Canada Small Business Financing Program 2024

Canada Small Business Financing Program 2024

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.

What is the Canada Small Business Financing Program?

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:

  • Term loan
  • Line of credit

Pros and cons of the Canada Small Business Financing Program

This section will discuss the benefits and drawbacks of applying for a loan through this program for your business.

Pros of the Canada Small Business Financing Program

  • Long loan repayment period of up to 15 years
  • High loan amount of up to $1 million
  • If a business defaults on paying back its loan, the ISED can cover 85% of it and 15% of a line of credit

Cons of the Canada Small Business Financing Program

  • Only small businesses are financed
  • Agricultural businesses cannot benefit from this loan
  • The loan can only be used for specific purposes

Eligibility criteria for the Canada Small Business Financing Program

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:

  • Businesses that are eligible for this program
  • Businesses activities that can be financed by this program

Businesses that are eligible for this financing program

The following are the requirements for small businesses to receive funding through this program:

  • The company should set up shop in Canada and conduct all its operations there. In addition, the organization’s assets must be physically present in Canada.
  • Company services must be made available to the public, either in bulk or retail settings.
  • Existing businesses should not have gross annual revenue above $10 million during the fiscal year when this program’s loan is approved.
  • New businesses should not have a gross annual revenue above $10 million during the first 52 weeks after this program’s loan is approved.

What can be financed by the small business financing program Canada

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:

  • Goodwill products
  • Inventories
  • Inventory purchases
  • Costs for purchasing permits
  • Purchase or improvement of business equipment
  • Real property purchases that can be used to improve the business
  • Repairs and renovations to leased property
  • Franchise fees
  • Advertising costs
  • Labour costs in a business’s area of expertise
  • Working capital

Things that cannot be funded by this program

In this section, we’ll cover some of the items, projects, and services that business owners cannot finance with this program.

  • Real estate that is purchased for the purpose of resale
  • Renovations on family dwellings
  • Buying vehicles for personal use
  • Purchasing shares
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How much does this program offer?

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.

Fees associated with the Canada Small Business Financing Program

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.

  • Registration fee
  • Administration fee
  • The interest of the lender
  • Other costs from the lender

Registration fee

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.

Administration fee

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.

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The interest of the lender

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.

  • Floating rate: The interest rate cannot exceed the lender’s prime rate by 3%. This interest rate also includes the 1.25% administration fee imposed by the lender.
  • Fixed-rate: The interest rate cannot exceed the lender’s single-family residential mortgage rate by more than 3%. This interest also combines with the 1.25% maximum allowed for administration fees.

Other costs from the lender

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:

  • Fees for converting a floating-rate interest loan into a fixed-rate interest loan and vice versa.
  • Fees for preparing and registering security documents. This fee also includes the cost of hiring professionals to inspect the borrower’s business premises. Remember that this fee’s value is typically smaller than what lenders charge for standard loans.
  • Fees for setting up the loan.
  • Some lenders also include costs for disability insurance and life insurance premiums.
  • Fees for renewing the CSBFP loan.
  • Fees for reviewing the loan every year.

CSBFP lines of credit

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.

Securities accepted when applying for this financing program

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:

  • Primary security
  • Guarantees and sureties
  • Additional security

Primary security

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.

Guarantees and sureties

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.

Additional security

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:

  • Loan amount documentation
  • Interest rate documentation
  • Payment frequency documentation
  • Documentation regarding the due date for the first payment
  • Repayment terms documentation

If you’re interested in taking out a line of credit, you should be prepared for the following documentation:

  • Signing a document to open the line of credit
  • A document that specifies the interest rate, authorized amount, and other credit terms.

How to apply for the Canada Small Business Financing Program

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.

  1. The first thing to do when you desire financing solutions from the CSBFP is to find a lender already working with them. There are many such lenders in Canada, and they are:
  2. ATB Financial
  3. HSBC
  4. CTBC Bank
  5. Caisses Populaires de l’Ontario (L’Alliance)
  6. Caisses Populaires Acadiennes
  7. Bank of Montreal
  8. Canadian Western Bank
  9. National Bank of Canada
  10. Canadian Imperial Bank of Commerce
  11. Canada’s Credit Unions
  12. Industrial and Commercial Bank of China
  13. Royal Bank of Canada
  14. Scotiabank
  15. Laurentian Bank of Canada
  16. Mouvement des caisses Desjardins
  17. Keb Hana Bank Canada
  18. Peace Hills Trust
  19. Shinhan Bank of Canada
  20. TD Canada Trust
  21. After settling on a potential lender, the following step is to pitch a business plan to them. This proposal will include the requested amount, the intended usage, and the repayment schedule.

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.

  • If your loan application gets approved, you’ll be called to negotiate the loan’s interest rate and other terms. After which, you’ll be given the loan and can use it as you stated.
  • If your loan application is rejected, however, this doesn’t mean that you can’t receive CSBFP assistance. You can simply try with another lender under this program that may have different criteria.

There are a few things to remember when submitting a loan application to a CSBFP lender.

  • The financial assistance that you receive from this program isn’t government money. The cash is coming from the lenders under this program. Therefore, they have complete discretion over which businesses receive financing.
  • The lending institution may be unfamiliar with this program and its requirements. In such cases, you are supposed to guide them to the official CSBFP website so they know its guidelines. If not, you’ll take a regular loan from that financial institution.
  • No business is expected to communicate with Innovation, Science and Economic Development Canada at any point in the loan application process. This organization has only partnered with many Canadian lenders to make loans more available to businesses.

Factors that increase your chances of getting approved on the Canada Small Business Financing Program

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.

Size of the loan

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.

Size of the business

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.

Repayment potential

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.

Location of the business

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.

Purpose of the loan

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.

What happens when you default on a loan on the Canada Small Business Financing Program?

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:

Following the standard loan collection procedure

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.

Liquidating the business assets

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.

Contact the personal guarantees

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.

Make a claim to the government

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.

Taking legal action

Lenders may resort to legal action to recover their money if all other options are exhausted.

Repayment terms for the Canada Small Business Financing Program

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.

Alternatives to the Canada Small Business Financing Program

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 business loan

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 business loan

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.

Canada Small Business Financing Program conclusion

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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FAQs about Canada small business financing programs

Can foreign-owned businesses apply for this Canada Business Financing Program?

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.

What happens when two or more borrowers come together as one company?

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.

Can a business owner use their personal assets to secure funding from the CSBFP?

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.

Can a farming business apply for the Canada Small Business Financing Program?

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.

What happens when two businesses with CSBFP lines of credit merge?

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.

Does defaulting on a Small Business Financing Program loan affect my credit score?

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.

What type of expenses can the CSBFP line of credit be used to finance?

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.

How much does the CSBFP line of credit cost?

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.

Can I transfer my Canada Small Business Financing Program loan when I sell my old business?

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.

Is it possible to get a CSBFP line of credit and a CSBFP term loan at the same time?

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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August 6, 2023
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