With the Canada Small Business Financing Program, high-risk small businesses have a better chance of being granted sizable loans from financial institutions. But how does it work, and how much can a business get?
The Canada Small Business Financing Program makes the government act as a backer for small businesses. This improves their chances of being granted sizable loans.
This program allows for loans of up to $1,000,000 with a maximum repayment term of 15 years. However, this financing is restricted to businesses in specific industries.
Learn what it means to take a loan through this program and other alternatives worth considering if this program doesn’t meet your needs.
The Canada Small Business Financing Program aims to broaden credit availability to small enterprises nationwide. This program is a joint effort between the Canadian government and a wide range of financial institutions (including private lenders and credit unions).
The government partners with these small businesses to make them eligible to borrow loans from lenders. Hence, if a business defaults on paying back its loan, Innovation, Science and Economic Development Canada (ISED) will pay back 85% of it.
With the government shouldering such risk on behalf of small businesses, most lenders will have no issue giving out loans.
The Canada Small Business Financing Program CSBFP has been active since 1999, and over 148,000 businesses have benefited from its efforts. This financing program usually comes in two forms:
This section will discuss the benefits and drawbacks of applying for a loan through this program for your business.
Before even bringing up the topic of applying, a business owner needs to find out if they meet the requirements. There are two considerations when deciding if you meet the requirements for this program:
The following are the requirements for small businesses to receive funding through this program:
It’s logical to think that a business that’s eligible for the Small Business Financing Program in Canada will have its services approved. However, that is not always the case, as this program only finances specific services, products, or activities, and they are:
In this section, we’ll cover some of the items, projects, and services that business owners cannot finance with this program.
With the help of Canada’s Small Business Financing Program, a company can receive up to $1,000,000 in financing. Lines of credit can be made available up to a maximum of $150,000.
Businesses can also receive several CSBFP loans if it doesn’t exceed the $1.15 million mark. This means an entrepreneur can receive a Canada Small Business Financing Program RBC loan and others from a different CSBFP lender.
The $1.15 million cap comprises the standard $1 million term loan cap plus the $150,000 line of credit cap.
A maximum of $1,000,000 may be borrowed by a company; however, only $500,000 may be utilized for leasehold improvements and equipment. So, the business can ask for $700,000 to acquire the leasehold but receive just $500,000.
When you want to apply for this program, you’ll need to understand its inherent costs. Other than the principal loan amount, additional fees may be considered.
This is the fee that borrowers pay before they can register for this financing program. It’s a one-time fee equal to 2% of the total amount the business intends to borrow. Most times, this fee is financed with a loan.
When a company borrows money, the interest rate isn’t the only expense it incurs. The CSBFP charges 1.25% of your premium to cover the price of claims. How much a company actually pays at the end of the month is based on how much of a loan balance remains unpaid.
One thing you need to understand about a CSBFP loan is that the interest rate is never fixed. This number fluctuates according to the terms the lender and the borrower agreed upon. Nevertheless, there is a maximum to the floating and fixed rates of interest charged by lenders.
This section encompasses any other fees a business owner must pay, depending on their agreement with a lender. Unlike the administration fees, these are not always financed by the loan. So, the borrowers will have to pay for it themselves.
The following are some of the costs that lenders demand:
Apart from a regular term loan, the small business financing program also offers a line of credit. This type of loan allows you to collect a loan in small portions, not all at once. This makes it more flexible than a regular loan.
A line of credit option was added on July 4, 2022, designed to finance working capital. A line of credit for a company can go up to a maximum of $150,000.
The government guarantees the conventional term loan up to 85%, but it only guarantees up to 15% for the line of credit.
This means that the government can step in and provide assistance equal to 15% of the remaining loan balance if the borrower cannot do so. Canadian firms will get a line of credit more easily with this government support.
Before a lender can approve a loan for the CSBFP, they’ll need to receive securities from the business owners. Not all securities can be used for this program. So, all lenders have the job of ensuring that the borrower’s securities are enforceable for their loan period.
There are three securities that Canadian business owners can offer when applying for the Canada Small Business Financing Program, and they include:
This compulsory security comprises the alternate security and the first-ranking security. The first-ranking security is one that automatically applies when a business uses its loan to finance a property.
You can see it as a bank taking a house purchased using their loan as collateral. It also applies when an entrepreneur purchases work machinery using this aid. That machinery can be taken as security and used as collateral.
However, the first-ranking security only applies when the borrower owns the property on which the loan is used. This means that a leasehold being renovated using this financial aid cannot be used as first-ranking security.
Alternate security is another business asset that can be used as collateral. Even though it wasn’t financed by the loan, the alternate security can serve in cases with first-ranking security.
However, using alternate security isn’t too advantageous to lenders, especially when the borrower has accepted other loans. That’s because if the borrower defaults on paying back the loan, all the lenders will have to scramble for collateral. So, using alternate security is too risky for some lenders.
This is another option that some entrepreneurs consider when they don’t have enough business assets to secure this financing. In this scenario, the business owner signs an unsecured personal guarantee for the full loan amount. This means the business owner bears full responsibility for loan repayment in the event of company insolvency.
Lenders can also accept more than one personal guarantee for a single CSBFP loan. This will become a joint personal guarantee, with all the borrowers sharing the loan risk. If the loan cannot be repaid, all these borrowers will be held accountable for it.
This is the case when primary security is insufficient to secure a loan, and the borrower decides to supplement it. In such a situation, the security becomes a combination of primary security and other business assets.
Documents Needed When Applying for the Canada Small Business Financing Program
The application process for this financing program requires a business to sign a few documents. These documents show their agreement to the terms of the loan, and they include:
If you’re interested in taking out a line of credit, you should be prepared for the following documentation:
The Canada Small Business Financing Program is a fantastic opportunity to obtain financing because many small businesses have experienced rejection from lenders. So, in this section, you’ll learn how to apply for this program.
Don’t forget that, just as with any other business loan, the bank will investigate your loan application thoroughly. This means that they’ll look at your business, the assets under it, and its financial capability. So, if your application doesn’t hold up to their scrutiny, it’ll be rejected.
There are a few things to remember when submitting a loan application to a CSBFP lender.
Over the years, numerous businesses have been approved according to the Canada Small Business Financing Program guidelines and received financial help. In contrast, numerous establishments have been rejected during this period. A careful study of these institutions has revealed that there are a few critical criteria that are similar.
Therefore, this section will show you how to improve your chances of acceptance into the program.
The maximum funding an organization can earn from this initiative is $1,000,000.00. However, banks and other lenders are more willing to grant low-interest loans. The optimum price is approximately $100,000 or a little higher.
According to the guidelines of this program, all small businesses are allowed to apply. However, it has been noted that it’s primarily micro enterprises with no more than 5 employees that gain approval. So, if you’re an entrepreneur who runs such a business, your loan approval will likely be approved.
All lenders aim to take as little risk as possible when offering loans, and their collaboration with the CSBFP hasn’t changed that. As such, most businesses that receive a loan through this program are those that can repay it. Due to this practice, since this program commenced, less than 3% of the borrowers have defaulted.
Although this financing program has no geographical restriction, businesses in British Columbia, Ontario, and Quebec have a clear advantage. So, if you want to improve your chances of getting a CSBFP loan, you can open your business in one of these provinces.
The purpose for which a business owner desires a loan is another factor that can improve the chances of getting one. So, loans that will be used to purchase equipment, improve a leasehold, or fund working capital are more likely to get approved.
Defaulting on a small business financing loan is similar to defaulting on a regular loan. This allows the lender to pursue legal action to recover their money as per the terms of the loan.
One potential upside is that the lending company can request that the Canadian government shoulder the remaining 85% of the loan. However, this isn’t the first step to recovering their funds from a borrower. The various steps that a lender can take to recover a CSBFP loan from a defaulter are as follows:
This includes calling the borrower, sending letters of collection, or negotiating new repayment agreements. In some cases, the lenders may also take legal action against the business.
When a business fails to pay back its small business financing loan, the financial institution can choose to sell its collateral. So, the business equipment, business premises, and other assets will be sold to recover the loan amount.
In a case where the lenders cannot recover their funds from selling the collateral, they can contact the personal guarantees.
The personal guarantees will then be made to repay the remainder of the loan. Keep in mind that this move is only possible when the business owner provides personal guarantees when taking the loan.
If a lender cannot recover their loan by following standard procedures like liquidating collateral and contacting personal guarantees, they can contact the government. In this case, the Canadian government will have to make do with its claim of paying off 85% of the outstanding balance.
Lenders may resort to legal action to recover their money if all other options are exhausted.
An important fact to remember about CSBFP loans is that their repayment terms are capped at 15 years. Loan amortization typically extends the repayment period beyond the standard maximum of 15 years. If the loan is still outstanding after this period, the terms will return to those of a traditional loan.
However, a CSBFP line of credit can only be in effect for a maximum of 5 years. The loan term can be extended by applying for a renewal. You can either prolong the term, pay it off early, or refinance into a more affordable loan.
The payment schedule of the CSBFP loan can be seasonal, escalating, or blended. The initial payment on the loan is due no later than twelve months after the loan was taken out, regardless of the payment plan selected.
In addition, once yearly, both the principal and interest must be paid. This doesn’t have to be on the same day, so borrowers have some flexibility.
If you can’t meet the requirements of this financing program or if it doesn’t satisfy your needs, you can try other alternatives. Some of the suitable alternatives include:
Merchant Growth is a financial institution that offers loans tailored to businesses. The CSBFP’s maximum loan amount of $1 million is lower than the $800,000 that this borrower provides. The most prolonged loan duration allowed under the CSBFP is 15 years, but this borrower often only offers financing for 24 months.
Loans Canada is a platform that connects businesses with lenders that can meet their needs. This platform offers a simple application process and offers loans with repayment periods that range from 3 to 60 months.
The small business financing scheme only allows for 15 years of financing. In contrast, the most extended term allowed here is 60 months (5 years).
This platform has a lower maximum loan amount than the CSBFP, which is $1 million. This loan is not subsidized by the government like the CSBFP loan is.
The Canada Small Business Financing Program offers an excellent chance for aspiring small businesses to expand. The government’s backing of this loan makes it easy for small businesses to receive loans. It also helps these businesses pay back a percentage of the loan if they default.
The terms of this financial aid are much better than what most business loans will offer. So, if your business is eligible for it, get yourself a Canada Small Business Financing Program loan when you can.
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Yes. Foreign-owned businesses are also eligible for this business financing program as long as they meet the required requirements. These requirements are to own a business established in Canada and offer its services to the Canadian public. The establishment should also have business assets in Canada, with gross annual revenue below $10 million.
When two or more borrowers amalgamate to become one business entity, their CSBFP loan remains. Any outstanding loan amount that goes above the $1 million mark is also valid and treated according to CSBFP guidelines. Of course, the next loans that the new business entity collects will stay within the $1 million maximum.
No. Business owners cannot secure CSBFP funding using their personal assets; it has to be a business asset. This is one of the requirements for a company to qualify for funding through this program. Startups that lack assets can use this funding to acquire something that can serve as collateral.
No, farming businesses cannot apply for the small business financing program because they are not eligible. Instead, they can apply for the Canadian Agricultural Loans Act Program. The program is headed by Agriculture and Agri-Food Canada, and it’s designed to provide loans to Canadian farmers.
When two businesses with a CSBFP line of credit merge, their lines of credit are combined. However, the line of credit that the new establishment will hold still follows the Canada Small Business Financing Program guidelines. So, the new line of credit cannot exceed $150,000.
Yes, defaulting on a CSBFP loan affects your line of credit and can affect your chances of getting a similar loan. This will have a knock-on effect on the guarantors who put up their own money to secure the loan. You may have trouble getting future business loans if you default on this one.
The CSBFP line of credit can only be used to finance working capital and other intangible expenses. These intangible expenses include rent and employee salaries. This means that you can't use the line of credit for anything other than financing the business's daily operations.
The small business financing program line of credit comes with a 2% registration fee. Although the interest rate for this loan is variable among lenders, the maximum is 5%. Businesses also need to pay a 1.25% annual admin fee on the average daily balance for a month.
Yes, you should be able to transfer your loan to the new business owner when you decide to sell the business. The CSBFP has already made provisions for such situations. However, the transfer will only go through if the lender approves.
Yes, the term loan and the line of credit can be obtained together. The loan can be obtained from a single participating lender or from a number of participating institutions. The only thing stopping you is making sure you qualify for these loans.
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