Changes To The Canada Small Business Financing Program

On July 4, 2022, certain amendments to the Canada Small Business Financing Regulations and Canada Small Business Financing Act came into force, resulting in changes to the Canada Small Business Financing Program (the “CSBFP”).  The CSBFP is intended to make it easier for small businesses to get loans from financial institutions by sharing the risk with lenders.¹ The amendments to the CSBFP provide lenders and small businesses with additional financing products, including a new class of loans, increased loan amounts and terms, improved loan conditions and decreased administrative burdens.  Several of these changes will be beneficial to both franchisors and franchisees.  Below is a summary of certain of these amendments²:

1. New Financing Amounts

The maximum loan amount for a borrower has been increased from $1 to $1.15 million,  which includes:

• $1 million for term loans of which a maximum of $500,000 is comprised of (1) equipment and leasehold improvements of up to $350,000; and (2) $150,000 for intangible assets and working capital costs.

and

• $150,000 for lines of credit for working capital costs. This would be over and above the $150,000 that can be used for working capital costs under the term loan product (above).

2. Term Loans

The amendments include two new financing classes – intangible assets and working capital costs can now be financed as term loans.  Intangible assets are defined as non-monetary assets without physical substance that can be sold, transferred, licensed, rented or exchanged or that arise from a contractual or other legal right.  This includes franchise fees, goodwill, incorporation costs and permits and licenses.

Maximum Loan Term

All term loans used to finance real property, leasehold improvements, equipment and intangible assets and working capital costs can now be made for a maximum of 15 years.  Equipment and leasehold improvement loans that are already registered (or disbursed and not registered) can be amended to the new 15 year term.

Appraisal of Eligible Expenditures

The time period to finance expenditures or commitments for any term loan has been increased from 180 days to 365 days prior to the date the term loan is approved.  If the lender is required to obtain an appraisal to finance a term loan, the date that the appraisal is made has been changed from 180 days before the term loan is approved to 365 days before the term loan is disbursed.

Security

For real property and equipment term loans, lenders must continue to take security in the assets financed.  Lenders must take security in any assets of the small business for the value of the loan for the following items:  leasehold improvement, computer software, website, intangible assets and working capital costs.

3. Line of Credit

Eligible businesses can now access a line of credit to be used for working capital costs (costs necessary to cover the day-to-day operating expenses of the business). Examples include: inventory, expenses related to the creation and development of software and websites, printed materials, professional fees (e.g. legal, accounting, appraisal), research and development costs, payroll and rent.  The line of credit may be used to pay for ongoing expenditures or commitments that arise or were invoiced no more than 365 days prior to the date that the line of credit was authorized. Lenders will be required to take security in any assets of the small business for the authorized amount of the line of credit.

Term and Renewal

The maximum term for the line of credit is 5 years beginning on the day after the line of credit is opened by the lender.  Prior to the end of the 5 year term, borrowers will have the following 3 options:

1. Re-register the line of credit for a new period of 5 years. In this case, a new registration form and a registration fee of 2% on the renewed authorized line of credit amount must be submitted to the CSBFP.
2. Borrowers can also convert the line of credit amount to a CSBFP term loan with a maximum 10-year CSBFP coverage. Any such term loan would need to meet the following conditions:
   • The interest rate must not be greater than the prime rate plus 5%;
   • The terms of the loan conversion must be set out in a document signed by the lender and the borrower and that provides a minimum of one principal and interest payment each year, with the first payment scheduled to be made within one year of the date of the conversion; and
   • The borrower and lender must enter into an agreement to repay the balance of the line of credit with a conventional loan.
3. The borrower and lender may enter into an agreement to repay the balance of the line of credit with a conventional loan.

Claim Process Documents and CSBFP Liability

Lenders must submit an attestation form signed by the borrower at the time the line of credit is registered stating that (1) the line of credit is to be used to pay for working capital costs of the day-to-day operational expenses of the small business, and (2) the expenses paid through the line of credit did not arise (and were not invoiced) more than 365 days before the line of credit was authorized.

The CSBFP's liability for lines of credit for a lender is limited to 15% of the total amount of the lines of credit authorized and registered by that lender, separate and apart from a lender's liability calculation for its registered term loans.

As noted above, one of the most significant changes for franchisees and franchisors is that franchise fees can now be financed under the CSBFP.  Prior to these changes, franchise fees were ineligible for financing under the program and had to be paid for out-of-pocket or through other credit products offered by financial institutions.

Footnotes

1 https://ised-isde.canada.ca/site/canada-small-business-financing-program/en/find-loan-your-small-business/about-program/helping-small-businesses-get-loans

2 https://ised-isde.canada.ca/site/canada-small-business-financing-program/en/documentation-centre/bulletins/2022-changes-canada-small-business-financing-program

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.