Lending Under The Canada Small Business Financing Program: Eligibility Requirements For Borrowers

What is the Canada Small Business Financing Program

Starting a small business can be difficult; competition with established companies, shifting economic demands, and consumer expectations can culminate in an unpredictable and costly endeavour.

One way the Government of Canada aims to alleviate these pressures is by operating a program, the Canada Small Business Financing Program (the “CSBFP”). The CSBFP aims to assist new business owners in business development by offering eligible businesses government-backed loans. This ultimately makes obtaining funding easier for borrowers and reduces the risk for lenders. The CSBFP is governed by the Canada Small Business Financing Act (S.C. 1998, c. 36) (the “CSBFA”). The CSBFA came into force on April 1, 1999, replacing the then Small Business Loans Act, which had similar objectives.

So, what is the CSBFP, who qualifies, and how are lenders affected upon default by a borrower? Below is an explanation of the basics of eligibility under the CSBFP.

Eligibility

Not every business is eligible for the CSBFP government-backed loans. As the name of the CSBFP indicates, the CSBFP was created for businesses that are both small and Canadian. Based on this description, which businesses are eligible may seem straightforward, but what exactly makes a business small, and what makes it quintessentially Canadian? After all, these descriptors could mean entirely different things depending on the context, and in reality, as will be explained below, not every small Canadian business is eligible for funding under the CSBFP.

Must be Canadian – Putting the Canada in “Canada Small Business Financing Program”

Unsurprisingly, as mentioned, to be eligible for the CSBFP, you must be a Canadian small business or start-up. Broadly speaking, “Canadian” under the program entails that a business is operating within Canada. Under the CSBFA, at section 2, it is specifically worded that the business must be “a business carried on or about to be carried on in Canada”. What this practically means is that an eligible business must have a physical location in Canada, where business operations are carried out, and it must have business assets that are also present in Canada.

Simply having ties to Canada in the form of nationality of the directing mind of the business or the business’s subject matter being about Canada does not constitute eligibility under this “Canadian” criterion. In fact, the program specifies that foreign citizens are eligible under the CSBFP as long as the business meets the above criteria. The presumed policy reasoning for this is that the CSBFP is centralized around promoting business development in Canada, not just supporting Canadians looking to develop a business.

Must be Small – Gross Annual Revenue less than $10 Million Aggregate

For an established, existing business to qualify for the CSBFP, the estimated gross annual revenues of the small business must be $10 million or less. Keep in mind that this required yearly estimate is at the time the loan is approved. So, to calculate eligibility for an existing business, data from the current fiscal year is used. After a business has been approved for the CSBFP loan, there is no requirement under the program that a small business maintain a gross annual revenue of below $10 million.

What happens if a business is not already established? Perhaps someone with a new business plan wants to obtain funding. After all, the CSBFP is designed to assist in business development. The CSBFP does consider this, and it adjusts requirements for new businesses. New businesses are required to have an estimated gross revenue of below $10 million in the first 52 weeks of operation.

For the uninitiated, gross revenue refers to the total funds produced by a business’s business operation. Thus, gross revenue does not include the costs associated with generating earnings. Gross revenue only includes what a business is bringing in cumulatively, not what is reduced from spending. From a big picture perspective, under this parameter, if your business wishes to be eligible for the CSBFP program, your business cannot generate, or be predicted to generate, more than $10 million per year at the time of eligibility. This is the “small” aspect of the CSBFP.

Types of Eligible Businesses

“Business” under the CSBFP does not exclude unincorporated businesses. A wide range of business structures are eligible for the term loans, including sole proprietors, partnerships, cooperatives, as well as federal and provincial corporations.

Previously, not-for-profit, charitable and religious organizations were not permitted to obtain funding through the CSBFP; however, as of June 30, 2021, these more philanthropic organizations became eligible for obtaining guaranteed loans under the CSBFA, so long as the business is, of course, also eligible under the previously mentioned criteria.

Farming Businesses

Farming Businesses are ineligible for funding under the CSBFP. The policy reason for this is that there are separate government-backed programs that provide borrowing to these Farming Businesses. For example, the Canadian Agricultural Loans Act Program handles government-backed loans for specific Farming Businesses, but that begs the question, what exactly is a “Farming” Business?

A Farming business is defined under the CSBFP by reference to the Standard Industrial Classification – Establishments (SIC-E) 1980, not the now more widely used North American Industry Classification System. Under the “Agricultural Industries” section, the SIC-E lays out the subcategories which are considered “farming” under the CSBFP. The categories include “Livestock Farms (Except Animal Specialties)”, “Other Animal Specialty Farms”, “Field Crop Farms, Field Crop Combination Farms”, “Fruit and Other Vegetable Farms, Horticultural Specialties”, and “Livestock, Field Crop and Horticultural Combination Farms”.

How Much Can Be Borrowed

Borrowers can borrow up to a maximum of $1,150,000.00. $1,000,000.00 of which can be borrowed by way of term loans. The additional $150,000.00 can be borrowed by way of a line of credit.

The $1,000,000.00 term loan and the $150,000.00 line of credit cannot be used to purchase just anything.

There are restrictions on how funds from a CBSFP loan can be used; most of the restrictions are aimed at ensuring that money from the loans is spent on developing the business and not for some other purpose.

The term loan and line of credit have different eligibility requirements when it comes to how the money from both credit products can be used.

For the term loan, $1,000,000.00 is eligible for purchasing “real property”, which essentially means obtaining buildings or land. $500,000.00 of the loan can be used for renovations to leased properties and for obtaining equipment. Finally, $150,000.00 of the term loan can be used to finance any working capital costs and for intangible assets. These figures are, of course, maximums, not minimum requirements for spending under the program.

For the line of credit, the total $150,000.00 can be used to finance the everyday operational expenses of the business.

Small business owners can also use the CSBFP to claim purchases that were made 365 days prior to approval of a loan. So, purchases made within the last year are eligible.

Government Guaranteed

One of the core benefits, if not the core benefit, of the CSBFP, for both borrowers and lenders, is that the Government backs up to 85% of the loss from the loan. This means that if a default should occur under a loan governed by the CSBFP, and a borrower is unable to rectify such a default, the lender is entitled to claim from the government 85% of whatever is unrecoverable.

However, it is critical that lenders are aware of which borrowers are eligible under the program, as the government will not back 85% if a borrower is loaned under the program and is ineligible.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.