How is the seller paid when a Canada Small Business Financing loan funds the purchase?

Innovation, Science and Economic Development Canada says the Canada Small Business Financing Program makes it easier for small businesses to get loans from financial institutions by sharing the risk with lenders, so the loan itself comes from the lender. The program’s guidelines, published by Innovation, Science and Economic Development Canada, say what proof of payment is needed if a loss claim is made. Where the loan disbursement is effected by a lawyer or notary, the guidelines say the program’s Small Business Financing Directorate accepts a copy of the deed of sale, the lawyer’s or notary’s trust statement confirming that the vendor has been paid, or confirmation from the vendor’s lawyer that the funds were received.

Proof of payment

When the eligible amount of a term loan is calculated, the guidelines say any invoice or purchase without proof of payment is excluded. Under section 38(4)(a) of the Canada Small Business Financing Regulations, a claim for loss on a term loan must be accompanied by documentation that substantiates the cost and proof of payment of the purchase or improvement financed by the loan, and the amount the lender disbursed. Under section 25(e), if a lender’s failure to provide all of that documentation was inadvertent, the Minister pays the loss only on the portion of the principal outstanding to which the non-compliance does not relate. This describes the program’s claim rules. It does not say what a particular lender requires at closing, so ask your lender which documents it wants from your lawyer.

What the program says about escrow

The program guidelines and regulations read for this page do not mention escrow. Check the purchase agreement and the lender’s terms for any escrow or holdback. Ask the lender and your lawyer whether the loan funds can be released into a lawyer’s trust account at closing, who holds them, and what releases them to the seller. For how a deposit differs from escrow, see deposit vs escrow.

What the purchase price can include

The guidelines list goodwill as eligible when it is part of a going concern purchase. The regulations define a going concern as a small business that has carried on operations at any time within 60 days before purchase or, for a seasonal business, during the season before purchase. The guidelines also say that when a vendor finances part of the purchase price, that amount is not eligible for a CSBF loan, and that acquiring shares is not eligible for financing. Ask the lender whether a CSBF loan can cover your purchase.

The regulations also say a loan is considered to have been made on the day the lender makes the first disbursement of funds. For the lender’s approval timing and your own financing condition, see financing as a closing condition.