Presentation: Making a Loan

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Overview

Due Diligence

General principle

  • Lenders must apply the same care and procedures in making and administering a CSBF loan as they would for a conventional loan

Procedures must include, but are not limited to:

  • Credit check on the borrower / guarantor
  • Repayment ability of the borrower

Terms of the Loan and Renewal

Terms of Loan

  • Maximum loan guarantee: 10 years
  • Minimum of one principal and interests payment scheduled per year

Renewal and Revision of Terms

  • At any time, the borrower and lender may agree to amend the repayment terms (payments, loan term, amortization) without the Minister's approval.
  • Terms of the loan can be renewed for additional terms to an aggregate maximum of 10 years subject to the following conditions:
    • term is less than 10 years from original first scheduled payment
    • at least one payment of principal and interest is scheduled per year
    • interest rate at renewal date cannot exceed prime + 3% or single family residential mortgage rate + 3%
  • The Minister's liability terminates after 10 years from date of first scheduled payment.

Interest Rate Conversion and Prepayment

Lenders can convert interest rates and accept prepayments

  • Interest rates can be converted:
    • From a fixed interest rate to a variable interest rate and vice versa
  • Lenders can accept prepayments and charge for conversion of the interest rate or prepayment as they would have charged for a conventional loan

Eligible and Ineligible Items

Eligible Items*:

  • Water supplies and drainage systems
  • Display cases
  • Moulds used for production
  • Dies and jigs
  • Landscaping
  • Paving of parking areas
  • Access sidewalks
  • Fences
  • Wood lot (timber must be capitalized)
  • Architectural, engineering and design fees related to the project being financed with the loan
  • An undivided share of an eligible asset that is required for the operation of a commercial business (e.g., a 60% share in a building or equipment) where the owners of the asset are or will be operating businesses independent of each other. The financing must be made to the entity carrying on the small business, not to another entity created specifically to own and manage the asset.

Ineligible Items:

  • Working capital
  • Improvements to a family dwelling for non commercial purposes
  • Purchase of shares in a corporation
  • Permits & licenses used in the operation of eligible assets
  • Franchise fees
  • Feasibility studies
  • Professional fees (e.g., legal, accounting and appraisal)
  • Survey costs
  • Building permits
  • Vehicles for personal use
  • Supplies (e.g., paper, staplers, pens, uniforms, erasers, menus, photocopies)
  • Intangibles (e.g., research/ development costs, prepaid expenses, goodwill)
  • Improvements to real property or immovables, where the vendor as the owner of that real property or immovable is selling those improvements
  • Labour costs of the borrower, its employees, shareholders and directors of a corporate borrower.

* The following lists are not exhaustive. When in doubt, lenders should contact their head office, regional office or their central office for advice. (Return to reference)

Eligible Amount Considerations

Trade-ins: Lenders may use the gross cost of the asset (as if there had been no trade in) to calculate the eligible cost.

Non-refundable taxes: Non-refundable taxes or customs duties may be included as part of the eligible cost of an asset. Eligible cost must not include any refundable items (GST, HST, PST or other).

Transportation and Installation of assets financed: Freight and installation, related to the asset being financed, may be included.

Decontamination cost: Decontamination costs of real property or immovables are eligible provided:

  • they are made in conjunction with the purchase of real property or immovables that are necessary for the operation of the business
  • they are required under a federal or provincial law;
  • the decontamination plan is disclosed to the lender on or before the day on which the first disbursement of the loan funds is made for the CSBF loan; and
  • the CSBF loan is secured by a first mortgage on the real property or immovables.

What to Look for When Considering Invoices

  • Addressed in the legal name of borrower
  • Contains vendor's name, business address and telephone number
  • Evidence of payment is made out to the vendor (cancelled cheque, attestation from vendor)
  • Relationship between the borrower and vendor is arm's length (same name?, same address?)
  • Dated within 180 days prior to the original approval date of the loan
  • Details of the assets purchased are provided on the invoice (serial number, product number, etc.)
  • Exclude refundable taxes (GST, QST and HST)

Specific Criteria (Real Property)

The 50% Rule:

Lenders can finance up to 90% of the eligible cost of real property, provided the borrower is using, or will be using, at least 50% of the area for the operation of the business within 90 days after final disbursement under the loan agreement. The 50% threshold is determined using either the proportion of the land or building required by a borrower's eligible operation. The area in excess of the operational area is not subject to the 3 years rule and can be leased.

The 3-year Rule:

At the time the loan is made, it is not the intention of the borrower to sell, lease or sub-lease the operational area for which the loan is made, for the next three years. The following industries are eligible to finance premises for leasing purposes: mini-storage, health care and hospitality.

Appraisals and Appraisal Conditions

Appraisals:

  • A lender must obtain an appraisal for:
    • Non-arm's length transactions
    • Purchases of all, or substantially all, the assets of a going concern
    • Purchases, from the lender or its representative, of assets financed.
  • Amount of the loan must be the lesser of:
    • Cost of purchasing
    • Appraised value

Conditions:

  • Appraisal made not more than 180 days prior to the loan approval
  • Made by an appraiser member of a professional association
    • Exception for equipment and leasehold improvement loans (if no professional associations)
  • Appraisal from a qualified individual who is at arm's length

Security, Substitution and Release

Primary Security:

  • Of 1st rank on assets financed.
  • Alternate security (for leasehold):
    • first ranking security on the assets financed; or
    • security on other business assets
  • Must be of highest rank available:
    • If, at the time of the first disbursement of CSBF loan funds, prior security exists on the assets financed, the lender's security shall be a charge of the highest available rank.
  • Equal ranking:
    • If asset is financed by a CSBF loan and other sources of financing (other than the borrower's funds), all security taken on the assets financed must be equal in rank.
  • After-acquired clause:
    • Where the prior charge flows from an "after-acquired clause" in the security held by the lender or another creditor, the lender is required to obtain a postponement of the security for the assets being financed by the loan.
  • 30 day equal ranking:
    • If, within 30 days (before or after) of the first disbursement of a CSBF loan, the lender makes an initial disbursement under a conventional term loan to finance assets that would have been CSBF-eligible, all security taken on CSBF-eligible assets for the term loan and the CSBF loan will become equal in ranking and in proportion to the total financing.
  • Non-arms length transactions:
    • The lender shall take security on the real property or immovable where:
      • leasehold improvements are being financed; and
      • the borrower and the landlord are not at arm's length

Assets that are the object of primary security can be substituted for other business assets of equal value.

A primary security can be released if certain conditions are met.

Additional Security:

  • Lender may obtain security on other assets of the business
  • Personal guarantees (25% of amount disbursed)
    • Can be substituted with other personal guarantees of same value
    • Can be released if certain conditions are met
  • Corporate guarantees

Additional security can be released or substituted at any time

Registering a CSBF Loan

Registration:

  • First disbursement on the loan must be made before registration;
  • Within 3 months from the date of first disbursement of loan funds
    • 3 months can be extended to 6 months if delay is inadvertent
  • Loan Registration form (#IC0664) must be signed by an authorized representative of the lender and by the borrower
  • 2% registration fee must be submitted with the loan registration form
  • Industry Canada will send an acknowledgement to the lender upon registration

2% registration fee:

  • Calculated on the amount of loan (real property, leasehold, equipment)
  • Refund of fees can be requested within 1 year from disbursement date (partial/full)
  • Can be financed under the CSBFP

Loan amount may be increased < 1 year from disbursement date

  • Lenders must attest that:
    • The increase is for the same project
    • The legal status of the borrower remains same
    • The loan is in good standing/terms and conditions of the Act and Regulations are met
    • The lender amends registered security
    • There are no modifications to the original registration form "Acknowledgment and Consent section"
    • The 2% fee related to the increase is submitted with the request.

Administering a CSBF Loan

Annual administration fee of 1.25% paid by the lender:

  • A 1.25% administration fee is payable quarterly by the lender
  • The fee is calculated at the annual rate of 1.25% applied to the end-of-month loan balances during the quarter
  • Must be paid on all loans, including those in default and those where an interim claim was paid
  • The cheque must be made payable to the Receiver General for Canada
  • Lenders must submit a statement substantiating how the payment was calculated

Annual Outstanding Loan Balance Report:

  • Submitted by Lender
  • Includes all active loans, including those in default
  • As at March 31

Transfer of Loans

Loans can be transferred between borrowers

  • The Regulations allow for the transfer of loans between borrowers and the release of the original borrower provided that the following conditions are met:
    • In approving the new borrower the lender exercises proper due diligence;
    • the new borrower total outstanding loans does not exceed the maximum loan amount
    • security of the same rank is maintained on the assets financed by the loan; and
    • existing guarantees are replaced with other guarantees of equal or greater value.

* Lenders should inform the CSBFP Directorate (e-mail/fax).
* The lender is required to provide the documentation in the event a claim for loss is filed.

Loans can be transferred between lenders

  • The lender acquiring the loan must complete the forms which must be signed by both lenders and the borrower.

Common Omissions – CSBFP Loan Registration Form

  • Lender's loan number: This number is important in order to reconcile the outstanding loan balance on an annual basis.
  • Business number: Lenders can check the "To follow" box for the Business number assigned by the Canada Revenue Agency. Lenders are required to send the Business number to the CSBF Program as soon as possible.
  • Names of shareholders: If the borrower is a corporation, the name(s) of the shareholder(s) must be provided.
  • Date of first disbursement: 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.
  • Borrower's / Lender's acknowledgement section: It is common that the borrower's initials are missing in this section. It is also important to print the name of the person who signs the borrower's or lender's acknowledgement.

Note: In order to avoid these common omissions, consider the new CSBFP online Loan Registration Application.

Reference Tools

Lenders should always refer to the Act and Regulations, as they constitute the legal authority for the program. They contain the procedures and conditions for making and administering CSBF loans and for submitting and substantiating claims for loan losses.

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