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Canada Small Business Financing Act

It does take money to make money. The founders of a start-up business will be the first to provide money, but once they've drawn on their credit cards or mortgaged their house and run through their family and friends, where will they turn to next? Most businesses won't want, or be able, to attract financing from venture capital firms or angel investors, or go to the trouble of trying to raise equity through a more or less formal share offering under the securities laws. So, in Canada, many small businesses turn to the banks.

Some businesses will have the wherewithal to be able to borrow money from the banks on ordinary terms. For those that qualify, though, some may want to see whether the loan program under the Canada Small Business Financing Act will work for them. (This Act is the successor to the Small Business Loans Act.)

For example, during 2004 - 2005, just over 11,000 loans were made under the program, with an average size of $94,000. A further 314 capital leases were allowed under a related pilot project, with an average value of $90,000 per lease. Start-ups (not defined) are said to account for 60 percent (almost $623 million) of the loans made under the program, so it's definitely worth a shot, even if you aren't fully established.

The CSBFA works like this:

  • Only small businesses qualify, which means businesses with revenues, or expected revenues, of under $5 million per year, but excluding always farms and charitable or religious organizations.
  • The borrower must meet certain eligibility criteria.
  • The maximum size of the loan is $250,000. (You can see that this amount will not be enough for certain businesses.)
  • The loan must be used for only specified purposes, and the loan must not exceed a certain proportion of the entire cost of those purposes.
  • A lender's loss on a loan that goes bad is guaranteed by the federal government (provided certain conditions are met, such as the lender paying an initial registration fee plus an annual maintenance fee -- both of which would no doubt be passed on to the borrower). The government initially limited its total liability under this guarantee to a total of $1.5 billion. (I haven't checked to see whether this amount has since been updated.) And there's a sliding scale of liability: during any five year period, a lender can recover 90 percent of the first $250,000 of losses under this program dropping to only 10 percent for losses over $500,000. There are other provisions in the Act that further limit the government's liability. So the Act provides some incentive, but not a huge incentive to lenders. And there have been defaults: In 2004-2005, the government paid out on 1,639 claims at an average cost of $47,342 per claim ($77.6 million) for loans issued in the 1999 to 2005 period.
  • The Act penalizes borrowers for misrepresentations or for disposing of assets put up as security for the loan. The penalties are for fines up to $50,000 or $500,000 or for imprisonment up to 6 months or 5 years, or both a fine and imprisonment. A three-year limitation period applies.
  • The government must review the program every 5 years. The first review was for the 5 year period ending in 2004. The report confirmed that the program was useful and effective. (Though in 20 years of law practice, I must admit I've never dealt with someone who had used the program. But maybe know that you know about it, you can ask and see whether it will work for your business.)

The Act has regulations attached to it. The regulations set out the details of the loans allowed under the program. These details include amount, duration, repayment terms, interest rate, security, and so on. Highlights of the details include:

  • The maximum duration of a loan is 10 years, including all renewals, if the lender allows renewals.
  • All loans must be secured, and have first position, or in some cases equal rank to other first position security.
  • The purpose of the loan must fall into these three main categories: buying or improving real property owned by the borrower and used in its business; obtaining or improving leasehold improvements for premises leased by the borrower and used in its business; or buying equipment. A portion of the loan can also be used to pay the required registration fee under the Act. There are restrictions about the kind of and use of real property a loan may be used for.
  • Usual due diligence by the lender is required as to credit references for the borrower, appraisals and other information.
  • The lender can, but is not required to, take personal guarantees. Any such guarantee must be limited to no more than 25 percent of the loan amount, plus applicable interest and legal fees and costs of collection. A guarantor may be released if the loan is in good standing and the borrower has repaid at least 50 percent of the principal. (Who says the government doesn't have a sense of humour?)
  • If default occurs, the lender may give the borrower a cure period. If the default isn't cured, the lender can pursue its various remedies. However, for partnership or proprietorships, outside of the assets used in the business, the lender may only seize personal assets not worth more than 25 percent of the original amount of the loan (plus applicable interest and legal fees and costs of collection).

You can find out more about the program at the website of Industry Canada, the ministry of the federal government that is responsible for the program. Who knows, it might just be the sort of money that will bump your business to the next level.

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