BDC Subordinate Financing

Think of subordinate financing as a hybrid of debt and equity financing.

In the simplest terms, it is like debt financing because even though you need cash flow to repay the loan, the terms of repayment are generally more flexible than conventional debt financing. Your repayment can be based on your available cash flow rather than your depreciating company assets.

Subordinate financing is often associated to equity financing because the Business Development Bank of Canada (BDC) may participate in your company's growth by receiving stock options and/or royalties, depending on the terms of your agreement with them.

Eligibility Criteria

Small or medium enterprises are eligible if they have:

• a strong management team;
• a profitable business;
• an excellent financial controls;
• a competitive advantage.

Start-ups are not considered for subordinate financing.

Eligible Activities

Management buy-outs (MBO)

With an aging population, many 50+ business owners are looking for ways to exit their companies. Subordinate financing can provide the necessary funds for an existing management team to invest in a company and launch an MBO.

Mergers & Acquisitions

Naturally involve both fixed assets and more difficult-to-finance intangible assets such as "goodwill." Subordinate financing can help companies purchase the goodwill while preserving their cash flow during a period where some uncertainty may exist.

Working capital for growth

Subordinate financing is often used to finance working capital for growth, which enables companies to increase revenues and profits. Entrepreneurs looking to invest money in market penetration, improve product R&D or finance additional headcount can take advantage of subordinate financing without compromising their regular cash flow used for daily operations.

Targeted industries:

• manufacturing
• aerospace
• health
• software
• Internet
• communications
• plastics
• forestry
• food
• furniture
• logistics

Industries not targeted:

• retail
• wholesale
• resource exploration
• real estate

Summary

Subordinate financing shares some of the characteristics of debt financing because the borrower has the obligation to repay. On the other hand, subordinate financing also mimics equity financing because repayment is based on cash flow rather than depreciating company assets.

Expected cost

Entrepreneurs can expect part of the cost to be in the form of fixed interest, which is a deductible expense. The remaining cost comes in the form of a variable component such as a royalty, bonus payments or options to purchase shares in the company at a discount.

New Brunswick Contact(s):
See National Contact.

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National Contact(s):
Head Office
Business Development Bank of Canada
Suite 400
5 Place Ville Marie
Montréal, Quebec  H3B 5E7
Fax: 1-877-329-9232
Toll-free (information): 1-877-BDC-BANX (1-877-232-2269)
E-mail: info@bdc.ca
Web site: http://www.bdc.ca/en/home.htm