What Security Lenders Take When You Buy a Business in Alberta

When you borrow to buy a business, the lender is not only looking at your plan. It is also looking at what it can claim if the loan is not repaid. That claim is called security, and it often reaches further than buyers expect.

This article explains the common types of lender security in plain words, how to check what is registered against a business in Alberta, and what to look at in government-backed financing. What a lender can actually take depends on the documents you sign, so have a lawyer review them first.

This article covers the law of Alberta.

What lender security usually looks like

Security is a right the lender holds over something you own, so that it can recover what it is owed if you miss payments. In a business purchase, lenders commonly ask for several layers at once.

• A general security agreement, which is a document where the borrowing business gives the lender a claim over its assets, often described broadly.
• Specific security over particular items, such as equipment or vehicles.
• A personal guarantee, where you promise to repay personally if the business cannot.
• Sometimes security over real property, if the deal includes land or a building.

The wording of each document decides what is covered. A broad agreement can reach inventory, equipment, accounts owed to the business and more, while a narrow one may list only certain items. Ask the lender to explain, in plain terms, exactly what is covered.

Registrations in the Personal Property Registry

The Personal Property Registry search returns one of four outcomes: exact match, inexact match, no match, or both exact and inexact matches. Searching it is one of the most useful checks you can make, both on the business you are buying and on yourself.

The search types available are individual debtor name, business debtor name, serial number (for vehicles, trailers, aircraft, boats and similar items), registration number, distribution seizure, and certificate of expired or discharged registration on form REG3329. Each is requested on a Search Request form submitted at any registry agent office in Alberta.

A search returns one of four outcomes: exact match, inexact match, no match, or both exact and inexact matches. For inexact matches, you may need to search the inexact name again or search the specific registration number, and questions about a result go to the party that registered the interest.

Checking the business itself

Alberta Corporate Registry searches are requested through a registry agent. Current and historical searches can show the registration date, owners, directors and legal addresses. They cover current or formerly registered Alberta and extra-provincial corporations, partnerships, trade names and incorporated non-profits.

A certificate of status confirms status as of a given date only, and a historical certificate of status confirms status as of a past date. Certificates of status are not available for trade names and partnerships. Combining registry results with Personal Property Registry results helps you see who owns the business and what claims already sit against its assets.

Personal guarantees and what can be seized

A personal guarantee means the lender can look to you, not only the business. Depending on the wording, that may put personal assets at risk if the business fails. Some guarantees are limited to a set amount, and others are not, so check this before you sign.

If payments are missed, what the lender can take depends on the security agreement, how it was registered and the loan terms. The agreement usually sets out what counts as default and what steps the lender may take. A lawyer can explain how those terms would work in your deal and whether any can be negotiated.

If the loan is financed through the Canada Small Business Financing Program, the program has its own limits, covered next.

Government-backed financing and what to do next

The Canada Small Business Financing Program can finance the eligible assets of an existing business, capped at the lower of the purchase price or the appraised value of those assets. It does not finance share purchases or assets acquired by a holding company, so a share purchase of an Alberta company cannot be funded this way. Eligibility is generally limited to businesses with gross revenues of $10 million or less, and farming businesses are excluded.

Total financing is at most $1.15 million, and the borrower and lender negotiate the actual amount. The registration fee is 2% of the total loan amount and can be financed, but lender fees such as set-up and renewal fees are charged separately and cannot be financed. Variable-rate term loans are capped at prime plus 3%, and lines of credit at prime plus 5%. Fixed-rate term loans are capped at the lender's single-family residential mortgage rate plus 3%. Program terms can change, so confirm them with your lender.

• Ask the lender for the draft security documents early.
• Search the Personal Property Registry and Corporate Registry for the business.
• Find out whether a personal guarantee is required and whether it has a limit.
• Have a lawyer review the documents before you sign.

Frequently asked questions