Worked Examples and Checklists
How to compare two business loan offers in Canada: a term sheet side by side
A worked comparison of two Canadian business loan offers with different rates, fees, prepayment terms and guarantees, showing total cost over the full term and if repaid early.
To compare two business loan offers, put them on the same basis: the same amount and end date, every fee included, and the cost calculated both over the full term and over the period you realistically expect to keep the loan. Then weigh what the numbers do not show: fixed versus floating rate risk, prepayment flexibility, covenants, and how much of your personal wealth the guarantee puts at risk. Two offers that differ by half a point on the rate can end up within a few hundred dollars of each other, at which point the terms should decide.
This guide is part of the business loan application checklist. Figures are illustrative.
The two offers
A Winnipeg food distributor needs $200,000 over 7 years to buy refrigerated trucks and racking.
| Term | Offer A | Offer B |
|---|---|---|
| Rate | 7.95% fixed for the full term | Prime + 2%, 7.45% today, floating |
| Amortization | 7 years, blended | 7 years, blended |
| Fees | 1% commitment fee ($2,000) | 2.5% fee ($5,000) + lender's legal $1,500 |
| Prepayment | Three months' interest on the amount prepaid | Open, no penalty |
| Personal guarantee | Unlimited, continuing, both owners jointly | Limited to 50% of the loan, this loan only |
| Financial covenant | DSCR at least 1.25, tested annually | DSCR at least 1.20, tested annually |
| Demand feature | None on the term loan | None on the term loan |
Step 1: monthly payment
- Offer A: $200,000 at 7.95% over 84 months = about $3,112 a month.
- Offer B: $200,000 at 7.45% over 84 months = about $3,063 a month today.
Step 2: effective rate on the cash received
Fees are deducted at funding, so the distributor receives $198,000 under A and $193,500 under B.
- Offer A: effective rate about 8.26%.
- Offer B: effective rate about 8.48%, if prime does not change.
Offer B's lower rate is more than offset by its fees, on a full-term basis. Use the fee calculator to see the cash received under each, and read the true cost of fees for the method.
Step 3: total cost over the full term and if repaid early
| Scenario | Offer A | Offer B |
|---|---|---|
| Kept for 7 years: interest + fees | about $63,430 | about $63,770 |
| Repaid after 3 years: interest + fees + penalty | about $44,185 (includes a $2,536 penalty) | about $43,550 |
Over the full term, A is about $340 cheaper. If the business is sold or refinanced after three years, B is about $635 cheaper, because it has no penalty. The difference either way is small.
Step 4: price the rate risk on Offer B
Offer B floats with prime. If prime rose by one point after the first year and stayed there, the extra interest would be roughly 1% of the balance each year, about $1,500–1,800 a year in years two and three on these balances, enough to erase B's early-repayment advantage. If prime fell, B would get cheaper. The question is whether the business can carry that swing; the prime-based pricing guide shows how.
Step 5: weigh the terms the numbers miss
| Factor | Advantage | Why |
|---|---|---|
| Rate certainty | A | Fixed for the whole term |
| Prepayment flexibility | B | Open; useful if a sale or refinance is likely |
| Personal guarantee | B, clearly | Limited to $100,000 and to this loan, instead of unlimited and continuing |
| Covenant headroom | B | 1.20 instead of 1.25 |
| Upfront cash | A | $2,000 of fees instead of $6,500 |
For the two owners, the guarantee may matter more than anything else: under A, each owner could be liable for the full balance of this loan and any future debts to that lender; under B, the maximum exposure is $100,000 for this loan. See collateral and personal guarantees.
Step 6: negotiate with the comparison in hand
With both offers written down, go back to each lender:
- Ask Lender A to limit the guarantee and reduce the prepayment penalty.
- Ask Lender B to reduce the fee or cap its legal costs.
- Ask both whether they can improve the covenant level or test it on a trailing 12-month basis.
Lenders often move on fees and guarantee terms more readily than on the rate.
A one-page comparison template
For each offer, write down:
- Amount, rate type, rate today, compounding, amortization and term.
- Payment: blended or fixed principal.
- Every fee, and whether deducted or added.
- Effective rate on cash received.
- Cost if kept to maturity, and if repaid at the date you think most likely.
- Prepayment terms.
- Covenants and reporting deadlines.
- Security and guarantees, with exact scope.
- Demand features on any part of the facility.
- Conditions before funding and the offer's expiry date.
If one offer is from a lender you already owe, include the cost of moving other facilities or the penalty on existing debt, using refinancing an expensive business loan.
Frequently asked questions
Should I always take the lower effective rate?
Not if the other offer has materially better terms on guarantees or prepayment. A few hundred dollars over seven years can be worth paying for a capped guarantee.
Is a government-backed offer always cheaper?
No. A CSBFP loan carries a 2% registration fee and rates up to the program cap; a conventional offer can be cheaper for a strong business. Compare on the same basis.
How long are offers valid?
Commitment letters usually have an acceptance deadline and a funding deadline. Ask for an extension in writing if you need more time to compare.
Can I accept one offer and keep the other as a backup?
Accepting may trigger a non-refundable fee, so accept only the offer you intend to close, after reading the fee clause.
Sources
- BDC — guidance on understanding loan offers
- Innovation, Science and Economic Development Canada — CSBFP fees and rate caps
- Justice Laws Website — Interest Act
- Bank of Canada — policy rate decisions that move prime
