The Canada Small Business Financing Program
The Canada Small Business Financing Program, also known as CSBFP, is one of the most popular financing programs that are available for small businesses provided by the Canadian Government.
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.
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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
- Partnership
- Corporations
- Cooperatives
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
- Goodwill
- Inventories
- Advertising
- Labour, this includes your operating expenses
- Permits
- 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 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 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. Other fees include the costs involved with hiring a third party to inspect the business premises of the borrower.
- Lenders will also charge a premium for disability insurance as well as life insurance.
- 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.
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 and enforceable for the whole period of the loan.
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.
If the CSBFP loan is going to be used to fund leasehold improvements, alternate security may be required.
Additional security
The lender can decide to secure the loan using more assets of the business