Starting a Business in Canada

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No nonsense information on small business.

Jul 4, 2011 - 4 minute read - banking

Choosing A Bank or Credit Union For Your Small Business

You might think that banks and credit unions are all the same but there are some subtle distinctions between them that should have an impact on your choice of financial institution. The first choice is between Canada’s big five banks (RBC, CIBC, BMO, Scotiabank, and TD) or a credit union.

Canadian Banks

The big banks have a number of advantages:

  • A wide variety of products and services. Whatever you want to do, they likely already have a customer using the same financial product.

  • A Global reach. Many of the banks have extensive U.S. operations which could be an advantage if you are exporting or if you have U.S. locations. The banks also have a presence in other countries around the world but this varies from bank to bank.

  • A large amount of capital. Your business would have to grow quite large before a bank would start to syndicate your loans to other financial institutions to hedge their risk. For most small business owners, they can serve as a one stop shop for financing.

There are other banks in Canada that make a legitimate choice. HSBC is a large global bank with considerable Canadian operations. They can make dealing in other countries easier. Smaller banks like National Bank, Laurention Bank, and the well run Canadian Western Bank can be the right fit for many businesses. Alberta Treasury Branches is a provincial crown corporation that does a considerable amount of commercial lending. Although they are publicly owned, they are far more like a bank than a credit union in my experience. The Business Development Bank is a federal crown corporation that fills a niche in that they are willing to take slightly more risk that most banks. They partner with organizations like the Canadian Youth Business Foundation (CYBF) to provide loans to young entrepreneurs. The different banks have different risk tolerances for different types of lending. For example, some banks do not like to deal with real estate developers, while others actively solicit this business. Different banks will also have varying levels of support for the Canada Small Business Financing Program (CSBFP). Some banks welcome these government guaranteed loans, while others feel the extra administration is not worth the hassle.

Credit Unions

Credit unions can be a good choice as a service provider for your small business’s financial needs. In general, credit unions have the following advantages:

  • A local focus. Because lending decisions are often made in the same community as the business is located in, they often understand the market better and this can work in your favour.

  • Better customer service. This varies from location to location but I think in general, credit unions provide better customer service. Banks can provide excellent service as well, like that I get at my own branch, but I think staff turnover is generally higher and the focus is more on the bottom line. This may change as credit unions merge and grow larger.

  • Membership has its benefits. Credit unions are owned by their members and the well run ones pay a dividend back to their members every year. This doesn’t amount to big money but its nice to get something back.

I encourage anyone who is looking for a financial institution for their small business to shop around. Consider what I have discussed above but also ask other business owners where they have their dealings and how happy they are. If you have a restaurant, talk to other restaurant owners. There can be regional differences in how the banks approach the risk they see in certain industries. Talk to people in your community. As a closing note, if there are lenders reading this blog, please feel free to comment below or email us with your comments on this post. We’ll respect your anonymity. Your voices would certainly be a valuable addition to this discussion.