Starting a Business in Canada

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No nonsense information on small business.

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.

Jul 8, 2011 - 1 minute read - Comments - business news

SavvyMom Is Looking For Canada's Top Mom Entrepreneur

SavvyMom is teaming up with Paypal to sponsor the SavvyMom Mom Entrepreneur of the Year Award. The winner will receive a $15,000 prize.

The nomination process is simple. Mom Entrepreneurs can nominate themselves by visiting momentrepreneuraward.ca. Your entry will be placed into the Mom Entrepreneur gallery where visitors to the site will vote for their favourites. The top 10 finalists as selected by voting will be eligible for the grand prize, which will be decided by a panel of expert judges..

Voting for your favourite Mom Entrepreneur will make you eligible for prizes as well. There will be 17 weekly draws for prize packages from Mabel’s Labels each worth $110.

If you are a Mom Entrepreneur, this is a great contest to enter. The voting process should provide good exposure for your business and winning the grand prize wouldn’t be too bad either!{}

Jul 7, 2011 - 1 minute read - Comments - business news

Scotiabank Forecasts Alberta, Saskatchewan Economies To Lead Nation

Scotiabank is predicting Alberta’s economy will grow at an average rate of 3.8% during 2011 and 2012. Saskatchewan is close behind at 3.5%. Both provinces are expected to benefit from continued demand for their natural resources. Alberta will benefit from continue oil sands development, while Saskatchewan will benefit from further potash development and continued investment in the Bakken oil play.

Canada as a whole is expected to grow an average of 2.6% over the same time period. Ontario and Québec are expected to get off to a weaker start due to poor growth in the United States and the natural disaster in Japan, which has widened their trade deficits. Growth for these two provinces is expected to improve in 2012. Atlantic Canada’s continued soft employment numbers will be a drag on growth.

Jul 6, 2011 - 3 minute read - Comments - entrepreneurship

How To Start A Business In Alberta

Albertans have always had an entrepreneurial spirit. If you are thinking of starting a business and joining your fellow entrepreneurs, you have come to the right place. A large undertaking like starting a business can be daunting at first but if you focus on one step at a time you’ll find that things will become more manageable. This blog post will attempt to do that for you. Follow the links for a more in depth look at each topic.

  1. Think about whether you are ready to be an entrepreneur. Talk to your immediate family members to make sure you have their support.
  2. Evaluate your business idea. Does it require a new business model or are other businesses currently operating successfully using this model?
  3. If you have a new business model conduct a feasibility study to confirm your idea is sound.
  4. If your business is operating under a proven business model, conduct preliminary research to make sure that the business makes sense, given your skills and finances. Make sure it makes sense for the market.
  5. If the your initial research or your feasibility study shows that your business idea has a reasonable chance of succeeding, continue to the next step. Otherwise, go back to the idea stage.
  6. Pick a name for your business.
  7. Consult your lawyer and accountant and decide on a legal structure for your business.
  8. Register your sole proprietorship, partnership or corporation. The Alberta Government has a site that will help you register your business name. This can be done at your local registry agent.
  9. Register the domain address for your website.
  10. Write a business plan.
  11. Register for a Business Account Number.
  12. Pick a bank and open an account.
  13. Apply for financing, if necessary.
  14. Apply for a business license and any other license you need to operate your business. The Alberta Government has a all encompassing website for this called BizPal It will take care of your provincial and municipal licensing needs. The site will ask you questions about your business and then suggest a list of licenses and permits to apply for.
  15. Start implementing your business plan. Depending on your circumstances, this could mean signing property leases, buying and installing equipment, building a website and generally getting your business ready to open to the public.

The process of opening your business might differ slightly from these steps, but the list includes the basic tasks that most businesses will need to complete. As you can see, when a large project such as starting a business is broken down into smaller tasks, things become more manageable. If you feel like you need more information on parts of the process or if you would like us to cover additional tasks not on this list, please leave a comment below.

Jul 5, 2011 - 1 minute read - Comments - business news

Banks Raise Residential Mortgage Rates

The Royal Bank, the TD and Laurention Bank have all increased their residential mortgage fixed rates. Rates have gone up across the various loan terms, with the 5 year mortgage rate up by 0.15% to 5.54%. The rest of the Banks will likely follow suit.

This has an impact on small business borrowing because commercial mortgage rates often move in tandem with the residential rates. While this rate increase isn’t large, it does indicate that we will be moving into a period of rising interest rates.

Jul 4, 2011 - 4 minute read - Comments - 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.