What it is?
If you need funds to start or grow your small business, The Canada Small Business Financing Program may be the right option for you.
The Canada Small Business Financing Program (CSBFP) is a program administered by Innovation, Science and Economic Development Canada (ISED) that helps Canadian small businesses obtain access to financing. Under the CSBFP, ISED and commercial lenders share the risk of providing small businesses with term loans for real property, equipment or leasehold improvements.
The primary objective of the CSBFP is to increase availability of financing for the establishment, expansion, modernization and improvement of small businesses by extending financing that would not otherwise be available or would be available under less favorable terms.
Small businesses account for 98 percent of all businesses and 68 percent of job creation and thus are very important for the Canadian economy. But still, they face unique challenges in accessing financing.
This is where CSBFP steps in – it is designed to facilitate access to financing for higher risk small businesses by sharing the risk of financing with lenders.
What that actually means? The program encourages lending to small businessesby reimbursing 85 percent of losses to financial institutions (lenders) in the event of default of asmall businesses. Over the past 10 years, small businesses have received $9.5 billion in financing through over 63,000 loans made.
Who is Eligible?
CSBFP is designed both for start-ups and existing small businesses in Canada with gross revenues of up to $10 million. The eligible entities can be incorporated as corporations, sole proprietors, partnerships or cooperatives.
Note that farming businesses are not eligible under this program as there is a specialized program administered by Agriculture and Agri-Food Canada called The Canadian Agricultural Loans Act program for this type of small business.
What Can You Finance with CSBFP Loans?
A small business can finance the following:
- purchase or improvement of commercial land or buildings
- purchase or improvement of new or used equipment
- purchase of new or existing leasehold improvements (i.e. renovations to a leased property by a tenant)
- purchase of assets of an existing business to the lesser amount of the cost of purchase and the appraised value of the eligible assets. You should contact your financial institution that administers the program before committing to appraisal expenses to ensure that you meet all the requirements.
Note that you cannot use CSBFP loan to finance items such as goodwill, working capital, inventory, franchise fees, research and development or assets that are acquired by holding company. For these types of loans and grants, not included in the CSBFA, you can check out working capital options, inventory financing and R&D Funding on our website.
As the listsof eligible and non-eligible purchases are not exhaustive, check with your financial institution if you qualify for a CSBFP loan.
Important Considerations Before Applying
- Loan Amount
The maximum loan amount per borrower is $1 million, of which no more than $350,000 can be used to finance the purchase or improvement of equipment and the purchase of leasehold improvements.
The exact loan amount will depend on each financial institution (lender) that participates in the program.
- Other Loan Terms and Conditions
Financial institutions are required to apply the same standards and procedures in making a CSBFP loan as they would for other similar loans. This means that their loan application decisions rest entirely with them. Make sure you discuss this with each individual lender.The lending decisions are based on qualifying criteria of each financial institution. This means that if one financial institution rejects your loan application, you are free to approach other institutions in search for the one that will be willing to finance your business. Although the decision to participate in the program is up to the individual financial institution, the majority of financial institutions participate in this program.Note also that under the program the lenders are required to take security in the assets that are financed and they may also take an additional unsecured personal guarantee.
Also, although the interest rate applied to CSBFP loans will depend on each individual lender and general credit market conditions, the maximum interest rate for a variable rate loan is the lender’s prime rate plus 3 percent and the maximum interest rate for a fixed rate loan is the lender’s single-family residential mortgage rate plus 3 percent.
How it Works?
Under the program, a small business applies for a loan from a financial institution (e.g., chartered bank, credit union or caissepopulaire) of its choice.
There are following administrative costs associated with using the program:
- a one-time registration fee: The borrower may be responsible for paying the registration fee – 2 percent of the total loan amount – which can be financed as part of the loan.
- an annual administration fees. Lenders also pay an annual administration fee of 1.25 percent quarterly based upon their loan portfolio, which is included in the interest rate charged to borrowers.
The lender submits both fees (registration fee and administration fee) to ISED, which are then used to help offset government costs of paying claims on defaulted CSBFP loans.