Two principal forms of debt financing are available from third-party lenders: operating financing and term financing. In general, operating financing finances the ongoing operations of the business, whereas term financing is made available for capital investment or acquisitions.
Corporations may raise capital in several ways, the most common of which are equity and debt financings. Debt financing may be provided to the corporation by the shareholders, in addition to capital provided by purchasing shares; by third parties such as banks and other financial institutions; or by offering debt securities in the capital markets. Canadian chartered banks, Canadian subsidiaries or branches of foreign banks and other financial institutions, such as merchant banks and life insurance companies, are all active in providing financing to private and public corporations in Canada. Third- party lenders may require that the corporation’s shareholders maintain a certain level of equity investment. Lenders may also require personal guarantees from the shareholders of small private corporations. Two principal forms of debt financing are available from third-party lenders: operating financing and term financing. Operating financing, as the name suggests, usually finances the ongoing operations of the business; term financing is usually made available for capital investment or acquisitions. Both operating and term financing generally bear interest at a fluctuating rate linked to market rates of interest. Term financing may require scheduled repayments over a defined period of time. Secured Debt Financing Lenders providing debt financing, whether on an operating basis or on a term loan basis, may require security for their loans. The security will often consist of a charge covering all assets of the borrower, including inventory, accounts receivable, capital assets, such as machinery and equipment and, in some instances, real estate. The exact nature of the security taken in each instance will depend upon the financial situation and bargaining power of the borrower and the nature of the assets available to secure the debt. Property is categorized in two ways in Canadian law: real or immovable property (land, buildings and property that is permanently attached to land) and personal or movable property (generally anything not attached to land, including vehicles, equipment, shares, inventory, accounts receivable and other intangibles). Security may be taken in real or immovable property through a mortgage or charge or, in Québec, through a hypothec. In each case, the secured party must register its security against the property in question in order to protect its security interest and ensure its priority as against third parties.
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Doing Business in Canada
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