Are you considering franchise ownership but wondering how you’re going to obtain financing? Fortunately, it’s in the Canadian government’s best interest to support business growth in the country, which is why they offer various programs to help business owners such as the Canada Digital Adoption Program (CDAP) and Canada Small Business Financing Program (CSBF).
While there are various financing options available for prospective business owners in Canada, the government offers a program that makes it easier to obtain a business loan. Similar to an SBA loan in the United States, the CSBF will guarantee 85% of a loan, which provides the backing a small business needs to acquire a loan from a private lender. The CSBF is available both to new businesses and established businesses that are experiencing a cash flow problem.
7 Key Features of the CSBF Program
It’s important to understand the terms and conditions of the CSBF to evaluate if it’s a viable option for you to purchase a franchise.
1 – Interest Rates
Both floating and fixed interest rates are available to the borrower. These rates will vary depending on which financial institution is providing the loan. However, the maximum chargeable for a floating rate is the lender’s prime lending rate plus 3%. For a variable rate, it’s the lender’s single-family residential mortgage rate for the term of the loan plus 3%.
2 – Term Loans
The program offers term loans to finance the purchase or improvement of assets. A term loan “provides borrowers with a lump sum of cash upfront in exchange for specific borrowing terms”. Borrowers often prefer term loans since they “offer more flexibility and lower interest rates” (Investopedia).
3 – Eligibility
Businesses eligible for the CSBF have gross annual revenues of $10 million or less. Farming businesses are not eligible for this program. Interestingly, charitable, religious, non-profit organizations (NPOs) used to be excluded from this program. However, since June 30, 2021, they are included provided that they carry on a small business.
4 – Loan Amounts
The maximum loan amount is $1 million. As of July 4, 2022, the CSBF also offers a line of credit. This can exceed the loan amount but is capped at $150,000.
5 – Flexible Use
In short, the CSBF term loan can be used for:
- real property;
- leasehold improvements;
- equipment;
- intangible assets (new requirement – intangible assets)
- working capital costs (new requirement – working capital costs) and
- 2% registration fees
Check out Canada Small Business Financing Program Guidelines for more specific information regarding the term loan stipulations.
6 – Government Guarantee
As mentioned already, this program makes it so that the Canadian government shares the risk of the loan with the lenders. If the borrower defaults, then the government will cover 85% of the losses. This guarantee makes it easier for small businesses to obtain a loan from participating financial institutions.
7 – Loan Repayment
While the specific terms for repayment will depend on each loan, the maximum term is 15 years. The loan can be amortized for a longer period, but after 15 years the remaining balance will be converted to a conventional loan. While at least one payment of principal and interest must be scheduled annually, the schedule for the rest of the payments can be flexible.
The maximum term for the CSBF’s line of credit is 5 years with options for renewal before the end of the term.
What is the Application Process?
You can apply for the CSBF if you meet the definition of a small business and are not in the agricultural industry.
Steps to Apply
If you’re interested in applying for the program, you can take the following steps:
- Find a financial institution eligible for this loan (check out this map for a list of lenders)
- Present a business proposal that outlines the size of loan you’re looking for, how it will be used, and your plan for repaying the loan
- If the loan is approved, then you will negotiate the interest rate and term of the loan with your lender
- If your loan application is rejected, apply with another financial institution that has different lending criteria
As you take the steps to apply for this program, remember that having a solid business plan can increase the lender’s confidence in giving you a loan.
Required Documentation and Paperwork
Let’s say the lender approves the loan application. Now, in order to obtain a CSBF loan, both parties will need to sign a document with a plan that includes the following information:
- Loan amount
- Interest rate
- Repayment terms
- Payment frequency
- Due date for the first payment
Regarding the CSBF line of credit, both parties must:
- Sign a document before opening the line of credit
- Specify the terms (amount, interest rate, credit terms)
- This can be any document used to secure repayment of a line of credit (promissory note, loan agreement, bank contract, etc.)
Ready to Finance Your Franchise in Canada?
If you are looking to buy a franchise, then you should definitely explore the CSBF program as a viable financing option. You should also reach out to FranNet for help navigating the process. Our expert franchise consultants will not only help you evaluate your funding options, but they will match you with the right franchise. You won’t have to pay a dime for our services. You have nothing to lose and everything to gain. Schedule your free consultation today!