How much can my business borrow? How lenders size a loan in Canada

The most common question owners ask is "how much can I get?" The honest answer: it depends on the type of financing, because each one is sized differently. Here's how lenders actually arrive at the number.

Cash-flow loans: sized from your deposits

For most term loans and credit lines from alternative lenders, the starting point is your business bank statements. Lenders work out your average monthly deposits, strip out transfers and one-time items, and add up the loan payments you already make. Then they ask how much of a new payment the business can carry on top without strain. A business with strong, steady deposits and few existing payments can support more than one with the same revenue and several daily debits. Here's how lenders read your bank statements in detail.

Bank loans: sized from your financial statements

Banks lean on your year-end financial statements. They compare your cash flow, typically earnings before interest, taxes, depreciation and amortization, to all of your debt payments, including the new one. That ratio, often called debt service coverage, has to clear the bank's minimum. That's why a strong current year can still get a no from a bank if last year-end was weak.

Equipment financing: sized from the equipment

With equipment financing, the amount is anchored to the price and value of what you're buying, less any down payment. Your cash flow still has to support the payment, but the equipment does much of the work as security.

Asset-based lines: sized from receivables and inventory

Asset-based lenders advance a percentage of your eligible receivables and inventory. Receivables from creditworthy customers usually get a higher advance rate than inventory, and the limit moves as those balances change. It's a common fit for growing manufacturers and distributors.

Government-backed loans: capped by program rules

The Canada Small Business Financing Program has its own limits by loan type, and the bank still underwrites within them.

What shrinks the number

• Existing daily or weekly debits from cash advances.
• NSFs, overdrafts and days below zero.
• A falling deposit trend in the last two or three months.
• CRA balances owing. Here's why lenders care so much.

What grows it

• Running all revenue through one operating account.
• Interim financial statements that show a strong current year.
• Collateral such as equipment or receivables.
• A longer term, which lowers the payment for the same amount.

Ask for what the project needs

Borrowing the maximum a lender will approve isn't the goal. Size the request to the project, with a cushion for overruns, and match the term to how long the benefit lasts. Your advisor can show you how different lenders would size your request, so you can choose the structure that fits rather than the biggest number.