The Canadian Small Business Loans Financing Act (CSBFA) is a Federal Government program that is meant to make it easier for small businesses to access the money they need to grow. This program provides a level of insurance against default by the borrower, which protects the lender. The insurance is provided by the Federal Government and is administered by the banks. CSBFA insured loans are available to businesses that have less than $5 million in gross annual revenues. A business can have a maximum $500,000 of these loans outstanding at any given time, with a maximum of $350,000 tied up in equipment or leasehold improvements.
Examples of eligible items include:
- buildings and land
- commercial vehicles
- hotel or restaurant equipment
- computer or telecommunications equipment and software
- production equipment
Ineligible items include:
- goodwill
- working capital
- inventories
- franchise fees
- research and development
The advantage of this program over normal financing is that 90% of the purchase price of eligible items can be financed. A bank would finance a much lower percentage of the purchase price if the loan wasn’t insured. There is a cost for this increased level of financing however, as the government requires 2% of the loan amount as an insurance premium. This can be financed as part of the loan. Interest rates are higher compared with other loans with floating rates at prime plus 3.0% and fixed rates at the bank’s residential mortgage rate plus 3%. A portion of this interest is paid to the federal government as part of the insurance premium.
Collateral for the loans is the assets being financed. If you are borrowing through a company, the bank can request a personal guarantee in amount up to but not exceeding 25% of the loan amount.
Detailed receipts must be provided for all items and services being purchased as the bank must prove that only eligible costs were financed. This can be quite a hassle, especially in the case of leasehold improvements which can create a lot of receipts for materials and labour.
CSBFA loans can be a good source of funds for the first time entrepreneur because the higher financing percentage means that less start up capital is required. It’s important to shop around for a CSBFA loan. Some banks don’t have a desire to do these loans due to the increased administration required. Make sure that you find a bank or credit union that is enthusiastic about the program and does a reasonable volume of CBFA loans. It takes some expertise to approve and set up these loans so it is best to deal with an Account Manager that has a lot of experience with them.
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