The essential sources of debt funding for SMEs in Canada

SMEs are the Canadian economy’s driving force, representing approximately 50% of employment and a little over 50% of the country’s GDP. The market for SME loans has been shifting in recent years, from new forms of debt finance like SR&ED loans to more established forms of alternative finance like debt crowdfunding. Overall, the options for Small and Medium Enterprises have become broader and more accessible – it has never been simpler to apply for a wider variety of debt facilities.

In this article, I want to give you an overview of what you need to know to access debt finance as an SME.

First, a little intro into the fundamentals:

What does SME mean?

SME is simply an acronym for Small and Medium Enterprises.

This is an important categorization, as it stands in contrast to Large Enterprises who are often subject to different regulations. In the area of finance, Large Companies usually also have access to different options than do SMEs, due to their sheer size and other considerations, like cash flow, collateral, and potential equity funding options. Large companies are often publicly traded as well, and this sets them further apart from Small and Medium Enterprises. SMEs are defined according to Innovation, Science and Economic Development Canada (ISED), as companies with:

  • no more than 5 employees – Micro Enterprise
  • no more than 100 employees – Small Enterprise
  • no more than 500 employees – Medium Enterprise

However, for the purpose of other measures and statistics, this definition isn’t always the one used, which makes comparisons between data sources sometimes hard. One thing that is clear is that SMEs account for the vast majority of Canadian companies. 

What types of SME loans are available?


The rise of alternative finance

Since the financial crisis, Canada’s government has avoided another too-big-to-fail scenario and has empowered new contenders to enter the finance sphere. Since then, we’ve seen a marked increase in the types and availability of alternative finance for the SME sector. SME business loans are now available from the classical banks, new internet-powered financiers, and various new, alternative finance providers that do not have or need a banking license.


Debt crowdfunding

While most people think about reaching out to a bank for a loan, one of the biggest growth sectors for SME lenders in Canada is happening totally outside of traditional banks’ scope. The P2P lending space, or debt crowdfunding as it is often called, has have sprung up to cover the whole lending market, both in secured and unsecured loans for everything from one-person outfits to large corporations. The new P2P lenders claim to have the advantage of new technologies and various data sources that can help them understand their customers better and offer both a speed and cost advantage to the lumbering old banking institutions.

Peer-to-Peer business funding is in some ways similar to equity crowdfunding. However, in many ways, it is more like a typical loan. The finance source is usually more distributed, and investors can earn a profit by lending to a wide variety of businesses with different profiles.

SR&ED finance

SR&ED finance or an SR&ED tax credit loan is a new type of credit that companies registered in Canada that are also eligible for the SR&ED tax credt scheme can credit scheme can access. This means that qualifying companies can get access to their expected SRED refund early, in the form of a loan secured against the repayment.

This type of finance is usually suited for companies that invest a significant amount into R&D – in salaries, contractors, or consumables used to conduct Research and Development. Many companies are still unaware if they qualify for SR&ED tax credits. If you’re curious if you could be qualifying and not know about it, our team is happy to advise and point you in the right direction.

The SR&ED loan is different from a typical SME business loan because it is accessible for companies that have yet to turn a profit and may have no tangible assets like equipment, receivables to factor, or land to use as collateral. Because the company has a significant investment in Research and Development and expects a repayment from the CRA, this acts as the asset and ensures the lender that the money will be repaid through the tax rebate.

Our best source on navigating the waters of SR&ED finance is our Complete Guide to SR&ED Loans. It’s the complete source on SR&ED loans, I would know, I wrote it!

And if you think you could be eligible or are just interested in how it works, let us know. Our team is here to see if SR&ED finance may be a good fit.

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Invoice discounting

For companies with seasonalities or a longer business cycle, invoice discounting can be very useful for a simple cash advance, boost cash flow for investment, and fund further production. A staple of manufacturing and wholesale businesses, invoice discounting is a type of business loan raised against an invoice that the company has sent out but has yet to cash in. The lender offers the funds at a “discount”, so their expected return is the discount percentage. If you have a very small business or a startup, invoice finance may not be on the table until you are revenue-generating.

Though invoice finance is an ancient business model, newer, web-based entrants in the market have brought speed, ease of access through better technology, and much more user-friendliness to the business of invoice discounting.

The classic: bank loans

For a lot of early-stage companies, a typical bank SME loan is hard to access. The main constraint, as always, is the lack of collateral and the lack of revenue. But once your business has taken off a little, it is much easier to access these types of business finance, as the banks understand that the business model works, and has survived the highly risky “experimental phase”.

A lot of founders end up using personal credit cards to finance their startups at the beginning of their entrepreneurial journey, or taking out a loan against their own assets. This is a very risky area, so it’s best to weigh your options before taking the plunge. 

The wrap up

SME loans are one of the most vibrant sectors of Canadian business finance and this increasing variety and availability is only good news for small businesses. Accessing essential cash flow in the form of a loan is now possible from the earliest days of the business’ journey, through innovative facilities like SR&ED finance or debt crowdfunding. If we’ve missed something important, please drop a note in the comments. We’re always looking to enrich our articles with useful information. If you’re interested in exploring the variety of available loans for your company, our team is happy to chat and point you in the right direction.

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Alex Kepka

Alex is a tech-focused funding expert, helping innovative companies grow through innovative funding through her work at Fundsquire. She also has a background in journalism, having written for outlets like Vice and many others in the past on topics ranging from philosophy to economics.