How to Fund Your Small Business With CSBFP
Obtaining a loan is an excellent way to finance an early-stage business. Loans allow you to fund your enterprise without yielding any control of the business to equity shareholders. However, new businesses without an established credit history may struggle to convince lenders to extend them credit.
Fortunately, the federal government has implemented the Canada Small Business Financing Program (CSBFP), designed to encourage private lenders to do just that. Through CSBFP, the government assumes some of the risk associated with lending money to small businesses, thereby encouraging lending to applicants who might otherwise be considered too risky. Successful CSBFP applicants can receive loans of up to $1M CAD to help cover business expenses or purchase the capital needed to start generating revenue. Certain conditions apply, which are detailed below.
Eligible borrowers and activities
CSBFP is only available for Canadian small businesses or start-ups generating less than $10M CAD in revenue. Non-profit, charitable, and religious enterprises may be eligible, though they must demonstrate an actual business need. Farming businesses are not eligible, but equivalent funding may be available through the Canadian Agricultural Loans Act program.
Only certain activities can be funded by CSBFP loans. Examples of things CSBFP may fund are the purchase of commercial vehicles, hotel or restaurant equipment, production equipment, computer or telecom equipment and software, and certain costs of purchasing a franchise. Of the $1M in potential loans, no more than $350,000 may be allocated to improving leased property or purchasing or improving equipment. Borrowers are not permitted to allocate any CSBFP funding to goodwill, working capital, inventory, franchise fees, or research and development.
What costs are associated with CSBFP?
Since the CSBFP is mediated through private lending institutions, the fee structures will vary by institution. Generally, borrowers will pay administration and registration fees, any other lender’s fees, and interest on the principal at the rate set by the lender.
Lenders may calculate interest on a floating or fixed-rate basis. Floating interest rates fluctuate with the lender’s prime rate, but are limited to prime, plus 3%. Fixed interest rates are agreed upon at the outset and do not fluctuate, and cannot exceed the lender’s single-family residential mortgage rate, plus 3%.
In both cases, the interest rate includes the 1.25% annual administration fee. In contrast, the registration fee is paid only once, and equals 2% of the overall loan principal.
How do I apply?
To access CSBFP funding, first select a participating lender. You can find a list of lenders offering CSBFP loans here. You will need to present a business proposal to the lender, who will evaluate its viability and perform other due diligence.
Before you can be approved, you will also need to offer security, or collateral, for the loan. This involves staking assets that will be seized by the lender in the event that you default on your loan repayments. Typically, if you are accessing CSBFP to fund real property or other assets, these will be registered as security on the loan. In some cases, where the loan is not funding such purchases, you may need to reach other security arrangements with the lender.
To learn more about the CSBFP and other available support for your small business, reach out to one of our lawyers.
-Shira Kalfa, BA, JD, Partner and Founder
Shira Kalfa is the founding partner of Kalfa Law. Shira’s practice is focused in corporate-commercial and tax law including corporate reorganizations, corporate restructuring, mergers and acquisitions, commercial financing, secured lending and transactional law. Shira graduated from York University achieving the highest academic accolade of Summa Cum Laude in 2012. She graduated from Western Law in 2015, with a specialization in business law. Shira is licensed to practice by the Law Society of Ontario. She is also a member of the Ontario Bar Association, the Canadian Tax Foundation, Women’s Law Association of Ontario, and the Toronto Jewish Law Society.
© Kalfa Law, 2021
The above provides information of a general nature only. This does not constitute legal advice. All transactions or circumstances vary, and specified legal advice is required to meet your particular needs. If you have a legal question you should consult with a lawyer.