Starting a business in today’s economic environment and financial turmoil created by COVID-19 is everything but easy.
The Canada Small Business Financing Program (CSBFP) creates the opportunity for small businesses to apply for loans by partnering with financial institutions, thereby sharing the risk with lenders. The majority of financial institutions participate in this program.
Over the past 10 years, small businesses have received over 53,000 CSBFP loans totalling $10 billion dollars.
Businesses that are eligible for the program include start-ups and existing for-profit, not-for-profit, and charitable small businesses in Canada with gross revenues of $10 million or less. These can be corporations, sole proprietors, partnerships, or cooperatives. Farming businesses are not eligible for this program but are eligible for the Canadian Agricultural Loans Act program.
Financial institutions deliver the program and are solely responsible for approving the loan.
Discuss your business needs with a financial officer at any bank, caisse populaire, or credit union in Canada. To apply, a borrower must present their business proposal directly to a financial institution of choice. Decisions related to approving loans rest entirely with the financial institutions. Once the decision is made to provide financing, the financial institution will disburse the funds and register the loan with Innovation, Science and Economic Development Canada (ISED). If the loan is approved, the money that is paid out is that of the financial institutions and not the government.
If your financial institution rejects your business proposal, you can contact another institution. Lenders generally have different lending criteria related to the approval of business loans. Another option would be to research other government funding options that might apply to your business.
It is up to you (the borrower) and the financial institution (the lender) to negotiate the amount of financing needed.
The maximum loan amount for a borrower is $1.15 million.
- Up to a maximum of $1,000,000 for term loans for any one borrower, of which no more than $500,000 can be used for purchasing leasehold improvements or improving leased property and purchasing or improving new or used equipment and of that amount, a maximum of $150,000 could be used for intangible assets and working capital costs.
- Up to a maximum of $150,000 for lines of credit.
Term loans can be used to finance the following costs:
- purchase or improvement of land or buildings used for commercial purposes
- purchase or improvement of new or used equipment
- purchase of new or existing leasehold improvements, i.e., renovations to a leased property by a tenant
- intangible assets and working capital costs
For example, you can use a term loan to finance:
- commercial vehicles
- hotel or restaurant equipment
- computer or telecommunications equipment and software
- production equipment
- costs to buy a franchise
Lines of credit can be used to pay for working capital costs, that is, day-to-day operating expenses of the business as well as the registration fee.
Lenders have the option to take an unsecured personal guarantee.
For real property and equipment, security must be taken on the assets financed. For leasehold improvements, intangible assets, working capital costs and when financing a line of credit, the lender must take security on other business assets.
Purchasing eligible assets of an existing business may qualify for financing under the CSBFP. You will be able to finance the lesser of the cost of purchase and the appraised value of the eligible assets. It is advised that you contact your financial institution before committing to appraisal expenses to ensure that all other requirements are met.
A loan from the CSBFP is not allowed to be used to finance items such as share purchases or assets that a holding company requires. The list, however, is not exhaustive and it is advised that you speak with your financial institution.
Registering a loan with the CSBFP will incur a registration fee of 2% of the total amount of the loan. This fee can be financed as part of the loan and is not payable upfront.
As with any financial institution, the term loans may have variable or fixed interest rates. The maximum chargeable variable rate is the lender’s prime lending rate plus 3%. For a fixed rate, the maximum chargeable is the lenders’ single family residential mortgage rate plus 3%.
The maximum interest rate for lines of credit is prime plus 5%.
The same fees may be charged by the lenders that are charged for a conventional loan of the same amount. These fees, such as set-up and renewal fees, are paid directly to the lender and cannot be financed under the CSBFP.
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