Posted by Jorge LeClair in 
There are many financing options for new or existing small businesses; one the best options is the Canada Small Business Financing Program. (CSBFP)
CSBFP provides government backed loans of up to $500 000 for new or existing small businesses with less than $5 million in annual revenues. Borrowers can receive 90% of their required capital for a maximum of $500 000 if the loan is for real property or a maximum $350 000 if the loan is to open or improve a new business. This means that borrowers only need a down payment of 10%. Eligible costs are basically assets that have real value such as property, equipment, signage, computers, communication systems, restaurant equipment, vehicles, etc. Agriculture related costs or farm property are ineligible because such items are covered under other federal and provincial programs. Ineligible costs also include assets that have intangible value such as goodwill, working capital, franchise fees, goods inventories, research and development expenses, etc. Loans have a maximum term of 10 years.
The Canada Small Business Financing Program was created in 1999 because the federal government recognized the importance of ensuring that small businesses and entrepreneurs have access to credit. Previously, the program permitted a maximum of $250 000, however, under Canada’s 2009 Economic Action Plan the limits where increased. Under the program, the Federal Government guarantees 85% of the loan made by eligible institutions to qualifying businesses. By sharing the credit risk with lenders, it increases the chances that a financial institution will lend to small business borrower.
Financing for small businesses comes from either private investors including family as well as friends, bank loans or the Canada Small Business Financing Program. Capital from private investors is ideal, but it harder to find. Bank loans will have the lowest interests rates compared to other avenues of financing but usually require that a borrower have minimum 25% down payment and provide a personal guarantee for 100% of the loan. CSBFP is a viable alternative for borrowers with good credit who cannot provide a minimum 25% down payment and cannot provide a personal guarantee for 100% of their loan.
CSBFP is administered by banks and credit unions. A small business or entrepreneur must apply for a loan at a financial institution of its choice. The interest rate which may be variable or fixed, is decided by the lender. The maximum variable interest rate allowed is the lender’s prime rate plus 3% and the maximum fixed rate allowed is the lender’s single family residential mortgage rate plus 3%. CSBFP has a program administration fee of 2% of the total amount loaned under the program which is paid by the borrower to the lender and can be financed as part of the loan. Consequently, CSBFP has a higher interest rate than a normal business loan.
A personal guarantee is still required but the lender can only ask for a personal guarantee of up to 25%, this is better than signing an unlimited guarantee. A lower personal guarantee means that it will be easier to qualify for a loan because a bank only has to ensure that a borrower can repay 25% of the loan.
A persuasive, detailed and professionally written Business Plan and Presentation will increase the chances of being accepted to the CSBFP.
The bottom line is that if a borrower who wants to buy a new franchise needs a total $350 000, which breaks into $300 000 real equipment, $25 000 franchise fee and $25 000 cash flow, the borrower can ask for $270 000. (90% of the $300 000 of eligible costs) The borrow will need a $30 000 down payment (10%) and to demonstrate to the bank that he/she can provide a personal guarantee for $75 000 (25% of the loan) based on a relationship with his/her lender, personal credit history and personal net worth. Furthermore, the new franchise owner will have to somehow come up with the remaining $25 000 of required cash flow. Thus, in this example the total required to ensure a loan through CSBFP is $55 000.
The Canada Small Business Financing Program has and continues to be a popular source of financing. As mentioned, it’s not the only financing option available. New or existing business owners should look into all the financing options available and decide which is most suited to their needs.
More information can be found here: http://www.ic.gc.ca/eic/site/csbfp-pfpec.nsf/eng/h_la02855.html
