Canada Small Business Financing Act: Capital Leasing Pilot Project Summative Review Report

2. Executive Summary

This review examines the Capital Leasing Pilot Project (CLPP), its role and its impact on small business' access to equipment financing. The review also evaluates the effectiveness of the pilot project's design and administration — with specific attention being paid to its ability to meet its two objectives:

• incrementality — extending financing that would otherwise have been unavailable to small businesses, or available only under less attractive conditions; and
• cost recovery — the ability of the pilot project's revenues to offset its associated cost of claims.

The structure of this review has been guided by the results-based management and accountability framework established at the launch of the pilot project. Supporting research included an analysis of the database of capital leases registered under the pilot project, a profile of lessors and small businesses using the pilot project, interviews with participating lessors and a survey of small businesses that received a CLPP capital lease. Research reports can be found at http://www.ic.gc.ca/sbresearch.

The pilot project was officially launched on April 1, 2002 and will expire March 31, 2007. At the time of the launch, it was expected that pilot project activity levels would be $2.1 billion over the five years (35 000 capital leases), with a minimum of 40 lessors participating. A gap in the marketplace was identified given that approximately 25 percent of all capital leasing applications were rejected and that these rejections were, in large part, related to firms with less than two years of experience and those seeking leases of less than $100 000. The leasing industry, through the Canadian Finance and Leasing Association (CFLA), was consulted extensively throughout the design of the pilot project.

Key findings from the review of the pilot project are as follows.

Program Activity

• Few lessors are participating — there are seven active leasing companies, but three extend the bulk of the leases^{Footnote 1}; and
• Take-up has been significantly smaller than envisioned when the pilot project was designed (1104 leases registered for a total value of $107 million from April 1, 002 to September 30, 2006). There has been recent growth in use, with forecast growth of 12 percent in the number of registered leases for 2006–2007 and 23 percent in the value, but this is still significantly less than originally forecast.

Incrementality and Cost Recovery

• Research indicates that both lessors who have extended capital leases under the pilot project and small businesses that received them believe that the financing was incremental.
• These small businesses also indicated that access to financing under the pilot project had strong, positive economic benefits, including keeping the business solvent, increasing production and hiring more employees.
• The pilot project has collected fee revenues and paid 24 claims (as at September 30, 2006) for net revenues of approximately $2.6 million. There is insufficient information to determine if the pilot project meets its objective of cost recovery.

Pilot Project Design and Administration

• Stakeholders have indicated that elements of the Lessor Designation Policy (LDP), put in place to control risk exposure to the Crown, are too restrictive and have discouraged potential participants in the pilot project.
• Lessors participating in the pilot project indicated that once they had invested the time necessary to train their people, administration was straightforward.
• Research highlighted a lingering opinion within the financing community that the CSBFA is difficult to administer and this contributed to some leasing companies choosing not to participate.

In summary, the CLPP has been useful to a small number of small businesses and has contributed to economic growth and job creation, but the level of take-up does not indicate that a gap in the marketplace exists as originally suggested. Usage of the program by lessors has been much lower than anticipated. However, those lessors with experience delivering the CLPP are in favour of having capital leasing become a permanent part of the CSBFA as it is useful for higher-risk leasing that is on the margin of their risk profile. If capital leasing becomes a permanent part of the CSBFA, lessors suggest targeted awareness building based on lessons learned from the pilot project, as well as revisiting the Lessor Designation Policy, to encourage more leasing companies to participate and to reach more small businesses.

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Footnotes

1. ^{1 back to footnote reference 1} Twenty-four lessors were approved to participate, of which six were designated by the Minister of Industry.