SEP 2026.

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A, B and C. The difference is what they lend against.

Every lender in Canada sits in one of three tiers. It is not a judgement on them or on you: it is a description of what they can look at, what that costs them, and therefore what it costs you.

A lenders

Banks, credit unions and the Crown lenders.

The big banks, BC credit unions, BDC, Farm Credit Canada, and anything carrying a government guarantee. Regulated, deposit-funded, and by a distance the cheapest money a business can borrow.

What they want

Two to three years of accountant-prepared statements
Cash flow covering payments about 1.25 times over
Debt within a normal multiple of earnings for your industry
Security they can register and realize on
A personal guarantee from every owner of any size
A clean record: no arrears with CRA, no unexplained losses

What it costs. Prime plus roughly 0.5% to 3% on a secured facility, a little more unsecured. Fixed-rate term lending is priced off the Government of Canada bond of a matching term plus a spread.

How long. Two weeks to two months, depending on how complete the file is on day one.

What to watch. Covenants and an annual review. The money is cheap because the conditions are real: break one and the loan can be called, or repriced, at the worst possible moment.

Use it for. Anything predictable: equipment, property, an acquisition with real earnings behind it, a line against receivables you can prove.

B lenders

Asset-based and specialty finance.

Commercial finance companies, asset-based lenders, equipment lessors, factors, mortgage investment corporations and the alternative arms of some banks. Not deposit-funded, so their own money costs more, and they lend against a thing rather than against a history.

What they want

An asset they understand: receivables, inventory, equipment, property
Regular reporting on that asset, often monthly
A business that is trading, even if it is not yet profitable
Room under whatever the A lender already has registered

What it costs. Broadly 9% to 20% a year, plus set-up and monitoring fees. Factoring and asset-based lines are quoted per invoice or per month rather than as a yearly rate, which makes them look cheaper than they are.

How long. One to four weeks. Diligence is on the asset, not on three years of history.

What to watch. Fees. A facility at 12% with a 2% set-up fee, a monthly minimum and a 3% exit fee is not a 12% facility. Add every fee, divide by what you actually received, and annualize it.

Use it for. Growing faster than a bank will fund, a bad year in the statements, a turnaround, or an asset a bank will not lend against.

C lenders

Private, short-term and revenue-based.

Private lenders, online short-term lenders, merchant cash advance providers and bridge funds. They underwrite the bank statements of the last six months and very little else.

What they want

Six to twelve months of bank or card-processing history
Revenue going through an account they can see
Often a general security agreement and a personal guarantee, even on small amounts

What it costs. Effective annual cost commonly 25% to well over 60%, and sometimes into three figures. Almost never quoted that way: expect a factor rate, a flat fee, or a daily payment instead.

How long. Twenty-four hours to a week.

What to watch. The repayment tempo. A daily or weekly sweep takes the money before your suppliers do, so a facility that looks affordable on paper strangles the working cycle. And never take a second one to pay the first.

Use it for. A genuine short-term gap with a date on it that you can name and close. Nothing structural, and nothing you would still be carrying in a year.

	A lenders	B lenders	C lenders
Who	Banks, credit unions, BDC, FCC	Asset-based and specialty finance, MICs	Private, online and revenue-based
They lend against	History, cash flow and security	An asset they can value and monitor	The last six months of deposits
Typical cost	Prime + 0.5% to 3%	9% to 20%, plus fees	25% to 60%+ effective, often far more
How long	Two weeks to two months	One to four weeks	One to seven days
What they need	Statements, forecast, security, guarantees	The asset, and reporting on it monthly	Bank statements and a guarantee
The catch	Covenants and an annual review	Fees, monitoring and minimums	Repayment tempo and renewal pressure
Use it for	Anything predictable	Growth or a bad year in the statements	A short gap with a date on it

The products

Fifteen ways to finance a business.

In rough order of what they cost. Each one says what it suits, how much, what it costs, how long, what security it takes, and the thing that catches people out.

Operating line of credit

A lenders

Revolving credit for the gap between paying for work and being paid for it. You draw what you need, repay when customers pay, and interest runs only on the balance.

SuitsAny business that carries receivables or inventory.

How muchUsually capped at a borrowing base: about 75% of receivables under 90 days, plus up to 50% of inventory, less anything owed to government.

What it costsPrime plus 1% to 3%, plus a standby fee on the unused portion and a monthly account fee.

How longDemand facility, reviewed yearly. Interest only.

SecurityA general security agreement over everything, and a personal guarantee.

What to watch. A line that never comes down is really a term loan, and is cheaper as one. Lenders notice, and so should you.

Secured term loan

A lenders

A fixed amount over a fixed period, repaid in instalments, secured against what it bought.

SuitsEquipment, a building, a fit-out, an acquisition.

How muchMatched to the life of the asset: 5 to 7 years on equipment, 10 to 25 on property.

What it costsPrime plus 0.5% to 3% variable, or a fixed rate priced off the matching Government of Canada bond plus a spread.

How longAmortized over the life of the asset, often with a shorter term and a renewal at the end.

SecurityA charge over the asset, usually a general security agreement too, and personal guarantees.

What to watch. Prepayment. Fixed-rate commercial loans often carry yield maintenance, which can cost more than a year of interest if you sell or refinance early. Ask before you sign, not after.

Unsecured term loan

A lenders

A term loan with no specific asset behind it. The lender is relying on cash flow and your covenant.

SuitsSoftware, marketing, working capital, professional fees: things a lender cannot repossess.

How muchModest. Usually well under a year of profit.

What it costsPrime plus 2% to 5% at a bank, considerably more outside one.

How longTwo to five years.

SecurityA general security agreement and personal guarantees, despite the name. Unsecured means no specific asset, not no security.

What to watch. Being told it is unsecured and reading it as no risk to you. The guarantee is the security.

Government-backed loan (CSBFP)

A lenders

Your own bank or credit union lends, and the federal government guarantees part of it, so the lender can say yes where it otherwise would not.

SuitsEquipment, leasehold improvements, property, and start-ups with no history.

How muchUp to $1.15 million per borrower: up to $1M in term loans, of which no more than $500,000 for equipment and leaseholds, plus a line of credit up to $150,000. Revenue must be $10M or less.

What it costsCapped by regulation: prime plus 3% on a floating loan, with a registration fee on top.

How longMatched to the asset, up to 10 or 15 years.

SecurityA charge over what was bought. Personal guarantees are limited by the program.

What to watch. Almost nobody asks for it, and most branch staff will not raise it. Ask for it by name.

Cash flow lending

B lenders

A loan sized on what the business earns rather than on what it owns, usually a multiple of EBITDA.

SuitsProfitable businesses with few hard assets: services, software, distribution. Acquisitions where the target's earnings, not its equipment, are what is being bought.

How muchTypically 2 to 3.5 times EBITDA in total debt, occasionally more with a strong story.

What it costsPrime plus 3% to 8% at the senior end; mezzanine sits above that.

How longThree to seven years, sometimes with interest-only at the start.

SecurityA general security agreement, financial covenants, and often a seat at the table on big decisions.

What to watch. Covenants are tighter than on an asset loan, because the asset is your earnings. A single soft quarter can trip one.

Mezzanine and subordinated debt

B lenders

A layer between the bank's loan and your own money. It ranks behind the bank, which is why it costs more.

SuitsAcquisitions, buying out a partner, succession, and growth that outruns the security available.

How muchSized on cash flow, commonly filling the gap between what a bank will lend and the price.

What it costsRoughly 12% to 20% all-in, sometimes with a fee at the end or a small share of the equity attached.

How longFour to seven years, often interest-only with the principal at the end.

SecuritySecond-ranking security, a shareholders' agreement, reporting, and sometimes a board seat.

What to watch. The equity kicker. A small percentage of a business you grow can cost far more than the interest did.

Equipment financing and leasing

B lenders

The machine, truck or system pays for itself over its working life. Either you borrow and own it, or you lease and the lessor owns it.

SuitsAnything with a serial number and a resale market.

How muchUp to the invoice, sometimes more to cover freight and installation.

What it costsRoughly 7% to 15% depending on the asset and your credit; sharper on a manufacturer's own programme.

How longTwo to seven years, matched to the asset.

SecurityThe equipment itself, usually with a personal guarantee on smaller deals.

What to watch. Open versus closed, and what happens at the end. An open lease can be paid out early without penalty; a closed one cannot, and breaking it can cost every remaining payment. A $1 buyout means you own it; a fair market value buyout means you may pay a large sum at the end or hand it back. Ask which one you are signing.

Receivables line of credit (asset-based lending)

B lenders

A revolving line that rises and falls with your receivables, like a bank operating line but from a lender that will take more risk and look harder at the collateral.

SuitsBusinesses growing faster than a bank will fund, or with a year in the statements a bank does not like.

How muchUsually 80% to 85% of eligible receivables, sometimes with inventory on top.

What it costsPrime plus 3% to 9%, plus a monthly monitoring fee and often a minimum.

How longRevolving, reviewed yearly, with monthly or even weekly reporting on the receivables.

SecurityFirst charge over receivables and inventory, and usually everything else.

What to watch. The reporting burden is real: aged lists, reconciliations, sometimes field exams you pay for. Budget the time.

Invoice factoring

B lenders

You sell an invoice rather than borrow against it. The factor advances most of the face value now and pays the rest, less their fee, when your customer pays.

SuitsBusinesses whose customers pay slowly but reliably: staffing, trucking, subcontracting, wholesale.

How muchAdvance of 70% to 90% of the invoice, with the rest held in reserve until the customer pays.

What it costsCommonly 1% to 5% of face value per 30 days the invoice is outstanding, plus wire and set-up fees. On 60-day terms that is an effective annual cost in the twenties or higher.

How longInvoice by invoice, or a whole-book facility with a minimum volume.

SecurityThe receivables are sold, not pledged. The factor may register security over them anyway.

What to watch. Recourse versus non-recourse. With recourse, you buy the invoice back if the customer does not pay, so the credit risk is still yours. And your customers usually find out, because they are told to pay the factor.

Purchase order and inventory finance

B lenders

Money to buy or make the goods for an order you already hold, repaid when the customer pays.

SuitsImporters, manufacturers and distributors with a confirmed order larger than their cash.

How muchUp to the cost of the goods, sometimes paid straight to your supplier.

What it costsAround 2% to 4% per month on the funds outstanding, so priced like factoring rather than like a loan.

How longThe length of the order cycle: 30 to 120 days.

SecurityThe goods, the purchase order and the resulting receivable. Usually paired with a factoring facility.

What to watch. It only works if the margin on the order carries the cost. On thin margins the financing can eat the profit.

Merchant cash advance and revenue-based funding

C lenders

Cash today in exchange for a fixed larger amount collected from future sales, usually swept daily or weekly.

SuitsRetail, restaurants and services with steady card sales and thin assets. A short, named gap.

How muchCommonly $5,000 to $500,000, sized on monthly deposits.

What it costsQuoted as a factor rate, typically 1.10 to 1.50 of the advance, repaid over 3 to 12 months. A factor of 1.30 over 6 months is an effective annual cost of roughly 80% to 100%, not 30%.

How longThree to twelve months.

SecurityA general security agreement and a personal guarantee, even on small amounts.

What to watch. Three things. The factor rate is not an interest rate. Daily repayment takes the money before your suppliers do. And stacking, taking a second advance to service the first, is the most common way a solvent business becomes an insolvent one.

Short-term online loans

C lenders

A fixed-term loan decided on bank data in a day or two, repaid daily or weekly.

SuitsA gap you can name and close inside a year.

How much$5,000 to $500,000.

What it costsThe best of them quote a real annual rate from around 8% to 15%; the rest price between 25% and 60% and up, often as a flat fee that hides it.

How longThree to eighteen months.

SecurityA general security agreement and a personal guarantee.

What to watch. A flat fee on the full amount for a loan you repay steadily means you are paying for money you no longer have. Work out the effective annual cost before you compare anything.

Commercial mortgage

B lenders

A loan secured against commercial property, underwritten on the building and its leases first and on you second.

SuitsBuying, building or refinancing premises, or releasing equity from property you already own.

How much60% to 75% of value on most commercial property; up to 85% on multi-unit residential with CMHC insurance.

What it costsA lenders roughly 1% to 2.5% over a matching Government of Canada bond; B lenders 8% to 12%; private lenders 10% to 15% plus one to two points in fees.

How longFive-year terms are common, amortized over 15 to 25 years.

SecurityA charge over the property, an assignment of rents, and usually a guarantee.

What to watch. Debt service coverage on the property is tested at 1.20x to 1.25x, and an appraisal, environmental report and building condition report are usually at your cost before anyone commits.

Private and bridge lending

C lenders

Short-term money from a private lender or mortgage investment corporation, usually against property, to get from here to a defined exit.

SuitsA purchase that cannot wait for a bank, a refinancing in progress, a project part-built.

How muchSized on the security, not on the business.

What it costs10% to 15% and up, plus a lender fee and a broker fee of one to three points each, and often interest prepaid.

How longSix to twenty-four months, interest only.

SecurityA registered charge, personal guarantees, and sometimes control of the exit.

What to watch. Have the exit in writing before you take it. Bridge money without a proven way out becomes the permanent financing, at bridge pricing.

Vendor take-back

B lenders

The seller of a business lends you part of the price and you repay them over a few years.

SuitsBuying a business, especially where the bank will not fund the whole price.

How muchCommonly 10% to 30% of the purchase price.

What it costsTypically 4% to 8%, well below anything else in the deal, because the seller wants the sale.

How longThree to seven years, sometimes with a payment holiday at the start.

SecurityRanks behind the bank, usually with a postponement agreement the bank requires.

What to watch. It is also a signal: a seller who will not carry any of the price is telling you something about the business.

Before you sign

Ten things that catch people out.

None of these are unusual. All of them are avoidable by asking one question before signing.

Comparing a factor rate to an interest rateA factor of 1.25 is not 25% a year. If it is collected over six months the effective annual cost is roughly double that, because you are paying the full amount on money you have already largely repaid. Convert everything to an effective annual cost before you compare two offers.
Counting the fees as separate from the rateA set-up fee, a monitoring fee, a monthly minimum, a renewal fee and an exit fee all belong in the cost. Add every dollar you will pay, divide by what actually landed in your account, and annualize it over the real term.
StackingTaking a second advance to service the first is the fastest route from a cash problem to an insolvency. If the first one cannot be serviced, the answer is a conversation with the lender, not another lender.
Ignoring the repayment tempoA daily or weekly sweep takes your money before your suppliers and your payroll do. A facility that is affordable monthly can be impossible daily, and no covenant will warn you.
Signing a general security agreement without reading what it blocksA GSA registered by a small lender over everything you own can stop a bank from lending you ten times as much next year. Check what is already registered against your business before you sign another one.
Not knowing what your personal guarantee coversMost guarantees are unlimited, cover every facility with that lender, survive the sale of the business, and continue until formally released. Ask for a limit, in dollars, and ask what releases it.
Prepayment penaltiesFixed-rate commercial loans often carry yield maintenance, and closed leases can require every remaining payment. Ask what it costs to exit early before you sign, because the answer changes which offer is cheapest.
Breaking a covenant without noticingMost defaults are technical, not missed payments: a coverage ratio, a reporting deadline, an unapproved capital purchase. Read the covenants, diarize them, and tell the lender before they find out.
Applying everywhere at onceMultiple applications leave multiple credit enquiries and, in a small market, a reputation. Prepare one file, take it to two or three lenders you have chosen deliberately, and compare what comes back.
Letting the cheapest rate decideThe cheapest facility with the wrong structure fails you in the month you need it. Amount, term, flexibility and what happens in a bad quarter usually matter more than fifty basis points.

Our free Business Planner converts two offers into the same yearly cost, fees included, and tells you which is actually cheaper and by how much.

Indicative, not an offer.

Pricing here is indicative and moves constantly. Variable facilities are quoted against prime, which is shown live on our home page. Nothing on this page is an offer of credit or a recommendation, and what any one business is offered depends on that business.

Who actually lends these in British Columbia is on our lenders page: the banks, the credit unions, BDC and the rest, with what each one suits.

Been offered something and want a second pair of eyes before you sign? Send it to us. We will tell you what it really costs, whether or not you use us.