Test your knowledge
Where lenders consider that a given situation is not clearly covered by the Act, Regulations, the Guidelines or these questions and answers, they should seek clarification and direction from their head office, regional office or their central office. Where appropriate, and at the written request of the lender's head office, regional office or central office, a ruling may be obtained from the Small Business Financing Directorate.
- Making a loan
- Are farming activities eligible for CSBFP loans?
- Are foreign citizens eligible for a CSBFP loan?
- Can related borrowers have more than one loan?
- What is the maximum amount of a loan under the CSBFP ?
- How much can be financed under the CSBFP ?
- Can a single loan be used to finance real property with a maximum loan term of 15 years and equipment with a maximum loan term of 15 years?
- When is an appraisal required?
- What constitutes a non-arm's length relationship?
- For appraisals, is it permissible to use someone who is not a member of a professional association?
- Can lenders charge fees for CSBFP loans?
- Are on-site visits mandatory?
- Can personal guarantees be secured?
- Can a lender submit the registration form even if it has not yet obtained the borrower's business (GST) number?
- Can a lender request an increase in the amount of the loan already registered under the CSBFP ?
- Can an extension be granted to a lender for submitting a loan for registration beyond the deadline?
- Can a lender get a refund of the 2% registration fees?
- Can a CSBFP loan be transferred to another lender?
- Before submitting a claim to the Minister, does the lender have to realize on the security taken on the assets financed?
- To what extent are proof of purchase and proof of payment required when submitting a claim?
- What qualifies as proof of purchase and proof of payment?
- Does the lender have to obtain a judgment against a borrower/guarantor when in the process of realizing on the security of a CSBFP loan?
- What are some of the common errors made when making a CSBFP loan that would result in invalidating a claim?
- What are some of the common errors made when making and administrating a CSBFP loan that would result in an adjustment to a claim?
Making a loan
1. Are farming activities eligible for CSBFP loans?
Businesses engaged in farming activities that qualify under the Major Group 01 Agricultural Industries are not eligible. Since "farming" businesses are ineligible, any assets that are used in any of these industries are not eligible for financing under the CSBFA. Financing for farming industries are available under the Canadian Agricultural Loans Act program.
Service Industries Incidental to farming in Major Group 02 Service Industries Incidental to Agriculture are eligible under the program. For example, a small business whose activity is to provide services to other farmers, such as harvesting services.
2. Are foreign citizens eligible for a CSBFP loan?
Yes. Small businesses, operated by foreign citizens are eligible to obtain a CSBFP loan as long as the borrower's business complies with federal or provincial legislation, the place of business is in Canada and the assets being purchased are to be used in Canada.
3. Can related borrowers have more than one CSBFP loan?
Yes. However, if an existing borrower and/or potential borrowers are related and cannot pass the independent small business test , they are limited to a maximum outstanding loan of $1.15 million amongst them.
Guidelines Item 2.4 Independent small business and related borrower
4. What is the maximum amount of a loan under the CSBFP ?
The maximum loan amount for a borrower (and related borrower) is $1.15 million which includes the following:
- $1 million for term loans of which a maximum of $500,000 includes:
- equipment and leasehold improvements loans; and
- $150,000 for intangible assets and working capital costs.
- $150,000 for lines of credit for working capital costs (which is over and above the $150,000 that can be used for working capital costs under the term loan product).
5. How much can be financed under the CSBFP ?
The percentage of financing is determined by the lender and negotiated with the borrower based on internal lending policies and the risk and needs of the borrower.
6. Can a single loan be used to finance real property with a maximum loan term of 15 years and equipment with a maximum loan term of 15 years?
Yes, a lender may choose to finance with the same loan the purchase or improvement of real property and equipment.
7. When is an appraisal required?
A lender must obtain an appraisal of the market value of the asset or services intended to improve an asset, when the borrower:
- Purchases an asset or services intended to improve an asset from a person not at arm's length.
- Purchases all or substantially all of the assets of a going concern
- Purchases, from the lender or its representative, an asset that is or was used to secure a conventional loan.
In the event a lender is required to obtain an appraisal to finance a term loan, the appraisal can be made at any time within 365 days before the term loan is disbursed.
For lines of credit, an appraisal is not required, however, a lender must take security in any assets of the small business for the authorized amount of the line of credit (e.g., a General Security Agreement).
There are other situations related to substituting or replacing security where appraisals may be required. Refer to the Guidelines Items on Substitutions, Release without substitution or replacement and Other appraisal requirements for more information.
8. What constitutes a non-arm's length relationship?
The concept of a party not at arm's length from the borrower is described in Item 251 of the Income Tax Act, a copy of which is provided in the Annex of the Guidelines. It defines related persons as individuals connected by blood, marriage, or adoption and any situation involving different degrees of control by these persons or corporations. Control is not defined by a specific percentage and can be a question of facts, even between two non-related parties.
9. For appraisals, is it permissible to use someone who is not a member of a professional association?
The services of an appraiser who is a member of a professional association must be used for the purchase of real property. There are no exceptions.
- For equipment or leasehold improvement loans:for an equipment loan, an appraisal can be made by a supplier of similar equipment, auctioneer, or expert in the field, who is at arm's length from the borrower.
- for a leasehold improvement loan, an appraisal can be made by a general construction contractor, a construction estimator, an engineer, an architect, a contractor specializing in similar leasehold improvements, construction consultant or interior designer.
10. Can lenders charge fees for CSBFP loans?
Yes. Lenders may charge the same fees (e.g. set-up and renewal fees), that they charge for a conventional loan of the same amount.
11. Are on-site visits mandatory?
No, on-site visits are not mandatory. Whether an on-site visit was conducted will only be considered if security is not enforceable, or there is insufficient information to determine that security was enforceable. A new form has been developed to clarify the type of information which should be verified during an on-site visit. It is recommended that lenders refer to the Site Visit Suggested Checklist for wording and content.
12. Can personal guarantees be secured?
No. Lenders have the option to obtain unsecured personal guarantees up to the original amount of the loan. The personal guarantee cannot be secured.
13. Can a lender submit the registration form even if it has not obtained the borrower's business (GST) number?
Yes. A lender can submit the registration form without the borrower's business (GST) number. Lenders are encouraged to submit the business (GST) number when it is available.
14. Can a lender request an increase in the amount of the loan already registered under the CSBFP?
Yes. The lender does not have to submit a new registration form. The request for the increase must be submitted in writing within one year after the date of the first disbursement of the initial loan. The lender must:
- detail the new loan amount by class of loan,
- attest that the increase relates to the same project,
- confirm that the legal status of the borrower remains the same as that of the initial loan,
- confirm that the loan is in good standing and all other terms and conditions of the Act and Regulations are met,
- amend the registered security to reflect the increased amount of the loan,
- certify that there are no modifications to the "Borrower's Acknowledgement and Consent" Section of the registration form originally submitted and
- submit a payment for the 2% registration fee related to the increase.
15. Can an extension be granted to a lender for submitting a loan for registration beyond the deadline?
Given the loan registration deadline has been extended to 6 months (up from 3 months), extensions after the 6 month period will not be possible. This 6 month loan registration period would also apply to loans disbursed prior to July 4, 2022 but not yet registered.
16. Can a lender get a refund of the 2% registration fees?
Yes. A partial refund of the registration fee may be authorized if the lender has disbursed less than the full amount of the loan registered. A full refund of the registration fee may be authorized if the lender determines the loan to be ineligible. However, the request for partial or full refund of registration fees must be submitted by the lender within one year from the date the loan was disbursed.
17. Can a CSBFP loan be transferred to another lender?
Yes. Loans can be transferred between lenders for a variety of reasons. Since the transfer of loans between lenders impacts the Minister's liability, it is possible that a request to transfer a loan at the request of a borrower could be refused if the Minister's remaining liability were to become insufficient following the transfer. Therefore, it is important for the acquiring lender to request the transfer of a loan before committing any funds in favour of the original lender.
18. Before submitting a claim to the Minister, does the lender have to realize on the security taken on the assets financed?
Yes. The lender should apply the same business practices as it would with a conventional loan and take proceedings (legal or other) only when it is cost effective to do so.
If the lender determines that the secured assets should be abandoned, detailed documentation is required to support the decision (i.e. appraisal, documentation of priority claims by Canada Revenue Agency, estimate of realization costs or legal costs, personal net worth statement of guarantors, etc.).
19. To what extent are proof of purchase and proof of payment required when submitting a claim?
Generally lenders are only required to submit proof of purchase and proof of payment in an amount equal to or greater than the outstanding principal loan amount at the time of default (prior to realizations).
For all term loans registered after July 4, 2022 and for CSBF term loans already registered for which the last loan payment is on or after July 4, 2022, the requirement to provide documentation that substantiates the cost and proof of payment of the purchase is 75% of the principal amount outstanding on the loan as of the date of the last payment of principal and/or interest and applies to initial, interim and additional claims.For lines of credit, lenders are not required to substantiate the cost and proof of payment for expenditures. Instead, the lenders must submit an attestation form signed by the borrower at the time the line of credit is registered stating that:
- 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;
- 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.
20. What qualifies as proof of purchase and proof of payment?
Eligible expenditures must be supported by proof of purchase and payment in the name of the borrower. The invoices and purchase agreements must provide details of the items being purchased or the work being done. Proof of payment can include copies of cancelled cheques, credit card or debit receipts. Other examples of proof of purchase and proof of payment documentation are provided in Item 5.3 of the Guidelines.
21. Does the lender have to obtain a judgment against a borrower/guarantor when in the process of realizing on the security of a CSBFP loan?
It is the responsibility of the lender to determine if a judgment should be obtained for a CSBFP loan as it would do for a conventional loan.
However, before incurring the legal costs to obtain judgment, the lender should do the necessary investigation (i.e. investigation report, updated credit bureau, financial statements, declaration of worth by the borrower/guarantor under oath, etc.) to determine if the procedure is cost effective and would reduce the Minister's loss.
22. What are some of the common errors made when making a CSBFP loan that would result in invalidating a claim?
The most common errors are:
- an independent appraisal that was required for all financed assets and services was not obtained when approving a loan and no other documentation was obtained to corroborate the value of the equipment and leasehold improvements
- all the loan proceeds were used for an ineligible purpose (e.g. share purchases)
- a loan made to an ineligible borrower (e.g. farming, holding company instead of operating company)
- the security taken was not valid and enforceable. A new security non-compliance Item has been added for loans that default after March 31, 2014. (Guidelines Item 24.2 Non-compliance remedies)
- a claim or final claim after an interim claim was paid (or request for extension) was not submitted within the required time frame.
23. What are some of the common errors made when making and administrating a CSBFP loan that would result in an adjustment to a claim?
The most common errors are:
- missing proof of purchase and proof of payment documents in the claim for loss
- appraisal requirements not met
- expenditures made more than 365 days before loan approval date
- interest rate in excess of maximum and borrower was not reimbursed for overcharges
Refer to the chart in the Non-Compliance Remedies Item of the Guidelines for a list of specific instances and the remedial action the lender may take to correct the non-compliance.