Can a buyer take over my Canada Small Business Financing loan when I sell?

Section 33(1) of the Canada Small Business Financing Regulations (SOR/99-141) deals with the sale of the business. It says that on the sale of all assets of a small business whose purchase or improvement is being financed by a loan, the borrower may be released by the lender from, and the purchaser may assume, liability in respect of the loan if its conditions are met. The wording is permissive: the lender “may” release you, so the lender is the first person to ask.

The three conditions in section 33(1)

Section 33(1) lists three conditions, joined by “and”, so each one must be met.

• Paragraph (a): the lender approves the purchaser as a borrower under the due diligence requirements in section 8, and the outstanding loan amount is not greater than the applicable limit referred to in any of paragraphs 4(2)(b) to (e) of the Act or in section 6.1.
• Paragraph (b): security of the same rank is maintained or taken by the lender on the assets that were used to secure the loan.
• Paragraph (c): a guarantee or suretyship taken under section 19 is replaced with another guarantee or suretyship, in accordance with that section, of an equal or greater value.

Paragraph (c) is where a personal guarantee or suretyship comes in. If the lender took one from you, ask what it needs from the purchaser to replace it, and when you would be released.

If a material condition is not met

Section 36 of the Regulations says the outstanding amount of the loan becomes due and payable, and the borrower is in default, as of the day the borrower fails to comply with a material condition of the loan agreement. Section 36 turns on your own loan agreement, so ask your lawyer to read it for any term that applies to a sale and for what it calls material.

A share sale

Section 33(1) speaks of a sale of all assets. Ask the lender and your lawyer how your loan agreement treats a change of ownership.

What to do before you list

Tell your lawyer about the loan before you negotiate, and bring the loan agreement. A buyer who is financing the purchase is a separate question, covered in how the seller is paid when a CSBF loan funds the purchase.