You might have come across the term 'government guaranteed loan' in passing while researching your business financing options, but what does it actually mean?
To simplify, think of the first time you applied for a car loan. Was someone (perhaps a parent) willing to co-sign for you? For a business in need of financial support, however, your parents probably aren't the strongest candidates to support your needs.
Essentially, under the Canada Small Business Financing Program (CSBFP), the federal government will step-in to co-sign your business loan if you meet their criteria and play by their rules. Let's look at the key features of the program:
AVAILABILITY AND ELIGIBILITY CRITERIA:
- Government guaranteed loans are not automatically approved. The program makes it easier for banks to lend money to new/existing businesses by reducing their risk (if the loan is not paid back properly, the bank can apply to the government for repayment), but at the end of the day it's still the financial institution that must approve your loan. For more information on obtaining financing, see this earlier entry.
- Apply at your bank/credit union of choice. Applications for this program are NOT submitted directly to the government by the business owner themself.
- Businesses must be operating 'for-profit in Canada', with less than $5 million dollars in current annual revenue.
- Maximum loan value can not exceed $500,000.
- Only 90% of initial startup costs can be borrowed under the program. If your initial investment in a new business will be less than 10% of the overall costs, you will not be eligible for the program. Also, the money from the loan has to be used in a certain way. Money from these loans can be used to purchase a variety of assets such as land, equipment, vehicles or for facilities improvement. Use of the money to finance the purchase of inventory, R&D, franchise fees, goodwill or working capital is not permitted.
- The program is not available for agricultural/farming businesses. These businesses can apply under different programs specific to the agricultural industry.
- The first thing to know about CSBFP and government guaranteed loans is that they are not a free service. To take advantage of the program, you will be required to pay a registration fee, equal to 2% of the total loan amount. This is an upfront fee, but it can be added into the total amount of the loan (so it does not have to be paid out of your own pocket right away).
- Fixed/Variable interest rates are offered. Not every borrower will be offered the same interest rate (the lending institution can set the rate according to their own criteria), but the rate can be no higher than the current prime lending rate + 3% for variable loans, or the lenders current residential mortgage rate + 3%.
- Repayment is always fixed over a certain number of years (depends on the amount of the loan and your ability to repay).
Finally, its important to remember that this federal government program is intended to assist small business owners (or potential owners). Lending to new or unproven businesses can be a risky game for lenders to play, and at the end of the day, your personal banker will usually recommend this program to you only if it's appropriate for your lending needs. If you are able to obtain financing for your business without government assistance, all the better (why pay the 2% fee if you don't have to?). Nonetheless, it's nice to know that the government is trying to make it easier for you to finance a business. The knowledge and information about what is available to you can only help with the planning and implementation of your new business! Check out the simplified program brochure to get started: English French.
Useful links about the Canada Small Business Financing Program/Act.
Canada Small Business Financing Program homepage (Industry Canada)
Canada Small Business Financing Program (CSBFP) Awareness and Satisfaction Study
SME Financing Data Initiative - Small Business Financing Profiles