2005–2006 Annual Report

Contents

• Copyright Information
• Minister's Message
• Highlights for 2005–06
• 1  Introduction
• 2  Performance and Financial Review
  • 2.1 Program Objectives and Impacts
  • 2.2 Program Activity
  • 2.3 The Crown's Program Liability
  • 2.4 Program Administration
• 3  Capital Leasing Pilot Project
  • 3.1 Leasing Activity
  • 3.2 Revenues and Costs
  • 3.3 The Crown's Program Liability
  • 3.4 Plilot Project Evaluation
• 4  Future Directions
• Appendix A:
  • Major Program Parameters
• Appendix B:
  • Canada Small Business Financing Act Tables
• Appendix C:
  • Small Business Loans Act Tables

Copyright Information

The Canada Small Business Financing (CSBF) Program is a national program operating in all provinces and territories. Under the loans component of the program, financial institutions make term loans of up to $250  000 to small businesses to purchase land, buildings or equipment, or to improve buildings and equipment. Under the CSBF Capital Leasing Pilot Project, participating lessors provide leases of up to $250 000 to small businesses to finance the leasing of equipment. The Government of Canada pays lenders 85 percent of the eligible losses incurred on defaulted loans and leases. One of the objectives of the CSBF Program is incrementality, which is the program's effectiveness in extending financing that would otherwise have been unavailable to small and medium-sized businesses, or available only under less attractive conditions. The other objective is cost recovery, which is defined as the cost of claims on defaulted loans and leases being balanced by revenues on loans and leases over a period of 10 years.

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60185

Minister's Message

I am pleased to present to Parliament this annual report on the Canada Small Business Financing Program for 2005–06, in accordance with section 20 of the Canada Small Business Financing Act.

This report details how Industry Canada, working in partnership with lending institutions across the country, helped small businesses access over 10 800 loans worth more than $1.1 billion, to acquire assets to either start new businesses or expand existing ones. This initiative has facilitated the creation of more than 17 000 jobs in Canada. The report also provides information on the Capital Leasing Pilot Project, which was launched in April 2002 to test the feasibility and utility of a similar program for capital leases.

Small businesses are the backbone of the Canadian economy. The Government of Canada is focused on ensuring that Canadian businesses operate in a supportive environment. The Canada Small Business Financing Program is an important part of this government's support for small and medium-sized enterprises.

Maxime Bernier

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Highlights for 2005–06

Small and medium-sized businesses took out loans worth $1.1 billion.

There were 10 840 small business loans made under the Canada Small Business Financing Act. The average loan size was approximately $101 500. The funds were used to help new businesses get started and established firms make improvements, purchase equipment and modernize.

Small and medium-sized businesses signed capital leases worth $39 million.

Under the Capital Leasing Pilot Project, small businesses were able to obtain 452 leases, with an average value of $86 700. Businesses leased new and used equipment such as vehicles, machinery and printing presses.

There was $72.5 million in claims paid to lenders.

There were 1615 claims on loans settled, with payments of $72.5 million, which averaged $44 892 per claim. These claims were associated with defaulted loans registered during the seven-year period from 1999–2006. There were 21 claims for loss under the Capital Leasing Pilot Project in the amount of $486 000.

Start-ups and new businesses received the largest share of available financing.

Start-ups and new businesses borrowed more than $645.5 million, or 59 percent of the total loan value. Under the leasing pilot, start-ups and new businesses accounted for 28 percent of the value of leases.

More than 19 000 new jobs were created.

Borrowers estimated that the loans enabled them to create 17 725 new jobs across Canada, an average of 1.6 new jobs per loan. As a result of the leasing pilot, businesses estimated that they were able to create 2.8 jobs per lease for a total of 1279 new jobs.

Lending is available in every province and territory.

A total of 1351 private sector lenders — in every province and territory — participate in the program to extend financing to small businesses.

The Canada Small Business Financing Program website is Industry Canada's most visited site.

The Canada Small Business Financing Program website recorded 116 280 visits, evidence of a high level of interest in loans and leasing.

1. Introduction

Lending a Hand to Business

The purpose of the Canada Small Business Financing (CSBF) Program is to help an important part of the economy — small and medium-sized businesses — get access to adequate financing. The CSBF Program helps fill a gap in the range of financing instruments available to these businesses, which might otherwise have difficulty qualifying for financing or finding financing that meets their needs.

The CSBF Program works because the Government of Canada shares the burden of risk with private sector lenders. As a result, lenders are able to increase the amount of financing they extend to small business.

The Canada Small Business Financing Act (CSBFA or the Act) took effect in 1999, replacing the successful Small Business Loans Act that had operated since 1961. The CSBFA provides for two forms of financing: loans and capital leases.^{Footnote 1}

Under the loans component of the program, start-up businesses and established businesses can expand and modernize by taking out loans to purchase real property, buy equipment and make improvements to their leased property. In 2005–06, the CSBF Program helped small and medium-sized businesses obtain over 10 800 loans with a value of more than $1 billion.

Under the five-year Capital Leasing Pilot Project component of the program, in effect since April 2002, firms may lease new and used equipment. In 2005–06, the Capital Leasing Pilot Project enabled businesses to sign 452 capital leases, worth $39 million.

The CSBF Program supports asset-based debt financing. The maximum loan or lease is $250 000, and terms of loans and leases are 10 years or less. The program is limited to small and medium-sized businesses with revenues of up to $5 million per year and is not targeted to any group or region. Both franchise and non-franchise businesses may participate, and any type of for-profit business is eligible, with the exception of farms and charitable institutions.

Industry Canada administers the CSBF Program, registers loans and leases, collects fees and pays eligible portions of losses on defaulted loans and leases. However, the Department is not involved in assessing individual loan and lease applications. It is the responsibility of private sector lenders and leasing companies to make all credit decisions and disburse funds. In accordance with the CSBFA and its regulations, lenders and leasing companies must act with due diligence, as they would with their own conventional loans and leases. In addition, they are required to register securities against the loans and leases.

Lenders include some 1350 chartered banks, credit unions, loan and insurance companies, and Caisses populaires. They operate from more than 15 000 locations, providing service to Canadians in all provinces and territories.

The Government of Canada shares the cost of losses with lenders and leasing companies by paying 85 percent of eligible losses on defaulted loans and leases. In order to limit the Crown's liability, there is a cap on claims paid to any one lender or leasing company. The Crown's exposure to high volume lenders and leasing companies is limited to approximately 10 percent of the value of the loans and leases.

2. Performance and Financial Review

2.1 Program Objectives and Impacts

Helping Small Business Grow

One of the objectives of the CSBF Program is incrementality.

Incrementality means that small and medium-sized businesses have access to financing that otherwise would not have been available to them. Incrementality may also mean that businesses can borrow on more favourable terms or with better security arrangements.

Research shows that new businesses and start-ups have the greatest difficulty of any business in accessing capital.^{Footnote 2} Therefore, an indicator of incrementality is the number of start-ups and new businesses that receive loans. In 2005–06, start-ups and new businesses borrowed $645.5 million in loans, or 59 percent of the total value of loans under the program (see Figure 1). This is a strong indication that the program is achieving incrementality.

The other objective of the CSBF Program is cost recovery.

Cost recovery means that the program should be self-sustaining, with the costs of paying claims on defaulted loans being balanced by the registration and administration fees being paid to Industry Canada.

For more detailed information, see Appendix B, Table VII.

For the current five-year period (2004–09), CSBF Program revenues amounted to $66.0 million as of March 31, 2006 (see Table 1). Total claim expenses were $12.2 million, resulting in a net balance of $53.8 million. A positive net balance early in the term of a five-year period is due to the fact that fees on loans start being collected at the time of registration, while claims are typically submitted 2 to 4 years after loans are made. For the first five-year period of the CSBF Program (1999–2004), expenditures were $70 million greater than revenues at the time of reporting. 

Table 1: Cumulative Revenues and Expenses, CSBF Program Presented by Five-Year Administrative Period

	($000)
	1999–2004	2004–2006
Revenues
Registration fees	$106 937.75	$42 560.49
Administration fees	$159 346.63	$23 693.80
Refunds of previous years' revenues	($837.29)	($206.73)
Total revenues	$265 447.09	$66 047.56
Expenditures
Claims paid	$336 724.44	$12 206.92
Refunds of previous years' claims	($1 210.58)	$0.00
Total expenditures	$335 513.85	$12 206.92
Total revenues less total expenditures	($70 066.76)	$53 840.64

Details may not add up to totals because of rounding.
For more detailed information, see Appendix B, Table VIII.

Small Business and Job Creation

Small and medium-sized businesses are engines of job creation. Information provided by borrowers on their loan registration forms enabled the CSBF Program to measure the gross effect on employment. In 2005–06, borrowers estimated that loans would help their businesses create a total of 17 725 new jobs, or 1.6 jobs per loan. In the previous year, 2004–05, borrowers estimated job creation at 2.3 new jobs per loan. Since 1999, the CSBF Program has helped to create some 241 571 new jobs, or 2.8 jobs per loan.

2.2 Program Activity

Loans, Business Successes and Claims

During the period 2005–06 the total value of loans that private sector lenders made under the CSBF Program surpassed $1 billion. This represents a significant injection of new financing for small and medium-sized businesses. Loans numbered 10 840, almost 3 percent less than the previous year (see Figure 2), and the size of the average loan grew 8 percent to $101 500 (see Figure 3).

Even with good financing at affordable rates, some business ventures cannot succeed. In 2005–06, 1615 claims were settled, with payments of $72.5 million, which averaged $44 892 per claim (see Figure 2 and Figure 3). These claims were associated with defaulted loans registered during the seven-year period from 1999–2006 and the average value per claim remained relatively unchanged between 2000 and 2006.

* Claims are typically submitted 2–4 years after loans are made.^{Footnote 3} This explains the rising number of claims later in the life of the program. The CSBF Program came into effect in 1999.
For more detailed information, see Appendix B, Table I.

For more detailed information, see Appendix B, Table I.

Investments in Modernization and Growth — Review by Asset Type

Firms borrowed capital for a variety of reasons. They invested in equipment and real property, and made other business improvements and innovations. Figure 4 shows the distribution of the total value of CSBF loans and claims by asset type over the seven years of the program. The purchase of equipment accounted for the largest percentage of the total value of both loans (57 percent) and claims (66 percent). During the same period, purchasing real property accounted for 22 percent of the total value of all loans, and 9 percent of the total value of claims. Finally, leasehold improvements represented the smallest percentage (20 percent) of the total value of loans, and accounted for 24 percent of the total value of claims.

The text below shows how the loans and claims were distributed by asset type during fiscal year 2005–06 relative to the seven years of the program:

• 56 percent of the total value of loans went toward purchasing equipment. This is similar to the seven-year average of 57 percent.
• 20 percent of the total value of loans went toward purchasing real property (land and buildings). This share is slightly below the seven-year average of 22 percent for real property.
• 25 percent of the total value of loans went toward making improvements to leasehold improvements. This is higher than the seven-year average of 20 percent for these expenditures.
• 58 percent of the total value of claims involved loans for the purchase of equipment. This is below the seven-year average of 66 percent.
• 10 percent of the total value of claims related to loans for financing real property. This is slightly higher than the seven-year average of 9 percent.
• 32 percent of the total value of claims was tied to leasehold improvements. The seven-year average was lower at 24 percent.

For more detailed information, see Appendix B, Table II.

Loans for Businesses in Every Province, Every Territory

Thanks to a large network of 1350 private sector lenders, the CSBF Program is able to serve Canadian firms in every part of the country, whether they do business in big cities, small towns or rural communities. The program is driven by demand. Variations in its use reflect choices made by lenders and borrowers.

In 2005–06, although businesses in every province and territory took out loans, the provinces of Quebec and Ontario registered the largest share. Businesses in these two provinces borrowed 68 percent of the value of the loans, consistent with the seven-year average. Studies have shown that 58 percent of all for-profit Canadian small and medium-sized businesses operate in Ontario and Quebec.^{Footnote 4}

Ontario and Quebec together accounted for 78 percent of the value of claims during 2005–06 and 80 percent over the period 1999–2006. For more information, see Appendix B, Table III.

Food and Beverage Services, Retail Trade, Manufacturing, and Transportation and Warehousing Sectors Lead the Way in Borrowing

Based on the seven-year average, the food and beverage sector accounted for 23 percent of the total value of loans made, the retail sector accounted for 15 percent, the manufacturing sector accounted for 9 percent and the transportation and warehousing sector accounted for 10 percent (see Figure 5).

For the seven-year period from 1999–2006, the food and beverage sector accounted for 32 percent of the total value of claims paid, while the retail trade sector accounted for 16 percent, the manufacturing sector accounted for 14 percent and the transportation and warehousing sector accounted for 3 percent.

For more detailed information, see Appendix B, Table IV.

As for 2005–06:

• These top four industry sectors, both by number and value of loans, together accounted for 57 percent of the total value of loans, consistent with the seven-year average.
• All other sectors together represented borrowing worth 43 percent of the value of loans. These include health care, construction, educational services, information and cultural industries, mining, oil and gas, and others.
• On the claims side, the top four industry sectors were responsible for a significant share of claims for losses, 65 percent of the value of claims, consistent with the seven-year average.

Type and Size of Borrowers Remain Steady

• Non-franchise businesses accounted for 84 percent of the total value of loans, whereas franchise businesses accounted for 16 percent of loans, figures consistent with the seven-year average. Franchise businesses represented 21 percent of the value of claims, consistent with the seven-year average. For more information, see Appendix B, Table V.
• Firms with annual revenues between $100 001 and $2 500 000 accounted for 89 percent of the value of all loans made in 2005–06, consistent with the past seven years. Based on this seven-year average, loan and claim values by segment are roughly in line with each other (see Figure 6). These firms also accounted for 93 percent of claims that were paid, slightly higher than the seven-year average of 91 percent.

* Based on borrower's revenue forecasts at time of loan registration.
For more detailed information, see Appendix B, Table VI.

2.3 The Crown's Program Liability

To limit the Government of Canada's overall exposure to liability, the Canada Small Business Financing Act established a $1.5 billion liability ceiling for each consecutive five-year period for claims paid on defaulted loans. As of March 31, 2006, the second year of the current five-year period, the Crown's remaining potential liability was $352.0 million, which was well below the statutory limit. The remaining contingent liability is calculated by the maximum potential liability^{Footnote 5} less reductions in the repayment of loans by borrowers and the reimbursement of losses by the government for this same period. 

2.4 Program Administration

The Canada Small Business Financing Program Directorate of Industry Canada is responsible for the administration of three programs: the Canada Small Business Financing Program (loans component), the five-year Capital Leasing Pilot Project and the Small Business Loans program. Although the Canada Small Business Financing Program replaced the Small Business Loans (SBL) program on April 1, 1999, the Directorate is still processing claims and recoveries from loans that were registered before 1999.

The Directorate employs 27 full-time staff and operates with an annual budget of about $2.8 million. Among its main administrative duties, the Directorate evaluates claims for losses and reimburses lenders for eligible losses. The time required to process a claim in 2005–06 took an average of 13 days, consistent with 2004–05.

The Directorate received a total of eight appeals of decisions made related to the two loan programs. Each appeal was considered in the light of any additional information or clarifications. As a result, the Directorate rejected five appeals and accepted two appeals. A decision on one appeal was pending at the time of writing.

It took an average of two days or less to register loans and leases.

There were 2467 telephone and email inquiries from small businesses and lenders. The program's website received more than 116 000 visits (similar to 2004–05), making it the most visited website at Industry Canada.

Claims for Losses

During 2005–06, the Directorate accepted 94 percent (1615) and rejected 6 percent (107) of Canada Small Business Financing Program claims (see Table 2). The rejection rate is consistent with last year's.

During 2005–06, the Directorate accepted 90 percent (183) and rejected 10 percent (20) of Small Business Loans program claims. By comparison, the 2004–05 rate of rejection was 15 percent. The reason for the difference in rejection rates is that under the CSBF Program, there are provisions for adjusting claims that would have been rejected outright under the terms of the SBL program.

Table 2: Canada Small Business Financing Program Directorate

Transactions	2005–06	2004–05
CSBF Program loans	10 840	11 143
Claims for loan losses processed
CSBF claims accepted	1 615	1 621
CSBF claims rejected	107	108
CSBF total number of claims	1 722	1 729
SBL claims accepted	183	377
SBL claims rejected	20	64
SBL total number of claims	203	441
Capital Leasing Pilot Project leases made	452	288
Claims for lease losses processed	21	1

3. Capital Leasing Pilot Project

The Capital Leasing Pilot Project was launched April 1, 2002. The project was based on consultations with the business and leasing communities. The purpose is to identify and test the viability and utility of the CSBF Program for capital leasing. This pilot project is based largely on the loan program and shares the objectives of incrementality and cost recovery. There is a maximum lease value of $250 000 and maximum term of 10 years. The Government of Canada pays eligible portions of defaulted leases up to 85 percent of their value. The pilot collects registration fees and administration fees. For more details, see Appendix A.

3.1 Leasing Activity

The Capital Leasing Pilot Project has enabled businesses to sign 921 capital leases, worth $90.1 million, since April 2002. In 2005–06, the leasing pilot made 452 capital leases worth a total value of $39.2 million. The average lease value was about $86 700, an amount that is approximately $15 000 less than the average value of CSBF Program loans.

Like the loans program, the leasing pilot project is driven by demand — variations in activity across the country reflect choices made by the leasing companies and the businesses that sign leases. The pilot project is available in all provinces and territories, and does not target any sector or region. Currently, there are five active lessors under this pilot project. In 2005–06, leasing activity took place in eight provinces (see Table 3).

• Start-ups and new businesses accounted for 28 percent of the value of leases.
• Firms more than three years old made up 50 percent of the value of new leases.
• Quebec accounted for the largest share of leases, 42 percent of the total value of leases.
• Firms that participated in the leasing pilot estimated that each lease helped create an average of 2.8 new jobs. All leases together contributed to the creation of 1279 new jobs.

Table 3: Capital Leases by Province and Territory, April 1, 2002 – March 31, 2006

Province or territory	Fiscal year	Leases made
		Number	Value ($000)	Percent of total value	Average ($000)
Newfoundland and Labrador	2002–03	2	240.2	3	120.1
	2003–04	0	0.0	0	0.0
	2004–05	0	0.0	0	0.0
	2005–06	0	0.0	0	0.0
Prince Edward Island	2002–03	0	0.0	0	0.0
	2003–04	0	0.0	0	0.0
	2004–05	0	0.0	0	0.0
	2005–06	0	0.0	0	0.0
Nova Scotia	2002–03	2	292.2	3	146.1
	2003–04	2	227.2	1	113.6
	2004–05	3	342.4	1	114.1
	2005–06	1	198.0	1	198.0
New Brunswick	2002–03	5	707.1	8	141.4
	2003–04	9	1 044.0	6	116.0
	2004–05	11	1 318.4	5	119.9
	2005–06	8	816.8	2	102.1
Quebec	2002–03	9	1 410.6	16	156.7
	2003–04	23	2 608.9	16	113.4
	2004–05	139	9 443.7	36	67.9
	2005–06	263	16 618.2	42	63.2
Ontario	2002–03	24	4 107.7	47	171.2
	2003–04	44	5 939.5	37	135.0
	2004–05	69	7 953.2	31	115.3
	2005–06	75	9 038.7	23	120.5
Manitoba	2002–03	2	287.9	3	143.9
	2003–04	0	0.0	0	0.0
	2004–05	5	768.6	3	153.7
	2005–06	8	852.1	2	106.5
Saskatchewan	2002–03	1	122.4	1	122.4
	2003–04	2	278.9	2	139.4
	2004–05	1	111.2	0	111.2
	2005–06	2	363.3	1	181.7
Alberta	2002–03	6	758.3	9	126.4
	2003–04	24	2 726.8	17	113.6
	2004–05	40	4 149.8	16	103.7
	2005–06	46	5 401.9	14	117.4
British Columbia	2002–03	6	847.3	10	141.2
	2003–04	20	3 383.2	21	169.2
	2004–05	20	1 886.3	7	94.3
	2005–06	49	5 879.2	15	120.0
Yukon	2002–03	0	0.0	0	0.0
	2003–04	0	0.0	0	0.0
	2004–05	0	0.0	0	0.0
	2005–06	0	0.0	0	0.0
Northwest Territories	2002–03	0	0.0	0	0.0
	2003–04	0	0.0	0	0.0
	2004–05	0	0.0	0	0.0
	2005–06	0	0.0	0	0.0
Nunavut	2002–03	0	0.0	0	0.0
	2003–04	0	0.0	0	0.0
	2004–05	0	0.0	0	0.0
	2005–06	0	0.0	0	0.0
Total*	2002–03	57	8 773.7	100	153.9
	2003–04	124	16 208.5	100	130.7
	2004–05	288	25 973.7	100	90.2
	2005–06	452	39 168.3	100	86.7
	Total	921	90 124.1	100	97.9

*Details may not add up to totals because of rounding.

3.2 Revenues and Costs

Revenues reached $2.7 million in fiscal year 2005–06 for the Capital Leasing Pilot Project. There have been 21 claims received in the amount of $486 000. A forecast of expected revenues and expenses for the pilot project will be undertaken in 2006–07 to assess whether the pilot can achieve cost recovery.

3.3 The Crown's Program Liability

To limit the Government of Canada's exposure to liability, the Capital Leasing Pilot Project established a $400 million liability ceiling for the five-year period ending March 31, 2007. Four years into the pilot project, on March 31, 2006, the Crown's remaining potential liability was calculated at $9.9 million, well below the $400 million ceiling permitted. The remaining contingent liability is calculated by the maximum potential liability^{Footnote 6} less reductions in the repayment of leases by borrowers and the reimbursement of losses by the government.

3.4 Pilot Project Evaluation

The Capital Leasing Pilot Project was launched in April 2002 and its regulations cease to have effect from April 1, 2007, unless the Government of Canada decides to make capital leasing a permanent component of the program. In that instance, following an announcement of the Government of Canada's decision, pilot project regulations will continue in force for one year while legislation and regulations are put in place to give effect to this decision. To facilitate the decision-making process, Industry Canada will be carrying out an evaluation of the pilot project in 2006–07.

4. Future Directions

Under the provisions of the Canada Small Business Financing Act, the CSBF Program undergoes a program review every five years. The last review report was tabled in Parliament in April 2005. The report (along with the related research and a summary review of the research) is available online (www.strategis.gc.ca/sbresearch/csbfa). The 2005 review report confirmed the importance, efficiency and effectiveness of the program in helping address the financing challenges faced by small business. It also established a framework for consultations to identify how the CSBF Program could be improved.

Industry Canada is continuing work to address program improvements, as well as regular program monitoring and assessment based on an evaluation framework that provides results-based monitoring of program activities. Framework evaluation activities include program awareness and satisfaction surveys, study of the level of cost recovery and incrementality, and economic and employment impact assessment.

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Footnotes

1. ^{1 back to footnote reference 1} A capital lease is a lease under which a leasing company provides equipment to a lessee meeting at least one of the following conditions: it includes a bargain purchase option; it provides for the transfer of ownership of the leased equipment to the lessor at the end of the term; the lease term is greater than 75 percent of the economic life of the equipment; and the net present value of the payments made under the lease is 90 percent or more of the cost of the equipment on the day the lease was entered into.
2. ^{2 back to footnote reference 2} Source: Industry Canada, Small and Medium-Sized Enterprise Financing in Canada, 2003.
3. ^{3 back to footnote reference 3} Source: Equinox Management Consultants, SBLA and CSBFA Claims and Cost Experience, 2003.
4. ^{4 back to footnote reference 4} Source: Industry Canada, Small and Medium-Sized Enterprise Financing in Canada, 2003.
5. ^{5 back to footnote reference 5} The Government of Canada's maximum potential liability is calculated as the sum of the Government of Canada's potential liability to each lender, per lending period, capped by the 90–50–10 formula. This formula limits the Crown's payments with respect to any lender according to the following: 90 percent of the first $250 000 of loans in a lender's account, 50 percent on the next $250 000 and 10 percent of all remaining loans.
6. ^{6 back to footnote reference 6} The Government of Canada's maximum potential liability is calculated as the sum of the Government of Canada's potential liability to each lessor, per lease period, capped by the 90–50–10 formula. This formula limits the Crown's payments with respect to any lessor according to the following: 90 percent of the first $250 000 of leases in a lessor's account, 50 percent on the next $250 000 and 10 percent of all remaining leases.