9 financing options for
small and medium businesses

A business may need capital to stock inventory, wait for a customer to pay, buy a machine, open a location, or take on a new export contract. Those needs are different. The right financing structure depends on what the money pays for, when the business will earn it back, and what it can reasonably offer a lender. This guide compares nine practical options for small and medium businesses and shows how to choose a short list.

These nine options are an editorial guide, not a ranking by popularity or promised cost. They include products, a federal program, and a risk-sharing structure because owners encounter all three when they search for financing. Some overlap: a CSBFP facility can be a term loan or a line of credit, and an operating line can be underwritten against receivables and inventory.

Nine SMB financing options at a glance

1. Operating line of credit

A business line of credit lets a company draw up to an approved limit, repay from collections, and borrow again without applying for each draw. It often helps a distributor buy stock before it sells that stock, or a contractor cover costs while a customer has 30 to 90 days to pay. Interest generally applies to the amount drawn, subject to the lender's agreement. BDC describes operating lines as flexible, short-term facilities, often linked to receivables and inventory.¹

The danger is using a revolving line to pay for a machine or a property improvement that will not generate cash for years. The draw stays outstanding, leaving less room for payroll and inventory. Some lines are reviewed annually, and an asset-based margin calculation can change availability as eligible receivables or inventory change. Match the draw to the operating cycle and keep a plan to bring the balance back down.²

2. Business term loan or working capital loan

A term loan advances a specified amount for a project and repays it on a schedule. The business knows how much capital is available and can plan payments against the expected benefit. A working capital or cash-flow term loan may support hiring, a new sales channel, a software implementation, or an acquisition component that cannot be financed against a tangible asset. Its security package varies by lender and borrower.²

Suppose a service firm needs $250,000 to hire and train a team before a new contract reaches full revenue. A term loan may be more coherent than permanently drawing its operating line. Show a month-by-month forecast that includes the ramp-up, and ask whether payment timing can reflect that ramp. Some fixed-rate structures create predictable payments but may include prepayment restrictions. Ask for the full term sheet, not only the rate.

3. Canada Small Business Financing Program (CSBFP)

The CSBFP is a program, not a direct government cheque to the business. Eligible financial institutions make the loans and decide whether to approve them; the federal program shares risk with lenders. The current borrower FAQ says most small businesses with gross annual revenue of $10 million or less may be eligible. It lists a combined maximum of $1.15 million, consisting of up to $1 million in term loans and up to $150,000 in lines of credit, subject to program rules and eligible cost categories.³

For eligibility, limits, fees and how the lender approval decision works, see our CSBFP loan guide.

Eligible term-loan purposes include commercial-use real property, equipment, leasehold improvements, certain intangible assets, and working capital costs. A CSBFP line of credit is for working capital. The program has a 2% registration fee, and interest is subject to program ceilings. Those ceilings are maximums, not the rate every borrower receives. The exact eligibility, security, and documentation requirements matter; for example, the program does not generally finance buying shares of an existing company.³

4. Equipment loan or lease

Equipment financing is designed around a specific asset: a manufacturing line, commercial vehicle, restaurant equipment, or technology hardware. With an equipment loan, the company generally buys the asset and the lender takes security in it. A lease may have a different ownership, tax, end-of-term, and residual-value arrangement. BDC notes that the repayment period commonly follows the asset's useful life and that larger transactions can require a down payment.⁴

The useful question is how much cash the equipment can generate or save during the repayment period. A pizza oven may increase capacity immediately; a specialized machine may need installation, training, and a sales ramp. Include these costs in the request. Compare an equipment loan, a lease, and a line from the vendor on total payments, maintenance obligations, buyout amount, ownership at the end, and what happens if you want to upgrade early.

5. Commercial mortgage or real-estate loan

A commercial mortgage helps buy or improve land or a building used by the business, with the property serving as collateral. It can align a long-lived asset with longer repayment. Owning premises may add control over operations and potential equity, but the business must plan for a down payment, appraisal, legal and closing costs, property upkeep, and a loan that can be less flexible than rent. BDC says commercial mortgages typically differ from residential mortgages in loan-to-value, amortization, and risk.⁵

Separate the decision to own the property from the decision to finance the operating company. An owner may have equity in an existing building, but refinancing it to fund a new project is a different transaction from the original purchase. Compare total occupancy cost, the opportunity cost of the down payment, and any security across related companies.

6. Invoice financing or factoring

If a business has delivered goods or services and issued invoices, it may be able to receive cash before customers pay. Under factoring, receivables are sold to a third party for an advance and a fee. Other invoice finance arrangements may instead be loans secured by receivables. These structures should not be treated as identical: customer notification, collections, recourse for nonpayment, and accounting treatment can differ. BDC defines factoring as selling receivables and notes that the factor may collect from customers directly.⁶

A manufacturer that pays suppliers now but collects from a strong customer in 60 days may use this structure to start the next order. The financing decision depends on invoice quality and customer payment behaviour, not just annual revenue. Review the advance percentage, reserve, discount or fee, minimum volume, disputes, concentration limits, and whether the business remains liable if the customer fails to pay.

7. Asset-based lending (ABL)

Asset-based lending places greater weight on the realizable value of collateral, which may include receivables, inventory, equipment, or property. A facility may use a borrowing base so the amount available moves with eligible assets. This can help a growing business whose assets expand faster than its historical cash-flow metrics, but lenders still review the whole risk and repayment story. BDC describes ABL as financing granted primarily against the assets offered as security.⁷

ABL can overlap with an operating line, but it often requires more detailed reporting and controls. The lender may exclude old invoices, slow-moving inventory, or a large customer concentration. Ask how frequently the base is recalculated, whether appraisals or field reviews are required, and what happens when sales decline. More nominal collateral does not always mean more available cash.

8. Export financing support and trade-related guarantees

Exporting may create a longer gap between spending on production and receiving payment, along with country, buyer, and currency exposure. Export Development Canada (EDC) has working-capital guarantee solutions that share some of a financial institution's risk. Depending on the solution and eligibility, this can support an operating line, another loan, or a release of collateral tied to certain trade obligations. The guarantee is support for the lender, not an automatic grant or an approval by EDC of every business request.⁸

A producer with a large international order might combine a bank operating facility with an EDC guarantee or trade credit insurance, if suitable. Prepare the order, buyer details, delivery milestones, currency exposure, gross margin, and timing of costs and receipts. Ask the bank and EDC which solution applies to your trade activity and what fees, coverage limits, and conditions follow.

9. Business credit card

A dedicated business credit card can simplify recurring purchases and employee expenses while creating a short payment window. It is easy to confuse this convenience with long-term financing. If the business carries a balance month after month, the interest and fees can make the purchase expensive. BDC cautions that card balances carried forward generally face high annual interest charges and recommends matching a longer-lived project to a loan with a suitable repayment term.⁹

Use the card only when there is a realistic plan to pay the statement in full on time. Compare the purchase APR, cash advance terms, annual fees, employee controls, and whether an owner is personally liable. If a card balance has become a permanent source of working capital, that is a signal to examine a line, a term loan, or the underlying cash cycle.

How do you choose the right financing option?

Start with the cash-flow event that will repay the money. A good financing structure follows the business cycle, rather than forcing the company to repay before the investment produces cash. Use this quick decision path to form a short list, then compare actual offers.

If the capital is for buying an existing company rather than funding day-to-day operations, compare structures in our business acquisition financing guide.

Often the answer is a combination. A manufacturer may finance a new machine with an equipment loan, use a line to buy raw materials, and fund growth in receivables as sales rise. The pieces should work together without pledging the same assets to incompatible lenders or putting too much repayment pressure on the business.

There are other routes beyond these nine: owner equity, outside investment, vendor financing, grants for specific eligible activities, community or microfinance programs, and merchant cash advances. Equity changes ownership and control; grants have narrow conditions and should not be assumed available; merchant advances require careful conversion of fees and daily deductions into a comparable financing cost. Include them when relevant, but assess each against the same cash-flow and total-cost questions.

What should you prepare before approaching lenders?

1. Use of funds: how much, why, when it is needed, and what outcomes the money will create.
2. Financial picture: recent statements, current management figures, tax information where requested, and an explanation of large changes.
3. Repayment forecast: monthly cash flows, seasonality, customer collection timing, and a downside case.
4. Existing debt and security: lender, outstanding balance, payment, maturity, covenants, guarantees, and collateral already pledged.
5. Proof of the project: quotes, invoices, purchase agreement, customer contract, property details, or eligible program costs.
6. Ownership and consent: company structure, people authorized to borrow, and permission to share information with lenders.

Then ask each lender for a comparable written offer: amount available, rate basis, all fees, amortization, security, guarantees, covenants, prepayment and release conditions, and time to funding. A lower advertised interest rate can be outweighed by fees or by a repayment schedule that strains the business. A larger limit is not useful if it is unavailable when receivables age or inventory changes.

A clearer path to capital

Choose financing that fits the business you are building.

ALOS helps business owners organize their information, identify relevant financing routes, and prepare a stronger application for suitable lenders. Bring us your goal, your financials, and your current debt picture. We will help structure the conversation.

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