Financing The Deal: Government Programs, The BDC, & Chartered Banks
Most individuals don’t have the financial resources to purchase a business outright. Money doesn’t grow on trees—and if it did, we’d almost definitely have businesses dedicated to growing money orchards!
We’ve discussed financing the deal on this blog before—it’s important for sellers to understand the means by which buyers can obtain financing and how those lenders will impact how deals should be structured.
Today, we’re going to take a closer look at three different vehicles for financing: Government programs, the BDC, and chartered banks (and credit unions).
Government programs
You may be aware of the amazing small business lending program that exists in the United States—the SBA. The SBA does more than just offer a variety of products through financial institutions, but that‘s mainly what it’s known for.
Canada has its own near-equivalent to SBA loans—the Canada Small Business Financing Program (CSBFP). The name’s a lot less snappy, we’ll give you that, but its loans do serve an important purpose.
The CSBFP has a narrower range of products than the SBA—it offers term loans and lines of credit. These products are not acquired directly from the Government—they are, instead, offered by financial institutions. The CSBFP shares risk with lenders and sets regulations for its financial products.
Here’s the million-dollar question: Can a CSBFP product be used to purchase a business?
Kind of.
You cannot use CSBFP products to purchase shares in a business. You can, however, purchase the eligible assets of a business with CSBFP products. The regulations governing this are too complex to include here, but know that if a buyer plans on using a CSBFP loan to purchase your business, it will affect how the deal needs to be structured.
There are, of course, a wide variety of grants and other forms of financing offered by the Government of Canada, provincial governments, and NGOs. We cannot, however, include these forms of financing here, as they are:
Subject to change
Rarely used as a form of financing to purchase a business
Onto the next form of financing for Canadians: The BDC!
The Business Development Bank of Canada (BDC)
The BDC is a Crown corporation (owned by the Government of Canada) dedicated to developing financial products and advising small and medium businesses.
The financial products offered by BDC are sometimes offered through partnerships with other organizations, like Futurpreneur Canada. Loans from the BDC often:
Require less (or no) collateral than traditional banks
May come with mentorship
Come with more flexibility than traditional bank loans
Are designed with SMBs in mind
May have higher interest rates than loans from traditional (chartered) banks
For a business broker, knowledge of the BDC’s products, the amount of collateral they require for these products, the types of businesses it is most likely to finance, and other factors that influence its lending habits are essential. The BDC is one of the most important SMB lenders in Canada, and knowing what amounts it’s likely to lend out (and to whom) is essential in pricing the business and structuring the deal.
Chartered banks and credit unions
When potential buyers have sufficient assets to put down as collateral and when they’re not worried about turning a profit before the loan repayment period starts, they may approach a chartered bank or credit union for their loan.
The reason to get a chartered bank loan is simple: Its rates are often lower than those offered by the BDC. When a prospective buyer has the cash flow to take out a loan from a chartered bank without worrying about the less flexible repayment periods, they’ll often opt to do so. These buyers are often financially stable enough that they can purchase a business without massive consequences if they don’t profit as much as expected in the first few months.
Talk to Jason Brice today!
Knowing as much as possible about how buyers will finance the deal is essential if you want to sell your Vancouver business.
Jason Brice knows the financing mechanisms most often used to purchase businesses in BC. He knows who these lenders tend to offer financing to, the amounts they usually offer, and more. This enables you to structure the deal and set a price point that will attract buyers, all while getting you the price your business is worth.
Interested in selling your business? Call Jason Brice today!