The loan that got a deal closed is not necessarily the loan that should still be in place two years on — and where the original financing ran through a federal programme, replacing it means working through that programme's own substitution rules, not just signing a new term sheet.
Key takeaways
The case for refinancing an acquisition loan two years after closing almost always comes down to one of two things having changed since the original underwriting. Either the business's own debt-service coverage has genuinely improved — two years of clean payment history and growing earnings against a fixed loan balance mechanically raises the coverage ratio a new lender would test — or the rate environment or lender relationship has moved in the borrower's favour since the original loan was priced. See the DSCR glossary entry for how that ratio is actually calculated; a business refinancing on improved coverage is, in effect, presenting a stronger version of the same test the original lender applied at closing.
Where the original loan ran through the Canada Small Business Financing Programme, its own published rate caps set a clear benchmark: variable-rate term loans are capped at the lender's prime lending rate plus 3%; fixed-rate term loans at the lenders' single-family residential mortgage rate plus 3%; and lines of credit at prime plus 5%. Lender fees charged on top of these rates are paid directly to the lender and cannot themselves be financed under the programme. These are ceilings on what the original lender was permitted to charge, not necessarily what was actually charged — but they are a real, sourced reference point for whether a proposed refinancing rate is a genuine improvement or a lateral move dressed up as one.
The programme’s own guidelines address this directly under a heading titled “Substitution and release of security,” with two distinct sub-processes: substitution, where new security replaces the original registered security as part of the refinancing; and release without substitution or replacement, where the original security is simply discharged. Which process applies depends on the specific facts of the refinancing and is a question for the lender directly — the material sourced for this article confirms the heading and the two named mechanisms, not the detailed conditions attached to each, and a refinancing that assumes the original CSBFP security simply disappears once a new lender is in place should confirm that with the guidelines' actual substitution-and-release provisions before closing.
The same guidelines set out, under a separate heading on security generally, how the original loan's collateral was ranked in the first place — first ranking, alternate security, equal ranking, and an after-acquired clause reaching property acquired after the loan closed. A refinancing lender stepping into that position needs to understand what it is actually inheriting, not just what the original loan amount was.
Paragraph 20(1)(c) of the Income Tax Act allows a deduction for interest on “borrowed money used for the purpose of earning income from a business or property.” The test runs on the current use of the borrowed money, not on when the loan originated — so replacing the original acquisition loan with a new facility does not, on its own, change the deductibility of the interest, provided the refinancing proceeds continue to be used for the same eligible business purpose. A refinancing that pulls out additional funds beyond simply replacing the original balance — for a shareholder distribution, say — needs that additional portion assessed separately against the same test, since it is being borrowed for a different purpose than the original acquisition debt.
A refinancing lender is, in effect, re-underwriting a deal it did not originate, without the benefit of the original purchase due diligence it can simply inherit. Two years of the target's own financial statements, filed and reconciled against CRA and GST/HST records, generally carries more weight at this stage than the original acquisition projections did — the business now has an actual track record under the current owner rather than a set of forward assumptions about how it would perform. A borrower approaching a refinancing should expect to rebuild much of the original documentation package fresh, not simply hand over what was submitted two years earlier.
A buyer financed a $980,000 equipment-distribution acquisition two years ago with a $600,000 CSBFP-backed term loan, priced at the programme's fixed-rate cap of the lender's residential mortgage rate plus 3%, alongside a $220,000 vendor take-back and $160,000 of buyer equity. At closing, trailing SDE was $185,000 against annual debt service of roughly $78,000 on the CSBFP loan — a coverage ratio of about 2.37×. Two years later, the vendor take-back has been fully repaid, and trailing SDE has grown to $240,000 on the same original loan balance, now amortized down to roughly $511,000.
A conventional bank offers to refinance the remaining $511,000 outside the CSBFP entirely, at a rate below the programme's fixed-rate cap, reflecting both the improved coverage ratio and two years of clean payment history the bank can now underwrite against directly rather than relying on the original programme guarantee. Before accepting, the buyer's counsel confirms with the original lender which of the two named processes applies — substitution of new security in favour of the refinancing bank, or a release of the CSBFP security followed by a fresh registration — since the answer determines the sequencing and documentation of the closing, not just the new interest rate. The interest on the new $511,000 facility remains deductible under the same general test as the original loan, since the borrowed money continues to be used for the same purpose: financing the business the buyer already owns and operates.
The guarantee is a loss-share arrangement between the government and the original lender, not a separate loan the borrower owes; the borrower's obligation runs to the lender under the loan agreement. The mechanics of how the original security is substituted or released on a refinancing are addressed in the programme's own guidelines and are a question for the original lender directly.
Not on its own. The CSBFP's rate caps are a useful benchmark for whether a proposed rate is meaningfully better, but any refinancing decision should also weigh the cost of discharging and re-registering security, any prepayment terms in the original loan agreement, and whether the improved coverage ratio driving the better rate is likely to hold.
The portion of the refinancing that simply replaces the original acquisition balance is tested the same way as before. Any additional amount borrowed beyond that needs its own assessment under the same borrowed-money-for-an-income-earning-purpose test, since it may be used for a different purpose than the original acquisition debt.
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