Small Business Finance in Canada

The Canada Small Business Financing Act - CSBF - Facilitates Small Business Loans

Before we look at government sources for small business finance in Canada, let us take a brief look at financing issues in general.

Business Finance

Businesses need money to pay for two distinct kinds of needs.

Firstly, they need money to set up the facilities needed to run the business. Depending on the type of business, this can include one or more of the following: Premises, Machinery & Equipment, Utility Installations, Furniture, Vehicles and Goodwill payments if you are buying an existing business. Typically, these are one-time expenses.

The one-time expenses for acquiring "fixed" assets are financed with one's own funds or long-term borrowings. These long-term borrowings are repaid over a number of years from the earnings of the business.

Secondly, businesses need money to carry on operations. Examples include rent payments, employee wages, raw materials or retail merchandise, office supplies, travel expenses, utility bills, maintenance of premises and equipment, and such other recurring expenses.

The recurring expenses are financed with current earnings of the business and short-term borrowings or lines of credit. Such short-term borrowings are known as working capital loans.

Lenders want to ensure that the money that they lend is repaid. They do this by looking at the viability of the business, character and credit record of the borrower and the availability of any "collateral" security such as the borrower's personal property.

Lenders also check to see how much money the borrowers have brought in on their own. Such personal investment, known as equity funds, goes to show that the borrower is serious about the business, and willing to take the risks involved. It also provides a margin that can provide a cushion to secure the external loans.

The Online Small Business Workshop page of Canada Business has a section on Financing Your Business that discusses the above issues in more detail.

Canada Small Business Finance

The Government of Canada has enacted a Canada Small Business Financing Act. The CSBF program under the act enables small businesses obtain long-term loans up to $250,000 for acquiring fixed assets. The loans are made directly by banks and some other financing institutions, and can be used for:

• the purchase or improvement of real property or immovables;
• the purchase of leasehold improvements or improvements to leased property;
• the purchase or improvement of new or used equipment necessary for the operation of the business; and
• the registration fee equal to 2% of the amount loaned, provided that the loan maximum of $250 000 in total is not exceeded.

The Business Development Bank of Canada - BDC "delivers financial and consulting services that complement those of private sector financial institutions". The bank assists small and medium businesses in Canada through financing, consulting and venture capital financing services.

You can seek the help of the nearest branch of BDC to prepare an effective presentation for seeking a loan or venture capital for your small business.

Other Sources of Business Finance

There are sources other than long-term loans and working capital borrowings (or lines of credit) for financing your business. The following list provides examples:

• Supplier Credit: Suppliers of raw materials and merchandise allow you to pay for the supplies one, two or even more months after the supply is made. You can use the supplies thus obtained to carry on your business and generate funds to pay the suppliers.
• Leasing Equipment: Premises and equipment can be rented or leased instead of bought outright. This can eliminate the need to negotiate a long-term loan, and can even save money and offer other advantages like not having to hold on to obsolete equipment.
• Customer Advances: For long-term projects such as construction contracts, it is usual to seek some advance payments (and subsequent progress payments) from the customer. These payments are received before work is started or completed and can help finance it.
• Factoring Accounts Receivable: There are factors who would purchase your unpaid customer invoices and collect the invoices directly from the customers on due dates. You can thus receive immediate payments against your receivables.

The separate article on Small Business Funding discusses how to go about raising funds for your small business.

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