A better idea? Speak to a trusted, credible an experienced Canada business financing advisor on information and help on franchise financing in Canada.
The answer? There are some differences, but you just might be surprised at the similarities when it comes to comparing the two. In Canada those lenders are specialized franchise financing firms, banks, and third party commercial finance companies. Clearly franchising fits into the area of the SME sector of Canada, and for that reason a lot of the challenges that the franchisee faces revolve around the same issues faced by any other start up.
In your case that might be real estate, construction, equipment and fixtures, leaseholds, and some opening inventory if you have a product as opposed to a service franchise. We mentioned the Govt business loan previously as a great conduit to get you approved for your new business. But we point to out clients that that loan program only covers equipment and leaseholds, so items such as the franchisee fee and opening inventory are not financeable. We have referenced the fact that while Canadian banks provide millions every year for entrepreneurs in the franchise sector via the specialized BIL loan, they in general are reluctant to finance the business outside the Govt program.
So discussions around bank financing quickly gravitate to personal collateral, home equity collateralization, etc. Another strong similarity in franchise finance when compared to other business financing is the fact that a strong emphasis is placed on your personal financial history. This is typically documented by your credit report and a solid amount of emphasis is placed on this report.
Seek out and speak to a trusted, credible and experienced Canadian business financing advisor for franchise finance assistance. Business franchise loan challenges. Your initial decision to purchase a franchise should always be tempered with the amount of funds that you can personally invest in the business.
The purchase of a website is eligible. However, the website must be "necessary for the operation of the business" such that the intended use is for the clients of the business to obtain information about the business, display inventory and services available for sale. The value and cost related to the website must be considered as a capital cost of the business in order to be eligible for financing under the program. If the registration fee is financed, the maximum loan amount for each asset class must include the registration fee associated with those assets.
The following table illustrates how the financing of the registration fee is factored in the determination of the maximum loan amount:. Eligible expenditures must be supported by proof of purchase invoices, purchase agreements, etc. The invoices and purchase agreements must provide details of the items being purchased e.
In the event a claim for loss is submitted, proof of purchase and proof of payment documentation must be included as follows:. Note: The issuance of shares by a corporation in exchange for the price of the purchased asset is not considered proof of payment for that asset since there is no cash payment by the corporation.
To determine the eligible amount of the loan, the cost and proof of payment for each loan class equipment, real property, leasehold improvements are calculated as follows:.
The lender need only submit the proof of purchase and payment for the principal amount outstanding on the loan as of the date of default. A lender must obtain an appraisal of the market value of the asset or services intended to improve an asset, when the borrower;. Purchases an asset or services intended to improve an asset from a person not at arm's length. The concept of a party not at arm's length from the borrower is described in section of the Income Tax Act in the Annex of these Guidelines which defines related persons as individuals connected by blood, marriage, or adoption includes father, mother, brother, sister, common law couples and any situation involving different degrees of control by these persons or corporations.
Control is not defined by a specific percentage and can be a question of fact, even between two non-related parties. For example, the borrower may have signed an acknowledgment on the registration form that restaurant equipment was purchased from an at arm's length supplier.
However, a corporate search reveals that the corporate supplier in fact is controlled sole shareholder by the borrower's brother. In such a case, an appraisal of the value of the restaurant equipment would be required. If a person, not at arm's length from the borrower, sells the borrower an asset, or services intended to improve an asset, which it previously purchased from a vendor at arm's length to the borrower, no appraisal is required. Such a transaction must be supported by proof of cost invoice and proof of payment of the assets or services intended to improve an asset showing that the price the borrower paid does not exceed the amount that the not at arm's length vendor paid to the original vendor and; the purchase from the original vendor has taken place within days of the date the loan is approved.
The "services intended to improve an asset" applies to labor and minor material costs incurred to improve or fix an asset, for example, the cost for a mechanic to repair a motor in a transport truck or the cost for painters to paint a building.
Purchases all or substantially all of the assets of a going concern. The term "going concern" is defined as a business that has carried on operations at any time within 60 days prior to purchase or, in the case of a small business that operates on a seasonal basis, during the season prior to purchase.
In assessing whether a sale involves "substantially all" of the assets of a going concern, lenders should consider the percentage of total assets being sold, whether the transaction would fundamentally change the nature of the business, and whether the vendor can continue its normal business activities without the assets that are being sold. If the purchaser will carry on the business being sold with the same assets that is the subject of the purchase agreement e.
This may apply even if the subject of the sale is only one branch or one location of the vendor. The following are also deemed to be purchases of a going concern: a franchisor selling a franchise under its control, and a franchisee selling its franchise business to a new franchisee. The Purchase and Sale Agreement of a going concern is for the purchase of specified assets of the vendor e. The Agreement should set out the allocation of the purchase price for each of the assets listed in the agreement.
In the absence of such allocation, other documentation setting out such allocation e. A value set out in an appraisal of the asset s will not be accepted as the allocation for the asset s. Note: In all cases, the appraiser must be impartial and at arm's length from the borrower. Where the assets are being sold to the borrower by the lender, the appraiser must also be at arm's length from the lender. On or before the day of the first disbursement of the CSBF loan funds, the borrower and the lender must sign a document setting out the principal amount of the loan, the rate of interest, the repayment terms, the frequency of the payments of principal and interest and the day on which the first payment of principal and interest is due.
This document can be in the form of a promissory note, a loan agreement, a bank contract or any other document that the lender registers to secure the repayment of the loan. Lenders may use their own loan-related documentation e. The repayment of the loan can be amortized over a period longer than 10 or 15 years for example, a mortgage on a real property with an interest term of 5 years and an amortization of 25 years.
However, in such a case, the balance of the loan at the end of the 10 or 15 year period from the date of the first scheduled payment must be converted to a conventional loan. The expiry of the term can be no more than 10 or 15 years from the date of the first scheduled payment of principal and interest, as specified in the initial loan document i.
To calculate the maximum loan term of 10 or 15 years, the 1st payment payable under the loan document should be used, irrespective of the fact that it's a payment of principal, a payment of interest or a payment of principal and interest.
For renewal and amendments of the terms of the loan, please refer to Item 11 of these Guidelines. The Regulations provide for either a floating or a fixed maximum rate of interest. Lenders may charge interest rates lower than the maximums below. NOTE: At any time during the repayment period of a CSBF loan, the lender and borrower may agree to convert the interest rate, from floating to fixed or vice versa, or to prepay the loan.
Any charges related to such conversions must be equal to or less than those charged in a conventional loan of the same amount. See Item 12 of these Guidelines. The lender cannot, at any time, request from the borrower a fee, service charge, or charge of any kind other than:. Also, such costs cannot, in any way, be capitalized on the loan account to increase the principal amount of the loan.
Lenders must ensure that the security is made valid and enforceable as of the date of the first disbursement on the CSBF loan and at all times during the duration of the loan including at the time of realization of the security.
Regs ss. The requirements for the substitution and release of security are explained in Item 13 of these Guidelines. When making a loan, the lender must ensure that the requirements for a valid and enforceable security have been met by considering the following factors, among others:.
Lenders are reminded that additional legislation provincial, municipal or otherwise may impose further obligations on a lender to ensure that valid and enforceable security has been obtained. Security on leasehold improvements can be problematic. The uncertainty of whether valid and enforceable security has been obtained on leasehold improvements in the cases of fixtures or building materials can perhaps be avoided if the lender takes a general security agreement pursuant to ss.
This would be regarded as taking security on other business assets and would satisfy the security requirements. Where a CSBF loan finances leasehold improvements to a tenant borrower and where the lender is unable to take a valid charge on the assets s financed by the loan, the lender must, in accordance with ss.
Other assets of the small business may include the receivables, inventory, equipment or equity investments of the business enterprise. NOTE: Where the lender's security is determined to be not enforceable, this non-compliance may be remedied if certain conditions are satisfied by the lender as explained in Item This security is mandatory.
It includes first ranking security and alternate security where applicable. The security is to be registered under the appropriate registry system so that ranking is not compromised and realization procedures, if required, can be enforced against the secured assets. A loan that finances real property or immovables must be secured with a first mortgage on the property. If such a loan is secured by any other document, the lender should ensure that a registered security interest is created in the real property or immovables, such that the property can be realized upon in the same manner as if it had been secured by a mortgage.
NOTE: Alternate security, once taken, becomes primary security and is to not be treated as additional security. The provision states that if, within 30 days before or after of the first disbursement of a CSBF loan, the lender makes an initial disbursement under a conventional term loan to finance assets that would have been CSBF-eligible, all security taken on CSBF-eligible assets for the term loan and the CSBF loan will become equal in ranking and in proportion to the total financing.
The day equal ranking applies only to all assets that would be eligible for a CSBF loan and that are held as security for one or more conventional term loans. In realization, the proceeds from the security on the leasehold improvements and the equipment only taken for the two loans would be shared based on the outstanding loan balances. Where a conventional loan is secured by a security in the borrower's property commercial in nature and that would be eligible for a CSBF loan without taking a personal guarantee, the lender shall take and retain an equal-ranking security in the same property to secure the loan granted under the CSBFA.
As a general rule, this situation will arise when the loan is made for improvements to an asset on which there is already a prior charge. If a loan is being transferred from one lender to another or the borrower already has financing with another lender and the other lender authorizes additional CSBFA financing for the same asset, the lender's security on the additional assets is a charge of the highest available rank.
Example: a lender has a conventional first ranking mortgage transferred from another lender and at the same time the borrower wants to do improvements to the real property.
The lender can approve a loan for the additional financing and secure it with a second mortgage on the property as long as the conventional first ranking loan does not exceed the outstanding loan amount of the other lender at the time the CSBF loan is granted. Example: the borrower has a CSBF mortgage on the real property with lender A and lender B authorizes financing for improvements to the real property. Lender B can secure the financing with a second ranking mortgage on the real property if that is the highest available rank.
This will result in the CSBF loan being secured by a first charge on the new asset. Sub-section 14 6 has been repealed and no longer applies to loans made after February 18, What this means is that where a lender is financing leasehold improvements and the borrower and the landlord are not at arm's length, the lender cannot take security for the loan on the landlord's real property. The security for the loan must be on the financed assets, that is, the leasehold improvements.
In the event a lender in its credit decision process decides to take a mortgage on the real property of the landlord, this would be permitted only if the following conditions are met:.
If the landlord is not a corporation, that is, it is an individual or a group of individuals and the lender has taken a personal guarantee from that landlord, the lender could not secure the guarantee with a mortgage on the real property because under s. Note : This requirement is independent of, and not affected by, the provisions relating to unsecured personal guarantees or suretyships.
Where the landlord is an individual and this is the only guarantee or suretyship held for the loan, if the guarantee or suretyship does not clearly indicate that it is taken only for the benefit of the collateral mortgage, a lender can:.
Where a borrower conducts its business on personal premises and requests a loan to finance improvements to the real property or immovables, the lender must take the real property or immovables as security. Where the premises occupied by the small business can be separated from the borrower's personal residence, the lender should be receptive to a request by the borrower to subdivide the property.
The lender may further secure the CSBF loan with additional security on any other assets of the business. A lender may wish to further secure a CSBF loan by way of a guarantee or suretyship, personal or corporate. The guarantee or suretyship may provide for interest that would ordinarily be included in any judgment that the lender may obtain.
See Item Personal guarantee or suretyship [ Regs ss. The guarantee document may provide for payment of interest on any judgment, taxed costs, legal fees, disbursements, and other costs relating to legal proceedings against the guarantor or surety.
Subject to the conditions regarding the non-compliance for personal guarantees in Item Unless clearly indicated on the document, a personal guarantee or suretyship must be considered at its face value not as a percentage of the original loan amount. When personal guarantees or suretyships are taken from more than one person, the liability can be joint and several or individual.
In all cases, if separate guarantees are taken from several guarantors and the lender intends that the guarantees be joint and several, either the guarantee documents or some other loan documentation should indicate this intention.
A personal guarantee or suretyship does not preclude a lender from also obtaining an assignment or postponement of shareholder's loans, because such an assignment or postponement would not constitute a demand for payment upon the guarantor or surety and has no realizable value in the event the borrower becomes insolvent.
Limiting a sole proprietor or partners' liability on their personal or non-business assets for a CSBFA loan: The liability of the borrower sole proprietor, partnership, or corporation cannot be limited on any of the borrower's business assets at the time the loan is approved nor during the realization on the assets of the business. The lender may, however, limit the realization on the personal or non-business assets of the sole proprietor or partners if:.
Lenders should consult their legal counsel for any questions on the legal feasibility or mechanism to limit realizations on personal or non-business assets of sole proprietors and partners. Corporate Guarantee or suretyships : The lender may take secured or unsecured corporate guarantees or suretyships.
There is no limit on the amount of the corporate guarantee or suretyship. This section provides lenders with procedures for CSBF loan registration, administration and reporting. In the case of a co-operative with share capital, the names of the shareholders must be listed. If the co-operative is without share capital, the names of the board of directors members must be listed in the registration form. To learn more about how your financial institution can take advantage of this improved business protocol, please contact the CSBF Program at or by e-mail at csbfp-pfpec ised-isde.
If the failure to register a loan within 3 months from the date of first loan disbursement is inadvertent, the lender needs to explain the error and request a deadline extension. In such a situation, the 3-month registration period will be extended to 6 months. Lenders who delay registration until after the final disbursement will not receive an extension for this reason, since the late registration will not be considered inadvertent.
In the event of a cost overrun e. A written request for a refund of registration and administration fees must be made by the lender not the borrower within one year of the date of the first disbursement of loan funds:.
Prepayment of a loan by the borrower does not constitute a valid reason for applying for a refund of the registration fee if the loan was eligible at the time it was active. There is no refund of registration fee and administration fee for those loans for which a claim has been submitted and for which an adjustment or a rejection of the claim was made. The approval of the SBF Directorate is not required where the lender and the borrower agree;. However, any such renewal or amendment must comply with the terms of the loan, rate of interest and other fees and charges outlined in Items 6.
For example:. Unless otherwise stated in the loan document, a fixed rate CSBF loan with a term less than the principal amortization period will be considered automatically renewed at the interest rate for the previous term until a renewal is properly completed.
The loan amortization period, however, may be increased beyond 10 years or 15 years. In such a case, either a balloon payment must then be scheduled to ensure full repayment of the CSBFP loan before the end of the tenth or 15 th year or, at the loan's 10 or 15 year anniversary, a conventional loan must be made for the period exceeding the 10 or 15 years. Where the original loan documentation makes reference to the process for the renewal of the loan that does not require the borrower's signature, the renewal documentation could be signed by only the lender provided the borrower is notified in writing of the terms of the renewal and the borrower has made payments pursuant to the terms of the renewal.
Lenders may require the borrower to pay, in the following situations, a charge equal to or lesser than in a conventional loan of the same amount:.
Primary security [ Regs s. Additional Security and Guarantees or Suretyships [ Regs s. If there is a substitution of guarantees, the SBF Directorate should be informed of the names of the new guarantors. For the purposes of guarantees or suretyships, the SBF Directorate considers that the value of a guarantee or suretyship is the amount for which the guarantor or surety is liable under the terms of the guarantee or suretyship.
The replacement guarantee or suretyship can be made irrespective of:. Note : When substituting any guarantee or suretyship, the lender should assess the replacement guarantors' or sureties ability to pay the guarantee or suretyship amount.
The ability to realize on the guarantee or suretyship should not be compromised. Two of the original guarantors or sureties wish to be released. Out of these cookies, the cookies that are categorized as necessary are stored on your browser as they are essential for the working of basic functionalities of the website.
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The percentage of financing is negotiated between the borrower and lender. Proof of purchase and payment must be obtained. The eligible amount of the loan is the lesser of the eligible cost of the assets purchased and the eligible proof of payment.
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