Kick starting small business: the federal government's Canada Small Business Financing Program...

Small business is big business in Canada, and getting that business the funding it needs to get started is no small matter. That's why changes are likely in store for the small business loans program that has helped thousands of businesses get a kick start

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Positive appearances, serious losses

The five-year report, required as part of Industry Canada's oversight of the program, covers the years 1999-2004 (the CSBF was created in 1999 as a successor to the Small Business Loans program, which originated in 1961 to provide debt financing to start-ups).

The research was conducted over the past year by business consultant BearingPoint, Equinox Management Consultants, Statistics Canada, and Compas Inc. and included extensive stakeholder interviews and information gathering.

The CSBF was examined on the basis of its success in meeting the needs of small business, particularly in the areas of incrementality (how well it provided financing that would otherwise be unavailable) and cost recovery (the ability of the program's revenues to offset its associated costs of claims).

At arm's-length, the program appears very successful: over five years it supported $5.4 billion in lending through 66,000 loans; it was highly incremental, with 50% of loans going to new or start-up firms; it helped create 110,000 incremental jobs; and CSBF borrowers had high sales growth and survival rates and operating profits. Those numbers reflect a small business community that is considered the engine of Canada's economy: of Canada's one million employer establishments, 98% have fewer than 100 employees, 74% less than 10 and 57% employ just one to four workers.

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Up close, concerns focused largely on program usage decline ($1.35 billion through 18,000 loans in 1999-2000 to $1 billion and 11,000 loans in 2003-04); in some cases, lower interest rates through regular bank loan programs are seen to be driving away low-risk lenders who don't need to rely on the program, leaving high-risk clients as the main customer base. The result was an estimated loss of $340 million to CSFB over five years--and critics say that, by extension, taxpayers could end up picking up the cost for bad loans within the next seven years, with losses of up to $90 million per year--almost $1 billion by 2012.

Why the loss? The government caps loan interest rates and guarantees up to 85% of any loss in return for business fees paid by clients. If high-risk clients don't repay, the government takes the loss.

Modernization a must-have

"We met primarily with the lenders and some of the representatives of the borrowers as well as industry associations like the Canadian Federation of Independent Business (CFIB)," said Peter Webber, director of small business financing policy for Industry Canada.

According to Webber, the report represents the first round of consultations. Once reviewed by the department, there will be further discussion and consultation within Industry Canada and, most importantly, with stakeholders and the lending community, before changes are made.

In assessing the program, banks and other financial institutions feel it doesn't keep pace with their increasingly automated lending practices. CSFB must undergo "administrative modernization," according to the report.

Caroline Hubberstey, director of public affairs for the Canadian Bankers Association, said the banks are increasingly streamlining their offerings to small business, from a simple, one-page application to a card-based line of credit that gives low-risk applicants a chance to access significant amounts of money quickly and easily.

"Generally you're looking at greater flexibility, meeting that need for working capital--and it mirrors the same issues we're addressing on the personal lending side," said Hubberstey. For instance, "a line of credit is 'credit that's immediately available to me.' Instead of having to go to a loan provider you can use the line of credit. We're seeing a fast-moving business environment, with growth in sectors like service, where you don't need a large asset base."

Lenders are moving to respond to this growth, added Hubberstey, citing a Statistics Canada study showing more than 3,700 providers of business financial services in Canada. "This report allows the government to look at changes and at how the niche providers and specialized financing companies respond to business."

Lending misunderstood

Among the report's recommendations are changing the current program parameters to allow greater scope in meeting the financing needs of small business; seeking greater cost recovery from the program; expanding the program to include new types of financing for small business, including allowing working capital to be eligible for financing under CSBF; and adapting the program to meet the financing needs of social economy enterprises (grassroots, not-for-profit entrepreneurial companies that produce goods and services for the market economy, but that redirect their surpluses toward social and community goals).

Andre Piche, director of National Affairs for CFIB, said his association, whose 105,000 members represent all sectors of the economy, was an active participant from the start. "When the review was undertaken, we got very interested because the financing is very much an issue for small business across the country. This program can be very helpful for companies starting out.

"Essentially, we want the focus of the program to remain what it is, (with) the focus on the small and medium enterprise (SME) market," said Piche. "We want to make sure that it is run in such a way that it recovers its own costs. That was the part of the review that was important to us."

The biggest hurdle? Piche said it's a "lack of understanding that applicants were actually getting a loan from this program." Many believed it to be a grant. "It clearly showed that many people didn't understand that they were being covered by this program. The other comment that was made by us involved the need to simplify the loan application process for both the applicant and the lender. If the bank manager finds the process onerous, they will be disinclined to offer this program to an applicant. We're looking at ways to make the process simpler."

Recovering costs, simplifying selling

Business succession is another issue of interest to CFIB, said Piche. Small business owners casting an eye to retirement need to make their businesses attractive to new buyers.

"A recent CFIB survey found that the percentage of SME owners looking toward retirement is on the rise," said Piche. "The challenge is in finding people who will purchase their businesses and often those potential buyers will need help from programs like the Canada Small Business Financing program. Our report said that four of 10 SME owners intend to exit their business in five years. In 10 years that jumps to 7 out of 10. Most cited retirement as the reason. The implications are that if you're trying to sell your business, who's going to buy it? Where will they get financing?"

If Industry Canada follows through, the program will be streamlined and made more cost-efficient. According to Webber, the report's recommendations will be examined and decisions made on revamping the system. For the CFIB, it will be a case of fine-tuning the areas that need fixing.

"We want to simplify the process and change the program so that it's cost recoverable as much as possible," said Piche. "That speaks in favour of not extending the program into areas that could easily increase cost and the exposure of government. There was talk before of allowing working capital-type loans under the program; you can do that under other programs. If the program sticks to its knitting, it should be very successful in future."

John Cooper is a Whitby, Ont.-based freelance writer.