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.