There is a wide range of financing options available in Canada for new and expanding foreign businesses.
Domestic and Foreign Banks
The banking system in Canada is sophisticated and highly regulated. Bank loans are available through domestic and foreign bank subsidiaries operating in Canada and Canadian branches of foreign banks. Loans will most commonly be made available in Canadian or US dollars, with interest charged at the Canadian bank prime rate for Canadian dollar loans and the US base rate for US dollar loans.
The six largest banks in Canada control most of the market, offering debt financing and providing cash management and investment services. Most domestic chartered banks have a highly developed network of branch operations throughout the country. Since most of them also have a presence in the US and internationally, they can be useful connections for foreign investors seeking to establish and carry on business in Canada.
The federal Bank Act (Canada) (“Act”) governs the activities of domestic and foreign banks operating in Canada. The Act authorizes Schedule I (domestic) banks, and Schedule II (foreign subsidiary) banks that are controlled by foreign banks, to conduct full service banking businesses in Canada. In addition, Schedule III banks (branches of foreign banks) which are not governed by the Act are able to conduct full banking businesses in Canada except that they are not permitted to accept retail deposits like Schedule I and Schedule II banks.
With increasing competition in the banking industry, a business borrower has a wide range of financing choices beyond domestic and foreign banks.
Non-Bank Lenders
Canada also has a number of non-bank lenders that provide debt financing often in the form of term loans or operating loans. Operating loans are typically provided on a short to medium term basis to finance a company’s working capital requirements and expenditure projects. Term loans are usually provided on a medium to long term loan basis for a fixed period of time and repayable on the occurrence of certain events of default or demand.
While unable to take deposits, life insurance companies in Canada manage segregated investment funds including pension funds and provide medium to long term financing. Trust and loan companies in Canada take deposits and provide debt financing. Financing is also increasingly available from credit unions, “caisses populaires” in Quebec and the financing arms of major industrial companies and hedge funds. In addition, financing can be secured from conventional real estate mortgage lenders for real property and equipment lessors.
Security
Loans can be unsecured but are more commonly, secured. Lenders often require a borrower to provide security over the assets being financed and in many cases, over the entire borrower’s personal property, including after acquired property, accounts receivable, securities and intellectual property. Lenders may require parent companies, holding companies, subsidiary companies and individual shareholders to provide guarantees and security as additional credit support. Lenders may also require security over real property, effected by way of a charge or mortgage of land or debenture.
Each of the common law provinces in Canada has enacted a Personal Property Security Act (PPSA) similar to the US Uniform Commercial Code Art. 9 system that governs the creation, registration and enforcement of security on personal property. Ontario and most of the other provinces in Canada have also enacted securities transfer legislation, based on the U.S. Uniform Securities Transfer Act, which creates a complete set of rules for the transfer of securities and other investment property.
Each province in Canada has its own electronic public registry system to record PPSA security interests granted by borrowers and guarantors over their personal property. Each system consists of a notice based registry, which provides notice of the existence of security interests that have been granted by debtors to secured creditors. Although PPSA legislation is similar in each province and territory, the provisions and obligations may differ. As a result, security given by corporate borrowers with assets in a number of provinces will need to comply with the legislation of each province. In turn, PPSA registrations may be necessary in various jurisdictions.
External Equity Financing
Private equity funds provide equity capital to companies that typically have growth potential. The strategies implemented by private equity funds may vary considerably, depending on the time during a company’s life at which the investment is made. These funds may provide “seed” or startup capital, as well as financing for development to assist with a turnaround or buyout.
Venture capitalists are private or publicly sponsored pools of capital that are interested in taking a minority equity position in a company in exchange for significant power over the running of the company. Venture capitalists often invest in the early stages of development prior to the company generating significant cash flows which would attract institutional debt financing. Venture capitalists have a particularly significant presence in the technology sectors.
Government Assistance Programs
The federal Business Development Bank of Canada provides business loans, loan guarantees and export financing. Export Development Canada provides financial assistance to exporters.
Further, both the federal and provincial governments offer investment programs which will provide equity capital to businesses, often partnering with private equity or venture capital firms.
In the next topic of this blog series, we will explore securities law and corporate governance in Canada.
Successful international expansion requires a robust strategy and a valuable partner. Canada has unique considerations when it comes to feasibility analysis (e.g. product/service adaptation), structuring (e.g. priority of regions and optimum corporate structures) as well as its laws. Dickinson Wright’s capabilities and extensive network make us an excellent partner to facilitate your growth in the ever-expanding and lucrative Canadian market.
This article is published to inform clients and contacts of important aspects and developments in Canadian law. The content is informational only and does not constitute legal or professional advice. We encourage you to consult a Dickinson Wright lawyer if you have specific questions or concerns relating to any of the topics covered here.