Have the Rules Changed for Canadian Small Business Loans? Q & A with TD Canada Trust

Canadian banks are hopping with applications for small business loans. It would seem that a lot of small businesses are taking a strategic approach to this recession. They are using this time to invest in their businesses for the long-haul.

What everyone wants to know is, how much tougher is it to get credit during this recession -whether or not the rules have changed and which expenses would be considered eligible for financing with Canadian small business loans.

I interviewed Melanie Porter, Manager of Business Banking at TD Canada Trust to shed light on these questions with specific reference to the easiest way to get a small business loan in Canada, the Canada Small Business Financing Program (CSBF).

The purpose of this program is to assist small business owners with the start-up, growth or modernization of their business operation, by making it easier for them to obtain financing up to a maximum of $500,000.

Under the Canada Small Business Financing Program, the Canadian Government guarantees 85% of the bank’s losses in the event of default. However, the bank must make and manage the Canada Small Business Financing Loan with due diligence, applying the same procedures and care they would apply to any loan, to any small business.

In the event of a claim for loss, the bank must be able to prove the loan was administered in accordance with the specific requirements of the Canada Small Business Financing Program. The Canada Small Business Financing guidelines are available for reference on Industry Canada’s website.

QUESTION

Can you tell us how much tougher it is for small businesses to get credit during this recession?

ANSWER

The bank used to contribute up to 90% of the eligible expenses while the small business owner was expected to contribute the remaining 10%. This has changed. Today, most banks are contributing:

A maximum of 70% for leasehold improvements and equipment (up to a maximum of $350,000)
A maximum of 90% for commercial real estate (up to a maximum of $500,000)

The small business owner’s contribution may be in the form of liquid cash or home equity. It CANNOT be equipment. This aspect has not changed.

QUESTION

Have the rules around giving credit changed for this Canadian small business loan i.e. the Canada Small Business Financing Program?

ANSWER

Banks have always been partial to the small business with a comprehensive business plan but they have become increasingly strict about checking references and analyzing strategies to mitigate risk.

The small business loan application is still assessed based on whether or not the small business owner can afford the loan payments, accounting for any assets, outstanding debts and income:

Homes are often considered the key to security when negotiating debt serviceability, at up to 80% of the value of a house (less the mortgage). If the house is co-owned by a significant other, he or she would need to co-sign the small business bank loan. Proof of income, financials and notices of assessment for the past 2-3 years would need to be provided for both parties.

Credit history will always play a role in this assessment. This has not changed.

QUESTION

Can you clarify which expenses are eligible for financing with this Canadian small business loan?

ANSWER

Business expenses eligible for financing include fixed assets (e.g. equipment and commercial property) as well as leasehold improvements. They do NOT include salable product, rent, franchise fees, goodwill, salaries or inventory. Other expenses that may be considered eligible include non-salable and permanent marketing investments including those required for showrooms.

QUESTION

Can you tell us how expenses are financed with this Canadian small business loan?

ANSWER

If you purchase a $1,000 table, the bank would finance $700 of the loan while the small business owner would need to provide $300. $700 in loan proceeds would be deposited to the small business owner’s business account, after which time the bank would send $1,000 to the supplier of the table.

If you pay for the table yourself, you would need to provide proof of purchase i.e. receipt, front and back of cheque, etc. The payment MUST come out of a business account NOT a personal account. The bill of sale must include the business name, address and telephone number. Cash payments will NOT be reimbursed. This is what the bank will look for:

Date of the invoice

Name of the supplier

Total invoice amount

Invoice amount (less taxes, which are not reimbursed)

Amount already paid by the small business

Amount to be paid directly to the supplier

QUESTION

What are the costs for this Canadian small business loan?

ANSWER

There are two costs to consider:

A registration fee of 2%, which can be financed as part of the loan.

The interest rate which can be: 1. Variable – the bank’s prime lending rate plus 3% or 2. Fixed – the bank’s single family residential mortgage rate plus 3%.

For more information on Canadian small business loans, see the Canada Small Business Financing Program (CSBF) on Industry Canada’s website.

Have the Rules Changed for Canadian Small Business Loans? Q & A with TD Canada Trust is based on an interview between Sandra Bekhor of Bekhor Management and Melanie Porter, Manager of Business Banking at TD Canada Trust. This article is meant to serve as a resource for Canadian small business owners exploring options to generate financing. It is not meant to be a substitute for professional advice and should not be relied on as any such substitute.

Melanie Porter can be reached at (905) 875-8554 or by email at: [email protected].

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