A term sheet is not an approval. Under the Canada Small Business Financing Program the government shares the lender's loss if the loan goes bad, but it never makes the credit decision — the participating lender does, using its own commercial process, and a file can fail that process for reasons that have nothing to do with whether the target business is any good.
Key takeaways
A buyer who has confirmed a target is eligible for Canada Small Business Financing Program support has confirmed exactly one thing: that the programme is allowed to guarantee part of a loan if the lender chooses to make it. ISED says as much directly — meeting programme eligibility “does not guarantee any lender will approve a specific loan.” The credit decision itself belongs entirely to the participating lender, using its own commercial underwriting, and a file that is eligible on paper can still fail there for reasons the programme's own rules never mention.
The programme's own eligibility test is narrow: small businesses or start-ups operating in Canada with gross annual revenues of $10 million or less, structured as corporations, sole proprietorships, partnerships or co-operatives, for-profit, not-for-profit or charitable. Farming businesses are carved out entirely — a separate federal programme, the Canadian Agricultural Loans Act, covers that sector instead. None of this speaks to whether the specific loan being asked for is a good credit risk; it only says the borrower is the kind of business the programme is willing to guarantee at all.
The most common technical reason a lender declines or resizes an acquisition loan is a debt-service coverage shortfall — the target's normalized earnings are not enough, relative to the debt being proposed, to clear the lender's own minimum coverage ratio. Deavo's capital-stack material, drawn from Canadian lending practice rather than the programme itself, puts typical targets at roughly 1.25 times SDE on smaller deals and 1.30 times EBITDA on larger ones, describing the ratio as the basis lenders actually underwrite against. A file that clears every eligibility box but falls short on coverage gets resized, restructured with more buyer equity, or declined outright — the guarantee behind the loan changes none of that math, because the government's 85% loss-share only applies after a loan has already gone bad, not before a lender agrees to make it.
A second, structural reason shows up before cash flow is even discussed: the borrower's own corporate shape. The programme is generally structured around financing specific assets — real property, leasehold improvements and equipment — which in an acquisition usually has to line up with the assets actually named in a purchase agreement. A deal built as a share purchase, or one where a holding company is the entity acquiring the assets, falls outside the programme's coverage entirely, no matter how strong the underlying business is — a fact worth checking against the deal structure long before the application is submitted, not after it is declined.
A lender does not just read the target's headline earnings figure — it reads how that figure was built, and several patterns in the underlying statements routinely turn up as reasons a credit committee pushes back before a coverage ratio is even calculated. Deavo's own buyer-facing due-diligence material flags owner compensation, benefits and personal expenses run through the business; one-time or non-recurring items such as a lawsuit settlement or a one-off equipment sale; related-party pricing, including rent paid to a property the owner also owns; a gap between the statements and what was actually filed with CRA or for GST/HST; accounts receivable growing faster than revenue; and rising inventory without a matching increase in sales as the recurring red flags a buyer — and, just as often, the lender's own underwriter — has to work through before trusting the normalized number a loan is being sized against. None of these flags kills a deal on its own, but an unusually aggressive set of add-backs is one of the more common points of pushback during due diligence, and a lender who cannot get comfortable with the normalized earnings figure a buyer is presenting will size the loan to its own, more conservative number instead — which is often exactly where a file that looked fully financeable on the buyer's spreadsheet fails at credit.
A declined or resized CSBFP application is not usually the end of the financing conversation. A weaker debt-service position often converts into a request for more buyer equity, a larger vendor take-back to bridge the gap, or a smaller working-capital line alongside a reduced term loan — the mechanics covered separately here. A registration fee equal to 2% of the loan applies once a CSBFP loan is actually advanced, and it can be financed as part of the loan rather than paid out of pocket at closing — a minor mechanical point, but one that matters when a buyer is already stretching equity to close the coverage gap a lender identified.
A buyer is seeking a $700,000 CSBFP term loan against a target with normalized SDE of $120,000, structured to carry annual debt service of $100,000. The lender's minimum coverage target on this file is 1.25 times SDE, meaning it needs to see at least $125,000 of normalized earnings behind $100,000 of annual debt service before it will approve the loan as proposed ($100,000 × 1.25 = $125,000). At $120,000 of actual SDE against that same $100,000 of debt service, the coverage ratio comes out to only 1.2 times ($120,000 ÷ $100,000) — short of the $125,000 of earnings the 1.25 times target actually requires. The lender declines the loan as proposed and comes back with two options: resize the term loan downward so the reduced debt service clears 1.25 times coverage against the same $120,000 of earnings, or ask the buyer to bring more equity to shrink the debt being serviced. Neither the target's eligibility for the programme nor the government's 85% loss-share guarantee changes that arithmetic — the shortfall sits entirely inside the lender's own credit decision.
No. ISED states directly that meeting programme eligibility does not guarantee any lender will approve a specific loan. The participating lender makes the credit decision using its own commercial underwriting process, independent of the programme's eligibility rules.
A shortfall in debt-service coverage — where the target's normalized earnings are not enough, relative to the proposed debt, to clear the lender's minimum coverage ratio. Canadian lending practice generally targets roughly 1.25 times SDE on smaller deals and 1.30 times EBITDA on larger ones.
No. The federal guarantee behind a CSBFP loan is a loss-share of up to 85% that only applies after a loan has gone into default — it plays no role in whether the lender approves the loan in the first place, and it does nothing to fix a borrower whose corporate structure, such as a share purchase or a holding-company acquisition, falls outside what the programme can finance at all.
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