Bulletin — July 2009
Printable Version: Eligibility of share purchases - Term of loan and amortization - The top 5 omissions on registration forms - July 2009(PDF Format 66 KB)
Eligibility of share purchases - Term of loan and amortization - The top 5 omissions on registration forms
This Bulletin deals with two items/issues that are the subject of lenders’ questions and details common omissions that occur when completing registration forms.
1. Eligibility of the purchase of shares
The purchase of shares (share purchase) in a corporation operating a small business is not eligible under the CSBF Program. The purpose of the Program is to help small and medium-sized businesses obtain financing for the purchase of real property, equipment and leasehold improvements (eligible assets) used in the operation of the business. In a share purchase, the purpose of the loan is to finance the equity in the existing business; it is not to finance the purchase of eligible assets under the CSBF Program. The funds are not advanced to the corporation operating the business but rather are advanced to an individual in order to purchase shares.
2. Term of loan and amortization
The use of “term” and “amortization” may be causing some confusion. “Term” can be defined as the period of time over which the interest rate, payment and other loan conditions are set. At the end of the term, the loan is due and payable unless renewed. “Amortization” is the actual number of years it will take to repay a loan in full. This may go beyond the term of the loan as in the case of real property mortgages that have the amortization period for 25-years even though the term is for a shorter period.
The CSBF Program requires that the maximum term of a loan or the aggregate of the loan terms (where the loan is renewed) is 10 years from the date of the first scheduled payment specified in the initial loan document (e.g., the promissory note). However, as stated in item 6.1, Section A of the Guidelines, repayment of the loan can be amortized over a period longer than 10 years.
What happens if the 10 year limit is exceeded on a loan? A claim on the loan will be paid only if the default occurred before the expiry of the 10 years calculated from the date of the first payment. If there is no default before the expiry of the 10 years, the balance of the loan at the end of the 10 years should be converted to a conventional loan. The CSBF Program no longer has a provision allowing the Minister to extend the term beyond 10 years.
3. Five common omissions on registration forms
Omissions on registration forms submitted by lenders delay the registration process. Below are the 5 most common omissions made (boxes refer to those on the registration form):
1) Box 3 lender's loan number is missing: This number is important for such things as reconciling the outstanding loan reports from lenders.
2) Box 7 business number not provided: Lenders can check a "To follow" box relating to the Business number assigned by the Canada Revenue Agency. Lenders should send the Business number to the CSBF Program as soon as possible.
3) Box 8 names of shareholders are missing: If the borrower is a corporation, the name(s) of the shareholder(s) must be provided.
4) Box 17 date of first disbursement missing: A loan can be registered within three months after the first disbursement date. The Registration form should not be submitted if the loan has not been disbursed.
5) Borrower's / Lender's acknowledgement section incomplete: It is common that the borrower’s initials are missing in this section. It is also important to print the name of responsible officer of the company, when applicable.
We welcome your comments and feedback on any points raised in this Bulletin. Please feel free to contact us.
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