In this guide, we will cover:
- What is the CSBFP?
- Who is eligible?
- How to get it
- The costs of a loan
- How to apply
What is the Canada Small Business Financing Program?
The Canada Small Business Financing Program is a financing program that is available for small businesses with the goal to help them expand and modernize. The Canadian government partnered with private lending institutions, including credit unions, chartered banks, and Caisse Populaire to make this available for entrepreneurs.
When giving out these loans, the idea is that the Government of Canada will take on some of the risks if the borrower defaults, Innovation, Science, and Economic Development Canada will reimburse the lender for 85% of their losses. As a result, lenders will have an easier time giving out these loans since they will not be as exposed to as much risk.
The CSBFP has funded over 148,000 businesses since 1999, this brings the total amount given to around $15 billion.
Why Does the Program Exist?
The CSBFP makes it much easier for small businesses to get the loans that they need. Also, businesses that are much riskier can have access to financing that can help them expand, such as businesses that are operating in volatile industries or start-ups which would normally not be eligible for a conventional loan.
Keep in mind that lenders will scrutinize what your plans are for the money when giving you a loan. For example, if your business had plans to buy a specific asset with the funds, the lender that is giving the loan will be able to use that asset as security until they are fully repaid, this will reduce their overall risk in case of a payment default.
However, other activities make it very risky for the lender such as a leasehold improvement which has no value at all in case the borrower defaults. Because of this, a lender will prefer to finance these activities through the CSBFP.
Who is Eligible for the CSBFP?
This can be broken down into two parts:
- Who is eligible for applying?
- What activities are eligible for financing?
Who is Eligible to Apply?
Any for-profit organization or start-up that operates in Canada can be eligible since the CSBFP is mainly aimed towards small and medium businesses, just so long as their gross revenue annually does not go over $10 million.
Businesses with the following business structures can apply:
- Sole proprietor
The following business entities would not be eligible:
- Farming businesses
- Charitable and religious organizations
- Non-profit organizations
What Activities are Eligible for Financing With CSBFP?
Different aspects of your business can be financed through the CSBFP.
These are the main activities that can be financed through the program:
- Property, including buildings and lands. This means that your business can buy or improve pieces of land and buildings that are going to be used for commercial purposes.
- Leasehold improvements. Your business can improve or renovate the property your business is currently leasing.
- Equipment. Your business will be able to improve or purchase both new and used equipment.
Keep in mind that there’s also a few activities and assets that will not be eligible for funding through the CSBFP, including:
- Franchise fees
- Labour, this includes your operating expenses
- Working capital
How Much Money Can be Provided?
The first thing to know is that one million dollars in total for any one business is the maximum available amount. This means, as long as all the loans combined do not add up to more than one million dollars that is outstanding, your business can have multiple CSBFP loans.
Only $350,000 of the funds can be used for equipment and leasehold improvements. The rest of the available funds from the loan can be used towards the real property. So, a business will get no more than $350,000 through the CSBFP if they wanted to finance $600,000 worth of equipment.
That being said, you should know that, on a case-by-case basis, the financing percentage for any single endeavor as well as the initial investment that is needed from the borrower are both negotiable and can be decided between the lender and the borrower.
How Much Will a CSBFP Loan Cost?
The costs of the loan can be divided into the following:
- The interest by the lender
- Registration fee
- Administration fee
- Other fees from the lender
Here’s a more detailed look for each one:
The interest by the lender
The interest rate is negotiable between the borrower and the lender, however, there is a maximum:
- Floating rate, the rate can’t go over the lender’s prime rate by more than 3%, this includes the 1.25% for the annual administration fee.
- Fixed-rate, the rate can’t go over the lender’s single-family mortgage rate for residential properties by more than 3%, and this will also take the 1.25% annual administration fee into account.
The registration fee
This is a 2% fee of the entire amount of the loan, it is a one-time registration fee. The fee has to be paid by the borrower, but it can be financed with the loan.
The administration fee
The borrower will have to pay a 1.25% annual administration fee that will go to the CSBFP, in addition to the annual interest rate, to make up for the cost of the claim. The outstanding loan balance at the end of each month will determine the fee to be paid, it must also be paid on any and all loans held by a business, this also includes loans that are in default or are in the realization process. This fee, as you may notice, is charged along with the lender’s interest rate.
Other fees from the lender
Other than the annual fee, interest rate, and registration fee, the borrower might have to pay other fees, this will depend on who the lender is and what deal the borrower and lender have negotiated. These separate lender fees, unlike the administration fee we have already discussed, may not be financed by the loan.
The lender may charge a business the following fees:
- Preparation and registration of the security documents fees may be charged by the lenders. The lender would usually make the fees less than what they would charge for similar loans that are not under the CSBFP. Other fees that the lender can charge are the costs involved with hiring a third party to inspect the business premises of the borrower and to make sure that both the business’s assets and operations are as stated.
- Lenders will also charge a premium for disability insurance as well as life insurance. This is pertinent when disability and/or life insurance are conditions for receiving the loan.
- Fees can be charged for converting a floating loan to a fixed-rate loan or vice-versa.
- Additional fees, including fees to set up the loan, annually review the loan, and renewing the loan can also be added by the lender.
What About Security?
Borrowers can offer the following as security for a CSBFP:
- Primary security
- Additional security
- Guarantees and suretyships
Lenders will need to be sure that the security offered by the borrower is valid, before distributing any part of the CSBFP loan, as well as enforceable, and that this will be the case for the whole period of the loan.
Here is a breakdown of the types of securities, this will tell you all that you need to know:
- Primary security
This is a compulsory type of security that can be broken down into alternate and first ranking security.
When the CSBFP loan is used to fund a real property, first ranking security will be applied. This is a way to think of it: When the bank gives a mortgage, it will use the house as collateral in case the borrower defaults. When a lender funds the improvement or purchase of an asset, the asset can be used as security against the loan.
If the CSBFP loan is going to be used to fund leasehold improvements, there may not be any direct assets that can be held as collateral. In this case, the lender can accept alternate security, this will result in using other business assets as security. This can create a ranking problem because these assets can be subject to prior charges.
Another way to put it, if the business defaults on the loans, other lenders will try to claim the assets that are being used as collateral, this creates an ordering problem of who will get to cover their losses first. As you can see, this is why funding any leasehold improvements can be risky.
- Additional security
The lender can decide to secure the loan using more assets of the business than the one that is being financed.
It is good to know that a lender can’t use any personal assets to secure a loan.
- Guarantees and Suretyships
An unsecured personal guarantee can be taken by the lender up to the original amount of the loan. The lender can also take a joint personal guarantee, if there is more than one borrower, drawing on the different borrowers. Should the business default on the loan, all of the borrowers will be held accountable after they become guarantors of the loan.
How to Apply for the CSBFP
You might want to consider applying if you feel that the Canada Small Business Financing Program is a good fit for you. To start, you can find a list of lenders near you that are eligible for this loan and are already working with ISED, and are offering the loan on the official Canadian government website.
You will then need to present them with a business proposal, once you have found an appropriate lender, that goes over how much you need, what the funding will be used for, and how you intend to pay the loan back.
Afterward, the lender will look over the proposal and decide whether or not they will move forward with your application. The terms of the loan, including the terms and interest rate, will be negotiated between the lender and you if you are approved.
You should be clear to receive a loan to expand your business if everything goes well.
However, you should be aware of a few things:
Any due diligence will be the responsibility of the lender, they will treat your application as they would for any other loan. Using a list of criteria, they will check to see how viable your business is. The lender may reject your proposal if your business does not hold up to those criteria.
Remember it does not have to affect you if you are rejected by a specific lender, you are allowed to apply with another lender who has different lending criteria.
The money will be from the lender, not the government if your proposal is approved.
The lender will claim the security, if at some point you default on the loan, and use it to cover their losses. However, once the collateral is sold it may not cover the full amount of the loan, in this case, the lender will contact the ISED and report their losses. Afterward, ISED will reimburse the lender for 85% of the losses, this will leave the lender to absorb the remaining 15%.
At no point during the process are you expected to speak with ISED. The CSBFP is a partnership that has been established between the government and the financial institutions, however, it is the financial institutions, instead of the government, who will have the final say on who will have their applications approved and which ones won’t. The Small Business Financing Directorate at ISED will have more information.
When presenting your business proposal, it is entirely possible that the commercial loan officer who is reviewing your application may not be familiar with the CSBFP and its criteria, in this case, you should let them know of the program and guide them to the appropriate web page.
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