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The Basics of the Canada Small Business Financing Act

The Canada Small Business Financing Act was introduced in 1999 as the modern equivalent of the Small Business Loans Act, first passed in 1961. It creates a de facto government guaranteed loan system through which financial institutions assume less risk. The purpose of the Act is to increase financing opportunities for Canadian small businesses.

The Act established the Canada Small Business Financing Program, which has distributed billions of dollars across more than 75,000 loans. If you are a small business owner or want to start your own small business, a CSBFP loan could help you get up and running, expand, or modernize.

Canada Small Business Financing Program

Only small businesses or startups with gross annual revenues not exceeding $10 million may apply for a loan through the Canada Small Business Financing Program. Some organizations, such as farm businesses or nonprofits, are ineligible for the program, though farmers have their own program with similar benefits.

You can apply for a CSBFP loan by visiting any certified financial institution in Canada, including credit unions. The program is delivered by different financial institutions, so your approval is at the mercy of the financial officers at whichever bank or credit union you visit. As with any other business loan, you should have a solid business plan prepared and be able to explain why it is a good idea for the bank to finance your business.

The Government of Canada encourages lenders to make loans under CSBFP but without changing due diligence and prudent lending standards; do not expect the lender to bend qualification criteria just because the loan is government guaranteed.

As of 2022, the limit for financing under a CSBFP loan is $1 million. However, no more than $350,000 can be earmarked for improving leased property, purchasing leasehold improvements, or improving new or used equipment.

You are expected to provide some personal guarantee to support any borrowed funds, although the law states that owner guarantees cannot exceed 25% of the initial loan amount. This can be quite useful if your business idea fails, since your personal liability is at most one quarter of the potential loss.

Loan Registration Fee

Each loan carries a registration fee of 2% of the total loan amount. You are responsible for this fee, and it must be paid to the lender, not the government. You can finance this fee as part of the loan agreement, so there are options if you are strapped for cash.

Loan Restrictions

You have to plan out what you want financed before you can be approved for a loan. Generally speaking, there are three types of costs eligible for CSBFP money:

  1. The purchase or improvement of commercial land or buildings
  2. The purchase or improvement of business equipment
  3. The purchase of renovations to a leased property by the tenant

This means you can buy things such as company cars, capital equipment, telecommunication equipment, computers, and software, and even put down money to buy a franchise. However, you may not use CSBFP funds to buy inventory, working capital, research and development, or goodwill.

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