Understanding Canadian Government Backed Loans

If you have ever applied for a loan before, you must be familiar with the concept of a guarantee. This is the party which undertakes to repay the loan, should you fail to do so. Small businesses in Canada can be able to obtain financing from various lenders with the government acting as their guarantor. The government created this program to ensure that lenders would be willing and able to finance small businesses without exposing themselves to too much risk. Remember that small businesses tend to be riskier as compared to larger, established entities.

How It Works

To get a government guaranteed loan, small business owners must apply for this program through a bank and not directly to the government. It is important to note that although this is a government program, the power to approve or deny loans is with the lender.

To qualify, the business must be operating in Canada, and be aimed at generating profits. Limits are placed on the maximum annual revenue of qualifying businesses as well as the maximum loan value.

Additionally, the loan amount to be used in starting up a business is set at 90% of the total start up cost. If you cannot contribute 10% of the total start up cost, you do not qualify for the loan guarantee program.

The money advanced through the program can only be used on various aspects of business including asset acquisition, or facility upgrades. It cannot be used to finance working capital, research and development, paying franchise fees or even goodwill.

Applicable Costs

This program attracts a variety of costs. First and foremost, business owners have to pay a registration fee equal to 2% of the loan amount. This fee can be paid upfront or added to the loan amount.

Lenders have the freedom to set the applicable interest rates whether variable or fixed. However, a cap is set on the maximum rate. This is no more than +3% of the prime rate or +3% of the current residential mortgage rate.

The repayment period of the loan is set at a number of years depending on the loan amount.

This government loan guarantee program is designed to help small businesses access financing from lenders without increasing the latter’s risk. Businesses that can access loans without the need for government guarantee should not use it as it increases their costs by the 2% registration fee.