Canada Small Business Financing Regulations (SOR/99-141)

Loan Classes and Conditions

• 5 (1) A loan must fall within one of the following prescribed classes:

  • (a) loans to finance the purchase or improvement of real property or immovables of which the borrower is or will become the owner, if the purchase or improvement is necessary for the operation of the borrower’s small business;

  • (b) loans to finance the purchase of leasehold improvements to real property or immovables of which the borrower is or will become the tenant or the improvement of such real property or immovables, if the purchase or improvement is necessary for the operation of the borrower’s small business;

  • (c) loans to finance the purchase or improvement of equipment necessary for the operation of the borrower’s small business;

  • (d) loans to finance the purchase of intangible assets and working capital costs;

  • (e) lines of credit for working capital costs; or

  • (f) loans to finance the payment by the borrower of registration fees payable in respect of a loan referred to in any of paragraphs (a) to (e).

• (2) A loan referred to in paragraph (1)(a) may not be made for the purchase of real property or immovables unless, at the time the loan is approved by the lender,

  • (a) at least 50% of the area of the real property or immovables is used for the operation of the small business or is intended to be so used within 90 days after the final disbursement under the loan agreement; and

  • (b) that portion of the area is not intended to be used within three years after the day on which the loan is made for

    • (i) resale, or

    • (ii) leasing or subleasing, except in the case of a small business in the health care industry, hospitality industry or mini-storage industry.

• (3) A loan referred to in paragraph (1)(a) for the purchase or improvement of real property or immovables may include the cost of decontamination of real property or immovables if

  • (a) the decontamination is required under a federal or provincial law, and the decontamination plan is disclosed to the lender on or before the day on which the loan is made; and

  • (b) [Repealed, SOR/2024-64, s. 3]

• (4) A loan referred to in paragraph (1)(b) may not be made if the real property or immovables are intended to be used within three years after the day on which the loan is made for subleasing except in the case of a small business in the health care industry, hospitality industry or mini-storage industry.

• (5) The cost of purchasing or improving the equipment, real property, immovables or leasehold improvements financed by a loan referred to in any of paragraphs (1)(a) to (c) must not include the cost of labour provided by the borrower or the borrower’s employees but may include the cost of labour provided by any subcontractor.

• (6) A loan referred to in any of paragraphs (1)(a) to (d) may not be used to finance the payment of any refundable taxes.

• 6 (1) A loan referred to in any of paragraphs 5(1)(a) to (e) may not be used to finance an expenditure or commitment that

  • (a) arose more than 365 days before

    • (i) the day on which the loan is approved, in the case of a loan referred to in any of paragraphs 5(1)(a) to (d), or

    • (ii) the day on which the line of credit is authorized, in the case of a loan referred to in paragraph 5(1)(e); or

  • (b) was previously financed by a conventional loan by the same lender.

• (2) The maximum loan term is

  • (a) in the case of a loan referred to in any of paragraphs 5(1)(a) to (d), or in the case of a loan to finance the payment by the borrower of registration fees payable in respect of a loan referred to in any of paragraphs 5(1)(a) to (d), 15 years beginning on the day on which the first payment of principal and interest is due; and

  • (b) in the case of a loan referred to in paragraph 5(1)(e), or in the case of a loan to finance the payment by the borrower of registration fees payable in respect of a loan referred to in paragraph 5(1)(e), five years beginning on the day on which the line of credit is opened.

Criteria for Eligibility

6.1 For the purposes of paragraph 4(2)(e) of the Act, a borrower is eligible for a loan on application to a lender if

• (a) in the case of a loan referred to in any of paragraphs 5(1)(a) to (d), the outstanding loan amount in relation to the borrower does not exceed $1,000,000, of which a maximum of $500,000 is for a purpose other than the purchase or improvement of real property or immovables of which the borrower is or will become the owner and, of that $500,000, a maximum of $150,000 is for the purpose of financing the purchase of intangible assets and working capital costs; or

• (b) in the case of a loan referred to in paragraph 5(1)(e), a maximum of $150,000 is for the purpose of financing working capital costs.

Designation of Lenders

7 The Minister is authorized to designate organizations as lenders.

Prescribed Condition

7.1 For the purpose of subparagraph (a)(ii) of the definition “lender” in section 2 of the Act, the member shall provide the Minister with the following:

• (a) the number assigned to them by the Canadian Payments Association; and

• (b) their external auditor’s certificate stating that the member has been a commercial lender for the past five years.

Due Diligence Requirements

8 In making and administering a loan, the lender must apply the same procedures as those that would be applied in respect of a conventional loan in the same amount, including, before making the loan,

• (a) obtaining credit references or conducting a credit check on the borrower and any persons who are legally or financially responsible for the borrower; and

• (b) completing an assessment of the repayment ability of the borrower, taking into account all other financial obligations of the borrower.

Appraisal

• 9 (1) The borrower must, before the loan is disbursed, provide to the lender from, subject to subsection (2), an appraiser who is a member of any professional association that is recognized under a federal or provincial law and who is at arm’s length from the borrower, and, in the case of assets described in paragraph (c), from the lender, an appraisal, made within 365 days before the loan is disbursed, of the value of the assets or services intended to improve the assets, as the case may be, if a borrower uses, or intends to use, all or part of a loan to purchase

  • (a) assets, or services intended to improve the assets, from a person who is not at arm’s length from the borrower;

  • (b) all or substantially all of the assets of a going concern; or

  • (c) assets from the lender or its representative that, at the time of purchase, are being or had been used to secure a conventional loan of the lender.

• (2) In the case of a loan to purchase equipment, leasehold improvements or intangible assets or to finance working capital costs, the appraisal must be made by an appraiser who is at arm’s length from the borrower and, in the case of equipment or leasehold improvements that are assets referred to in paragraph (1)(c), the lender.

• (3) [Repealed, SOR/2014-7, s. 7]

• (4) If an appraisal is required, the amount of the loan must be based on the lesser of

  • (a) the cost of purchasing or improving the asset or both, and

  • (b) the appraised value of the asset or improved asset.

Terms of the Loan

• 10 (1) On or before the day on which a loan referred to in any of paragraphs 5(1)(a) to (d) is made, the lender and the borrower must sign a document that sets out the principal amount of the loan, the rate of interest payable, the repayment terms, the frequency of payments of principal and interest and the day on which the first payment of principal and interest is due.

• (1.1) On or before the day on which a loan referred to in paragraph 5(1)(e) is opened, the lender and the borrower must sign a document that sets out the authorized amount of the line of credit, the rate of interest payable, the repayment terms and, if applicable, the frequency of payments and the day on which the first payment is due.

• (2) The lender and the borrower may, at any time, agree to amend the terms of the loan or, at the end of a loan term, to renew the loan, to an aggregate maximum term of 15 years for a loan referred to in any of paragraphs 5(1)(a) to (d), beginning on the day on which the first payment of principal and interest is due.

• (3) On or before the day on which a loan is renewed or its terms are amended, the lender and borrower must sign a document that sets out the terms of the renewal or amendment.

• (4) For greater certainty, the terms described in subsections (1) and (3) may be set out in more than one document, as long as each document is signed by the lender and the borrower.

• (5) The repayment terms must provide that

  • (a) the loan is payable by instalments;

  • (b) at least one instalment of principal and interest is payable annually; and

  • (c) the first instalment of principal and interest is payable no later than one year after the day on which the loan is made.

• (6) Before the end of the five year period that begins the day after a loan referred to in paragraph 5(1)(e) is opened, the lender and the borrower may

  • (a) submit a new registration under section 2 for an additional five year term, along with the registration fee under subsection 4(1.1), if the additional five year term begins within five years after the day on which the line of credit is opened;

  • (b) convert the line of credit to a loan that meets the requirements of subsections (1) and (3) to (5), with a maximum loan term of 10 years; or

  • (c) enter into an agreement to repay the balance of the line of credit with a conventional loan.

• (6.1) Before the end of the additional five year term referred to in paragraph (6)(a), the lender and the borrower may

  • (a) convert the line of credit to a loan that meets the requirements of subsections (1) and (3) to (5), with a maximum loan term of 10 years; or

  • (b) enter into an agreement to repay the balance of the line of credit with a conventional loan.

11 [Repealed, SOR/2009-102, s. 11]

Interest Rate

• 12 (1) The maximum annual rate of interest payable in respect of a loan referred to in any of paragraphs 5(1)(a) to (d) on the day on which the loan is made or renewed or on which the loan term is amended, or on which a document is signed that sets out the terms of the loan that is made or renewed or that sets out the amended loan term, must not exceed

  • (a) in the case of a floating rate loan, the aggregate of 3% and the prime lending rate that is in effect at that lender on each day of the loan term, beginning on the day on which the loan is made; and

  • (b) in the case of a fixed rate loan, the aggregate of 3% and

    • (i) the single family residential mortgage or hypothec rate in effect at that lender for the loan term, or

    • (ii) in the case of a loan term of more than five years if there is no single family residential mortgage or hypothec rate for that loan term, the five-year single family residential mortgage or hypothec rate.

• (2) The maximum annual rate of interest payable in respect of a loan referred to in paragraph 5(1)(e) is the aggregate of 5% and the prime lending rate that is in effect at the lender on each day of the line of credit term, beginning on the day on which the line of credit is opened.