Tips for Newcomers on Small Business Loans
By Jack Zwicker
Jack Zwicker is a business and real estate lawyer, negotiator, and lecturer and practises in Markham, Ontario.
As a recent immigrant to Canada, you may be looking at setting up a new business or buying an existing one. No matter which approach you take, you will likely need financing to buy inventory and equipment. And whether you buy or lease the premises from which you intend to operate, you will probably have to spend some money in improving its appearance so as to make it attractive to your customers.
If you are more comfortable investing your own funds without depending upon on any family members for loans, you should be aware that business financing is available from chartered banks, credit unions, caisses populaires, and other financial institutions such as the Business Development Bank of Canada, a federal crown corporation, under the Canada Small Business Financing Program. In fact, there are more than 1,500 lenders with over 15,000 branches across Canada who can assist in making small business loans. These lenders make all of the required credit decisions,
provide the loan funds, and ensure through their own lawyers that adequate security is taken to support these loans.
Small business loans are available to investors in both new and existing ‘for profit’ businesses whose estimated annual revenues do not exceed $5,000,000 in the first year of the loan. However, non-profit clubs, charitable businesses, and farming businesses do not qualify.
Canada Small Business Financing loans or CSBF’s are available to finance up to 90 percent of the cost of purchasing or improving real estate; the purchase of ‘leasehold improvements’ or the cost of making improvements to existing leasehold improvements, and the purchase or improvement of new or used equipment. Under this program, the maximum loan is capped at $250,000. In addition, CSBF loans are available to qualified businesses to assist in ‘leasing’ new or used equipment, should that option make better financial sense than buying the equipment. The rates of interest which lenders may charge are limited to no more than three percent above bank prime on loans with a floating rate, or no more than three percent above the lender’s residential fixed mortgage rate based upon the term of the loan.
Most small Canadian businesses that are starting up will not reach the $5,000,000, the first year revenue limit, which means that very few small businesses will not qualify for financing. And because the Government of Canada guarantees 85 percent of the loan, banks, credit unions, caisses populaires, and similar financial institutions are comfortable extending these loans in the knowledge that the federal government will guarantee 85 percent of the lender’s losses.
Before dealing with your lender, you will need to have incorporated a ‘for profit’ company. Under the CSBF program, loans can be made only to incorporated companies and not to individuals or unincorporated partnerships. Because the corporation is always the borrower, the loan will be advanced to it and the
corporation will be required to extend its own guarantee. Should the corporation purchase real estate from which the business is to operate, the lender will insist upon registering a mortgage against that land. As well, you and any other shareholders in the corporation will be required to personally guarantee 25 percent of the loan amount.
You should also be aware that any CSBF’s involve a loan administration fee of two percent which is charged at the time that the loan is advanced and security registered. These fees help to finance the program.
While small business loan financing is readily available to investors in new or existing businesses, it is important to prepare a detailed business plan, to incorporate a ‘for profit company’, and to be ready to supply the lender with detailed information regarding the assets over which security will be taken, all of which will take time. The lender will arrange for an appraisal of the assets that are to be secured. And the loan application process, the appraisals and the legal work that the lender’s lawyer has to complete are not done overnight. A typical CSBF loan application may require several months from start to finish. And you will need to retain your own lawyer to work along with the lender’s lawyer in completing the loan documentation, and in obtaining the loan advance.
So it is important to leave yourself sufficient lead time. Be careful then not to commit to any premature closing dates either with the seller of an existing business, or of real estate, or with a landlord without first ensuring when CSBF loan funds will actually be available to you.