Canada Small Business Financing Program (2023): Plain English CSBFP Guide for Entrepreneurs
The Canada Small Business Financing Program (also known as CSBFP) is one of the most popular financing programs for small business provided by the Government in Canada.
In this comprehensive guide, we cover:
But first, here’s a quick summary of the CSBFP:
Summary of the Canada Small Business Financing Program
Amount:
$1,150,000
Type of Program:
Loan Guarantee
Description:
The Canada Small Business Financing Program makes it easier for small businesses to obtain loans from financial institutions because the government shares the risk with the lenders.
How Much You Can Get:
The maximum loan amount a borrower can access under this program is $1.15 million, which includes:
- $1 million for term loans
- $150,000 for lines of credit
Interest rates are determined by the applicant’s financial institution and may be variable or fixed:
- Variable: The maximum chargeable is the lender’s prime lending rate plus 3%.
- Fixed: The maximum chargeable is the lender’s single family residential mortgage rate for the term of the loan plus 3%.
A registration fee of 2% of the total amount loaned under the program must also be paid by the borrower to the lender. It can be financed as part of the loan.
When It Ends:
Ongoing
Deadline:
Rolling deadline
Eligibility:
Applicants must:
Applications Steps:
The applicant must discuss their business needs with a financial officer at any bank, caisse populaire, or credit union in Canada that is eligible to make loans under the CSBFP.
The financial officer will review your business proposal and make a decision on the loan application. Once the decision is made to offer financing under the program, the financial institution will disburse the funds and register the loan with Innovation, Science and Economic Development Canada.
In the sections below we cover the CSBFP in more detail…
What is the Canada Small Business Financing Program?
The short answer: the CSBFP is a financing program geared towards small businesses with the end goal of aiding these businesses in expanding and modernizing themselves.
The long answer: the CSBFP is a collaborative program between the government and private lending institutions, including chartered banks, credit unions, and caisse populaire.
The idea is that the government shoulders some of the risk involved in giving out these loans, and should a borrower default, the ISED reimburses the lender for a large chunk of their losses, 85 percent to be exact. As a result, lenders have an easier time giving out loans as they aren’t exposed to as much as risk as they normally would be.
Since 1999, the CSBFP has managed to fund over 148,000 businesses, bringing the total amount of the loans given out to around $15 billion. And, this program is active all over Canada, not just in Ontario.
Why does the CSBFP exist?
For starters, the CSBFP makes it easier for small and medium-sized businesses to get much-needed loans. Additionally, some of the riskier businesses, the ones that would normally be ineligible for a loan such as start-ups and companies operating in volatile industries, can gain access to capital that can help them expand.
You should also bear in mind that when giving out a loan, lenders will scrutinize what the borrower plans to do with the money. For instance, when a business plans to buy a certain asset with a loan, the lender will be able to secure their money with said asset until they are paid back in full, reducing their overall risk.
However, some activities, such as leasehold improvements, have no value whatsoever in case of default by the borrower, making it very risky for the lender. Ergo, lenders prefer to finance such activities through the CSBFP.
Who is eligible for the Canada Small Business Financing Program?
When talking about eligibility, we have to break the conversation into two parts:
- Who is eligible for applying for the loan?
- What activities are eligible for being financed by the loan?
Who is eligible for applying for the loan?
The CSBFP is for small and medium-sized businesses meeting the following eligibility criteria:
- Business is carried on in Canada, with a place of business in Canada, and assets held in Canada for the purpose of operating the business;
- Business must offer its services or products to the public (includes retail and wholesale);
- For an existing business: during the fiscal year in which the CSBF loan is approved, its estimated gross annual revenues will not exceed $10 million
- For a new business: at the time the CSBF loan is approved, its estimated gross annual revenues during the first 52 weeks of operation will not exceed $10 million.
- There are no restrictions as to the principal of a small business. An incorporated small business operating in Canada can be owned by foreign citizens.
What activities are eligible for being financed by the loan?
The CSBFP can be used to finance different aspects of a business. With regards to assets, these are the main ones that can be financed by the CSBFP:
- Real property, which includes lands and buildings. This means that businesses can purchase or improve pieces of land and buildings that are used for commercial purposes.
- Leasehold improvements. This means that businesses can renovate or improve property they are currently leasing.
- Equipment. This means that businesses can purchase or improve equipment, both used and new.
- Franchise fees
- Goodwill
- Inventories
- Advertising
- Labor, which includes a business’s operating expense
- Permits
- Working capital
How much money does the CSBFP provide?
The first thing you need to know is that the maximum available amount for any one business is one million dollars in total. This means that a business can have multiple CSBFP loans so long as all the loans combined do not exceed $1.15 million dollars outstanding.
Of the million dollars, businesses can only use $500,000 for leasehold improvements and equipment. The rest of the available loan may be directed towards real property. So, if a business wants to finance $600,000 worth of equipment, it will get no more than $500,000 through the CSBFP.
That said, it should be pointed out that the percentage of financing provided for any single endeavor as well as the initial investment required from the borrower are both negotiable and are decided between the borrower and the lender on a case-by-case basis.
How much does a loan from the CSBFP cost?
The main costs of the loan can be divided into the following:
- The interest charged by the lender
- The registration feeThe administration fee
- Other fees charged by the lender
Let’s look at each one of those separately:
- The interest charged by the lender
Even though the interest rate is negotiable between the lender and the borrower, there is a maximum:
a. For a floating rate, the maximum rate cannot exceed the lender’s prime rate by more than 3 percent, and this includes the 1.25 percent for the annual administration fee (more on this later).
b. For a fixed rate, the maximum rate cannot exceed the lender’s posted single-family residential mortgage rate by more than 3 percent, and, again, this takes into account the 1.25 percent for the annual administration fee.
- The registration fee
This is a one-time registration fee that is equal to 2 percent of the entire loan amount. The borrower has to pay this fee, but it can be financed as part of the loan they are taking.
- The administration fee
In addition to the annual interest rate, the borrower has to pay a 1.25 percent annual administration fee that goes to the CSBFP to make up for the cost of the claims. The fee to be paid depends on the outstanding loan balance at the end of every month, and it must be paid on any and all loans held by a business, which even includes loans that are in default or are in the realization process. As you might have noticed, this fee is usually charged along with the lender’s interest rate.
- Other fees charged by the lender
Aside from the interest rate, the annual fee, and the registration fee, borrowers might have to pay other fees, depending on who is lending them the money and what deal both parties have negotiated. You should also know that, unlike the administration fees mentioned above, these separate lender fees may not be financed by the loan.
Here are some of the fees a lender may charge a business:
a. Lenders may charge fees for the preparations and registration of the security documents. The fee here is usually less than what the lender would typically charge for similar loans that aren’t under the CSBFP. Among the charges a borrower could incur are the costs that come with hiring a third party to inspect the borrower’s business premises and to ensure that both the business’s operations and assets are as stated.
b. Lenders also charge premiums for life insurance as well as disability insurance. This is especially pertinent when life and/or disability insurance are conditions for receiving the loan.
c. Lenders charge fees for converting a fixed-rate loan to a floating one or vice-versa.
d. Lenders may charge additional fees, including fees for setting up the loan, fees for reviewing the loan annually, and fees for renewing the loan.
What about security?
When securing a CSBFP loan, borrowers can offer one of three types of securities:
- Primary security.
- Additional security
- Guarantees and suretyships
Before disbursing any part of the CSBF loan, lenders need to make sure that the security offered by the borrower is valid as well as enforceable and that this is the case for the entire period of the loan.
This is a quick breakdown of the different types of securities, telling you all you need to know:
- Primary security
This type of security is compulsory and can be broken down into first ranking security and alternate security.
First ranking security applies when the CSBF loan is used to finance a real property. You can think of it this way: When a bank gives out a mortgage, it uses the house being finances as collateral in case of default by the borrower. Similarly, when a lender finances the purchase or improvement of an asset, said asset can be used as security against the loan.
However, if the CSBF loan finances leasehold improvements, then there might not be any direct assets to be held as collateral. In such a scenario, the lender will accept alternate security, which boils down to security on other business assets. The problem here is that these assets might be subject to prior charges, which can create a ranking problem.
In simpler terms, if the business defaults on its loans, several lenders will try to claim the collateralized assets, creating an ordering problem of who gets to cover their losses first. This is why financing leasehold improvements can be so risky.
- Additional security
In short, this is when the lender decides to secure the loan more assets of the business than the one being financed. Nevertheless, it is worth pointing out that lenders cannot use personal assets to secure a CSBF loan.
- Guarantees and Suretyships
Lenders can take an unsecured personal guarantee up to the original amount of the loan. In the event of there being more than one borrower, the lender may take a joint personal guarantee, drawing on the different borrowers. Consequently, all borrowers will become guarantors of the loan, and they will be accountable should the business default on its obligation.
How can you apply for the Canada Small Business Financing Program?
If you feel that the CSBFP is for you, then you might want to consider applying. First of all, you should find a financial institution near you that is eligible for this loan; you can find a list of lenders already working with ISED and offering CSBF loans on the official website of the Government of Canada.
Once you’ve found an appropriate lender, you need to present them with a business proposal that details how much money you need, what the money will be used for, and how you intend to repay the loan.
After that, the financial institution, aka the lender, will look over your proposal and decide whether they will go forward with the loan. If approved, the terms of the loan, including the interest rate and the term of the loan, will be negotiated between you and the lender.
Assuming that all goes well, you should be clear to get a loan and expand your business.
However, there are a few things you should be aware of here:
- The financial institution will be responsible for the due diligence part, and they will treat this just as they would any other loan. They will check the viability of your business against a list of criteria, and if your business does not hold up, the institution may reject your proposal.
Consequently, getting rejected by a specific financial institution does not have to deter you; you can apply to a different financial institution with different lending criteria.
- If your proposal is approved, you will be taking the financial institution’s money, not the government’s.
- If you default on your loan at some point, the financial institution will claim the security and use it to cover their losses. However, it is entirely possible that once the collateral is sold, it won’t cover the total amount of the outstanding loan, in which case the institution will reach out to ISED and report its resultant losses. In return, ISED will reimburse the institution/ lender for 85 percent of their realized losses, leaving them to absorb the remaining 15 percent.
- At no point throughout this entire process are you, the borrower, expected to communicate with ISED. The CSBFP is a partnership between financial institutions and the government, yet it is the financial institutions, not the government, who get the final say in which applications get approved and which don’t. You can find more information provided by the Small Business Financing Directorate at ISED.
- It is possible that when presenting your business proposal, the commercial loan officer reviewing your application may not be aware of the CSBFP and its criteria, in which case you should notify them of the program and guide them to the appropriate web page.
CSBFP Eligibility: Types of Businesses That Have Received CSBFP Loans
The Canada Small Business Financing Program Evaluation Final Report, published by the Government of Canada, provides an in-depth analysis of the characteristics of small businesses that have obtained loans through the CSBFP. Some of the key characteristics identified in the report are:
CSBFP Documentation Requirements
Here are the documentation requirements for CSBFP loans and lines of credit:
CSBFP Loan Documentation:
To obtain a CSBF term loan, the borrower and lender must sign a document setting out the following information:
CSBFP Line of Credit Documentation:
To obtain a CSBF line of credit, the borrower and lender must:
CSBFP Repayment, Interest Rates, and Fees
CSBFP Repayment Terms
For a CSBFP loan, the maximum term is 15 years, and the loan can be amortized for a longer period. However, the remaining balance at the end of the 15-year period must be converted to a conventional loan.
For a CSBF line of credit, the maximum term is 5 years, but the credit line can be renewed, converted to a term loan, repaid, or closed before the end of the term.
CSBFP Payments
Payments for a CSBF term loan may be blended, seasonal, or escalating. At least one payment of principal and interest must be scheduled annually, and the first payment must be made no later than a year from the first disbursement. The payments need not occur on the same date. For renewal and amendments of the loan terms, refer to Item 11 of the guidelines.
CSBFP Interest Rates
CSBF Term Loan Requirements
CSBF Line of Credit Requirements
CSBFP – Other Fees and Charges
The lender may request fees, service fees, or charges equal to or less than those for similar conventional loans or lines of credit.
These fees and costs may include fees related to:
CSBFP List of Lenders
The lenders currently authorized to provide CSBFP loans are as follows:
CSBFP Guarantees (Personal and Corporate)
Lenders can secure a CSBF loan by taking a personal or corporate guarantee.
CSBFP Personal Guarantees:
Personal guarantees can be unsecured and up to the original loan amount disbursed. The guarantee document may include provisions for payment of interest, taxed costs, legal fees, disbursements, and other costs related to legal proceedings against the guarantor.
A personal guarantee cannot be secured by collateral assets, and its value must be considered at face value, not as a percentage of the original loan amount. Liability can be joint and several or individual when personal guarantees are taken from more than one person, and the intention should be clearly indicated in the guarantee documents or other loan documentation.
A borrower operating as a sole proprietorship or partnership is liable for 100% of the repayment of the CSBF loan disbursed, and the liability cannot be limited on any of the borrower’s business assets at the time the loan is approved or during the realization on the assets of the business. However, the lender may limit the realization on the personal or non-business assets of the sole proprietor or partners if an agreement is reached during the loan approval stage or after obtaining judgment against them.
CSBFP Corporate Guarantees:
Lenders can take secured or unsecured corporate guarantees for a CSBF loan. There is no limit on the amount of the corporate guarantee that can be taken.
Guarantees Related to Defaulting on a CSBFP Loan:
Lenders must take reasonable steps to collect from guarantors in case of loan default. These steps may include legal action and/or compromise settlements. Realization on personal guarantees is limited to the amount of the guarantees signed by the guarantors plus interest, taxed costs, legal fees, disbursements, and other costs. There is no limit to the amount a lender may realize on corporate guarantees.
If a lender has personal or corporate guarantees on its conventional loan(s) with the borrower, in addition to guarantees on CSBF Program loan(s), the lender must take legal proceedings at the same time against all guarantees and not favor proceeding against the guarantees on its conventional loan(s) first to the detriment of the guarantees on the CSBF Program loan(s).
Lenders are encouraged to settle out-of-court on any guarantees and to resort to a legal judgement only when it is cost-effective. A lender must provide documentation substantiating the realization or non-realization of guarantees when a claim for loss is submitted.
CSBFP Loan Default – Steps the Lender May Take
If a borrower defaults on a CSBFP loan, the lender may take action to recover the outstanding debt. The specific steps taken will depend on the terms of the loan agreement and the lender’s policies and procedures.
In general, the lender may attempt to work with the borrower to find a solution to the default, such as restructuring the loan or setting up a payment plan. If the borrower is unable or unwilling to make payments, the lender may take legal action to recover the debt.
Under the CSBFP, the federal government guarantees up to 85% of the loan, which means that the lender may make a claim to the government for the outstanding balance if they are unable to recover the debt from the borrower. However, the lender must follow specific procedures and requirements to make a claim under the program.
In the event of a default, the following may occur:
friendly fyi CSBFP has updated it’s lending amounts to 1.15MM equipment/leaseholds up to 500K and now has added goodwill with line of credit option as well we can finance equipment and leaseholds that were purchased within 1 year as long as clients paid cash
Thanks Paula! Article has been updated 🙂