How to Get a Loan to Buy a Business in British Columbia

Most people who buy a business do not pay for it all in cash. They combine their own savings with a loan, and sometimes with money from the seller. If you are in that position, it helps to know what lenders usually want to see before you sign a purchase agreement that depends on financing.

This article sets out how financing is generally approached in British Columbia, including down payment, security, vendor financing and government-backed lending. Specific loan terms change by lender and over time, so confirm current numbers with the lender.

This article covers the law of British Columbia.

What lenders usually look at

A lender is mainly asking whether the business can repay the loan from its own earnings, and what happens if it cannot. Expect to be asked for several things.

• Financial statements and tax returns for the business, usually for several years.
• A buyer's business plan showing how you expect to run it and repay the loan.
• Your own résumé, showing experience in this or a related line of work.
• Personal financial information, including savings, debts and a net worth statement.
• The draft purchase agreement and a summary of what is being bought.

Lenders vary in how much weight they give each item, and in how much of the price they will finance. A bank, a credit union and another type of lender can each reach different answers on the same business.

Down payment and security

Lenders generally expect the buyer to put in some of their own money, often called equity or a down payment. How much depends on the lender, the type of business and the strength of the cash flow, so there is no one figure to rely on.

Security is what the lender can claim if the loan is not repaid. It may include a charge over the business assets, a personal guarantee from you, or a mortgage on real estate if land is part of the purchase. Whether you are buying assets or shares affects what there is to pledge, since in an asset sale you acquire specific assets and in a share sale you acquire a corporation as it stands.

The Canada Small Business Financing Program

Government-backed lending programs for small businesses may be worth asking about alongside ordinary bank or credit union loans. Whether a purchase qualifies, how much can be borrowed, what it can be spent on and what fees apply depend on the program rules and the lender, so how this applies to you is worth confirming with your lender and a lawyer. Ask your lender whether your purchase is eligible and get the current terms in writing.

A program loan does not replace the rest of the financing plan. Lenders still look at cash flow and your contribution, and you may still need other sources for part of the price.

Vendor financing

In vendor financing, the seller accepts part of the price over time. This can help close a gap between what a lender will advance and the price, and it shows the buyer that the seller believes in the business. It is usually documented in a promissory note and often secured against the business.

For a seller, being paid over time can have tax effects. A capital gains reserve lets a seller who is paid over time spread the gain, and most reserves can be claimed over a maximum of four years, so the gain is included over five years. A nine-year period applies in some cases, such as certain transfers to children and some qualifying business transfers. Both sides should have an accountant review the arrangement.

If a bank is also lending, it will often want to rank ahead of the seller, so expect a conversation about whose security comes first.

Costs and conditions to plan for

A lender will want to know that the purchase is clean, and the price is not the only cost. Several British Columbia items can affect the amount you need to borrow.

• Property transfer tax, if land is included: the purchaser pays 1% on the first $200,000 of fair market value, 2% from over $200,000 to $2,000,000, and 3% above $2,000,000.
• PST: it applies to taxable assets such as affixed machinery, equipment and computer hardware, but not to goodwill, inventory, accounts receivable or real property, and not to the sale of shares.
• PST clearance certificate: a purchaser should obtain one, and if they do not, they are liable for an amount equal to any outstanding amount owed by the collector.
• GST: where the buyer acquires all or substantially all the property needed to carry on the business, the supplier and a registrant recipient may jointly file an election so no GST is payable on supplies under the agreement. The election is not available where the supplier is a registrant and the recipient is not, and tax still applies to a taxable supply of a service by the supplier, to taxable supplies of property by lease or licence, and, where the recipient is not a registrant, to a taxable sale of real property.
• Liquor licence: the buyer files an application with a $330 fee, and an expired licence cannot be transferred.
• Franchise: a prospective franchisee must receive the disclosure document at least 14 days before the earlier of signing a franchise agreement or related agreement, or paying consideration, and a franchise resale is a grant under the Act. A franchisee selling for its own account is exempt only if the sale is not effected by or through the franchisor, and a franchisor's right to approve the sale, or a fee not exceeding reasonable processing costs, does not by itself mean it was.

What to do next

• Meet your lender before you make a firm offer, so you know what they are likely to lend.
• Gather the business's financial statements and your own personal financial records, and ask your lender how many years they want to see.
• Make the purchase agreement conditional on financing, with a clear date.
• Ask the seller whether they would consider vendor financing.
• Ask an accountant and a lawyer to review the structure, tax and security before you sign.

Frequently asked questions