Starting a Business in Canada

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Jul 11, 2011 - 4 minute read - Comments - banking funding

Understanding the Canada Small Business Financing Program (CSBFP)

Update March 10, 2014 — Industry Canada has announced updated guidelines for the CSBFP. For more information, please read our post on the changes.

The Canada Small Business Financing Program (CSBFP) is a program in which the Canadian Government provides insurance to banks and credit unions to insure small business loans. This insurance allows banks and credit unions to take more risk than they would normally be comfortable in taking.

In order to qualify for this program, your business must have less than $5 million in annual or projected revenue revenue and be located in Canada. Farms aren’t eligible under this program and should look at the Canadian Agricultural Loans Act Program (CALA) instead.

The maximum loan amount available under the CSBFP is $500,000 with a maximum of $350,000 eligible for leasehold improvements or equipment. These loan amounts are for each independent small business that someone owns. A business is considered to be independent if it receives 25% or less of its revenue from a related business and the related businesses operate out of different premises. For example, if someone owns a restaurant and a tire shop that operate out of different locations and do not pay each other revenue, each business would be eligible for up to $500,000 in financing.

Items Eligible For Financing

  • buildings and land
  • commercial vehicles
  • hotel or restaurant equipment
  • computer or telecommunications equipment and software
  • production equipment

Items ineligible For Financing

  • goodwill
  • working capital
  • inventories
  • franchise fees
  • research and development

There are additional restrictions on financing real estate. The business purchasing the real estate must occupy at least 50% of the building for its own business operations. The business must agree not to lease or sub-lease this space to another party for at least 3 years following the date the loan was taken out. The CSBFP is meant to help operating businesses. These restrictions are in place to prevent people from using this money to speculate on real estate or become a landlord.

If you’ve made purchases that qualify for the loan prior to being approved for it, you can finance them provided they have been made within 180 days prior to the approval date of the loan. What this means is that you should talk to your banker about one of these loans early in the process. If you try to go it alone and decide towards the end that you’ll need money, some of your earliest purchases will not be eligible for financing under this program if they are more than 180 days old. Existing loans cannot be refinanced as part of a CSBFP loan.

These loans come with either a fixed or floating rate. The interest rate is slightly higher than a normal small business loan due to the 1.25% annual insurance premium that must be paid by the financial institution to the Government. The interest rate will be either prime + 3.0% or the bank’s residential mortgage rate for a particular term + 3.0%. There is a registration fee of 2% of the loan amount that must be paid to the lender at the time the loan is taken out. This fee can be financed as part of the loan amount provided enough room remains to stay within the program’s loan limits.

The maximum amortization for these loans is 10 years, which can make for some pretty big monthly payments on a $500,000 loan on real estate. Under a traditional commercial mortgage, a 20 year amortization might be possible so it’s best to explore your options.

Collateral for these loans will be the assets being financed. If the loans are being borrowed in the name of a corporation, the bank has the option to take an unsecured personal guarantee from the shareholders for up to 25% of the loan amount. These guarantees can be joint and several or individual. If they are joint and several, any individual could be liable for the full 25%. If they are individual, each shareholder would only be responsible for his or her share of the 25%. In my experience, the bank will almost always take joint and several personal guarantees from all shareholders of a corporation that is borrowing under this program. If you are concerned about signing guarantees, you should contact your lawyer for advice.

The CSBFP can be a very good program, especially for new businesses. It gives the lender a degree of comfort so that it will take more risk that it is normally willing to. However, the fundamentals of the business or your business plan will have to be sound. There will have to be evidence that there will be sufficient cash flow to make the payments and the the business has a reasonable chance of being successful. If a lender takes a wild risk and finances a business that doesn’t merit financing, its insurance claim could be denied if the business fails.

For more information, see the Canada Small Business Financing Program (CSBFP) website.