What happens if I default on a CSBFP loan?

A Canada Small Business Financing Program (CSBFP) loan is made by a lender, and the Canada Small Business Financing Regulations say what that lender must do when the borrower defaults. This answer follows that sequence. It describes the rules, not what will happen on any one loan. If the business itself is failing, see our answer on what happens to a business loan if the business fails.

When the borrower is in default

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. The program’s guidelines add that, to be material, the failure to comply must have the potential to affect the collection of the loan. Read your loan agreement to see which conditions it sets.

The demand for repayment

Under section 37(2), if a borrower is in default, the lender must demand repayment of the outstanding amount within the period specified in the demand. It must do that before it submits a claim for loss to the Minister under section 38. The demand sets the deadline, so keep it and note the date.

Security, guarantees and the lender’s claim

If the amount is not repaid within the period, section 37(3) requires the lender to take whichever measures will minimize its loss or maximize what it recovers. These include fully realizing any security, guarantee or suretyship and fully implementing a compromise settlement. Section 38(1) says the lender must take all the applicable measures before it submits a claim to the Minister. Section 37(4) limits how far a lender may execute a judgment against the assets of a sole proprietor or partners beyond the business, and section 39 allows interim claims in some cases, so read those sections for your situation. On guarantees, section 19 limits the unsecured personal guarantees a lender may take; check the guarantee you signed against it.

Who the government pays

Section 5 of the Act, subject to the limits it sets, makes the Minister liable to pay a lender an eligible loss, calculated under the regulations, sustained as a result of a loan that met the requirements of the Act and regulations. That payment goes to the lender. Section 38(2) says the lender must submit a claim within 60 months after the last payment was received or, if no payment was made, after the first scheduled payment, and section 38(3) lets the Minister extend that period if the lender asks before it expires. Ask the lender, and a lawyer, what a claim means for what you personally owe. For loans taken to buy a business, see what happens if you default on an acquisition loan.