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

• 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 is made, the lender and borrower must sign a document that sets out the principal amount of the loan, the rate of interest payable in respect of the loan, 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.

• (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.

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.

Additional Amounts Payable by Borrowers

• 13 (1) A lender may require the borrower to pay to the lender, in addition to the registration fee referred to in section 11 of the Act,

  • (a) any charge that would be charged by the lender for taking security in respect of a conventional loan of the same amount;

  • (b) any premium under a life or disability insurance policy that provides that a benefit is or may become payable to the lender, if the lender pays the premium under the loan agreement;

  • (c) any charge for the conversion of a conventional fixed rate loan to a conventional floating rate loan of the same amount, or a conventional floating rate loan to a conventional fixed rate loan of the same amount, or any charge for the prepayment of all or part of a loan that would be charged by the lender in respect of a conventional loan of the same amount; and

  • (d) in the case of a loan made after March 31, 2014, any other charge that would be charged by the lender in respect of a conventional loan of the same amount.

• (2) If a charge referred to in paragraph (1)(a) or a premium referred to in paragraph (1)(b) is expressed as a percentage of the outstanding amount of the loan, the charge or premium must not be combined with the rate of interest payable in respect of the loan unless the percentage that is attributable to the charge or premium is clearly set out in the loan agreement.

• (3) [Repealed, SOR/2009-102, s. 13]

Security

Primary Security

• 14 (1) A lender must, when making a loan referred to in paragraph 5(1)(a) or (c), take valid and enforceable first-ranking security in the assets of the small business whose purchase or improvement is to be financed by the loan.

• (2) If the purchase or improvement of the assets of the small business is to be financed by a loan and another source of financing, the security taken by the lender in those assets must be equal in rank to that taken in those assets in relation to the other source of financing.

• (3) In the case of a loan referred to in paragraph 5(1)(b), (d) or (e), or a loan referred to in paragraph 5(1)(c) for the financing of computer software, the lender must take security in any assets of the small business in respect of which the loan is made.

• (4) If, within 30 days before or after the day on which a loan is made or opened, the lender makes or opens one or more conventional loans to the same borrower to finance a purchase or improvement that would be eligible for a loan, the lender

  • (a) must, in addition to any security otherwise required by this section to be taken, take security in the same assets and equal in rank to that taken to secure the conventional loan or loans; and

  • (b) may take security to secure the conventional loan or loans on the same assets and equal in rank to that taken to secure the loan.

• (5) If there is existing security in an asset whose purchase or improvement is to be financed by a loan, the security taken by the lender in that asset must be of the highest available rank, but if the existing security is the result of the application of a provision respecting subsequently acquired property, the lender must obtain all necessary postponements to ensure that the security in the asset is a first ranking charge.

• (6) [Repealed, SOR/2016-18, s. 4]

Substitution of Assets

15 Primary security must not be replaced by a different type of security, but an asset that is the object of a primary security may be substituted at any time for another asset of the small business in respect of which a loan is made that is of equal or greater value at the time of replacement.

Release of Primary Security

• 16 (1) The lender may, in respect of a loan, release primary security in an asset if

  • (a) the loan is in good standing; and

  • (b) the outstanding amount of the loan has been reduced by the amount of the original cost of the asset that is to be released.

• (2) The lender may also release primary security in an asset at any time if

  • (a) the asset is sold by the borrower to a person at arm’s length from the borrower and all of the proceeds of sale are applied to reduce the outstanding amount of the loan; or

  • (b) the asset is sold by the borrower to a person not at arm’s length from the borrower and

    • (i) the borrower provides to the lender an appraisal of the value of the asset made at any time within 180 days before the date of the sale by an appraiser who at that time met the professional qualifications and arm’s length requirements of subsection 9(1) or (2), as the case may be, and

    • (ii) the outstanding amount of the loan is reduced by the greater of the proceeds of the sale and the appraised value of the asset.

Additional Security

17 A lender, in addition to any primary security required by section 14 to be taken, may take additional security in any other assets of the small business in respect of which the loan is made.

Release and Substitution of Additional Security

18 The lender may release any additional security at any time if the loan is in good standing.

Guarantees and Suretyships

Personal Guarantees and Suretyships

• 19 (1) A lender, in addition to the primary security referred to in section 14, may take one or more unsecured personal guarantees or suretyships for an amount of not more than the aggregate of

  • (a) in the case of a loan made before April 1, 2014, 25% of the original amount of the loan, and in the case of a loan made after March 31, 2014, the original amount of the loan,

  • (b) interest on any judgment against the guarantor or surety,

  • (c) taxed costs for, or incidental to, the legal proceedings against the guarantor or surety, and

  • (d) legal fees and disbursements — other than costs referred to in paragraph (c) — and other costs incurred by the lender for services rendered to it by persons other than its employees for the purpose of the legal proceedings against the guarantor or surety.

• (2) If a lender takes more than one personal guarantee or suretyship, the guarantees or suretyships must state that the aggregate liability of the guarantors or sureties may not exceed the aggregate amount referred to in subsection (1).

Corporate Guarantees and Suretyships

20 A lender, in addition to the primary security referred to in section 14, may take one or more secured or unsecured corporate guarantees or suretyships.

Release of Guarantors and Sureties

21 A lender may release a guarantor or surety from a guarantee or suretyship only if the loan is in good standing.