Results-Based Management and Accountability Framework for the Core Program Under the Canada Small Business Financing Act (CSBFA)

Section 1. Program Profile — CSBF Core Program

1.1 Context

Small businesses are the growth engine of the Canadian economy. To realize their full potential, they need a supportive environment in which to grow and prosper. The Canadian government, like governments in many other countries, including all of Canada's major trading partners, has long recognized the importance of small business to economic well-being and that access to financing can be a critical issue for small businesses, particularly during their early years. Research has indicated that small businesses have more difficulty obtaining financing than large firms and that there are many small businesses in Canada whose financing needs are not being satisfied by private sector providers. This is primarily because loans to SMEs are riskier. Lenders respond to this higher degree of risk in a variety of ways that have the effect of limiting the availability of financing for SMEs. The financing challenges faced by SME start-ups are particularly acute. Work by Industry Canada contains the following findings²:

• Loan application rejection rates for start-ups are greater than 40 percent. The degree of risk associated with start-ups is simply too high for most financial institutions.
  
  
• Only 29 percent of start-up SMEs are financed through commercial loans or lines of credit from financial institutions, compared with 49 percent of established SMEs.
  
  
• Start-ups rely much more than established SMEs on informal sources of external financing and tend to rely more on the personal credit and savings of the business owners.
  
  

This provides strong evidence that there remains a public policy rationale for government to help fill marketplace gaps. Therefore, the government, through the Canada Small Business Financing Program (and its predecessor the Small Business Loans Program) has sought to help small businesses in accessing the financing which is crucial to their start-up, growth and survival.

The Canada Small Business Financing Act (CSBFA), which replaced the Small Business Loans Act (SBLA), came into force on April 1, 1999. The objective of the Canada Small Business Financing (CSBF) Program is to facilitate access to asset-based debt financing for the establishment, expansion, modernization and improvement of small and medium-sized enterprises (SMEs). It does this by sharing the financial risk of lending to small businesses among the borrowers, lenders and tax payers. It is the federal government's single most important program to assist small businesses.

Industry Canada administers the CSBF Program, however, the department is not involved in assessing the loan applications. The credit decisions are made by private sector participants who make the loans and disburse the loans from their own funds. The CSBF Program is delivered by a network of around 1 400 private sector lenders. The Government of Canada shares the cost of losses with lenders by reimbursing 85 percent of eligible losses on defaulted loans.

The CSBF loan loss-sharing program, is a statutory program and, as such, has very few equivalents in government. Whereas most government programs see credit decisions being made by program managers who manage the risk and the size of the program, this is not the case with the CSBF Program. It is delivered by third parties - the lenders, who make all the credit decisions and register loans with Industry Canada. Industry Canada does not directly control the size (except inasmuch as it has an overall cap on the size of the program - maximum contingent liability³ of $1.5 billion for each five-year period) or the risk of the loan portfolio.

The key parameters of the program are provided in detail in Appendix A. These are also defined in the Act and Regulations.

1.2 Objectives

There are two key objectives set out for the CSBF Program:

• Incrementality — i.e. that the loans made under the core program would not have been made in the absence of it or would have been made under less favourable terms (relating to maturity, interest rate and repayment conditions) for the SME; and
• Cost recovery — i.e. that the program be self-sustaining (revenue neutral). User fees (registration and annual administration fees paid by borrowers) will cover claims payments (made to lenders on loan defaults) over the life of the loans.
  
  Note on program objectives: Cost-recovery was established as an objective for the program in 1995. However, the Auditor General pointed out in 1997 and again in 2002 that cost recovery is at odds with program incrementality (i.e. the more incremental the lending, the greater the possibility of cost through loan default).
  
  The independent evaluation completed in 2005 under the 2002 RMAF concurred, and concluded the program cannot be restructured in a way that would make it cost-recoverable if any sort of “reasonable” degree of loan incrementality is maintained. Evaluators recommended that Industry Canada should give explicit recognition to the fact that cost recovery and incrementality are inversely related, and complete an economic benefits study to assess the balance between costs and benefits.
  
  In response, Industry Canada has added an economic benefits study to the RMAF work that complements the research and analysis on cost recovery and incrementality.

In addition to these two objectives, a number of other outcomes related to the program's design will determine its level of success, including:

• economic benefits;
  
  
• strengthening of partnership with lenders;
  
  
• increased awareness among lenders of the existence of the program as an additional financing product they can offer to SME clients;
  
  
• take-up by lenders;
  
  
• increased awareness among SMEs of the existence of the program as one of the financing tools available to them; and
  
  
• effective and transparent administration of the program.
  
  

Given the preceding objectives, the program's final outcome is to increase opportunities for investments by SMEs through improved access to asset-based debt financing. This will contribute to Industry Canada`s strategic objective of a competitive industry and sustainable communities.

1.3 Stakeholders and Beneficiaries

Stakeholders

Stakeholders are key in the continuing development and implementation of the program. Stakeholders with a direct interest in the program include:

• The lenders eligible under the program;
  
  
• Canadian Bankers Association (CBA), representing the major banks and financial institutions;
  
  
• Credit Union Central of Canada (CUCC), representing most credit unions in Canada;
  
  
• Fédération des Caisses Populaires Desjardins, representing the caisses populaires in Quebec;
  
  
• Business associations, such as the Canadian Federation of Independent Business (CFIB), Canadian Chamber of Commerce and the Information Technology Association of Canada (ITAC), which represent Canadian SMEs;
  
  
• other government departments, such as Finance, Treasury Board and the Privy Council Office, and other organizations, such as the Canadian Business Services Centres (CBSCs), regional agencies, such as ACOA, FedNor, Canada Economic Development for Quebec; and
  
  
• Parliamentarians.
  
  

Beneficiaries

The beneficiaries of the CSBF Program are for-profit small businesses operating in Canada with up to $5 million in annual gross revenues. Not-for profit, charitable or religious organizations and farming businesses are excluded from the program.

The profile of CSBF borrowers for the period 1999 to 2004 was:

• young — small businesses just starting up (less than one year old) received approximately half of the number and value of loans made;
  
  
• small — a significant majority of all CSBF borrowers receiving loans had annual revenues of less than $1,000,000;
  
  
• seeking small amounts — average overall loan size was $82,000;
  
  
• key sectors (by value of loans) — accommodation, food and beverage services, retail trade, manufacturing, and transportation and warehousing.
  
  

1.4 Resources

In 1995 (under the SBL Program), Industry Canada was given a mandate to achieve cost recovery on loans made. This cost recovery objective continues for the CSBF Program which is intended to recover, through user fee revenues (2 percent registration fee and the annual 1.25 percent administration fee), its claims costs over the life of the loans. Determining if the program is on track to meet its goal of cost recovery requires a complex method of forecasting the value of claims against flow of fees from existing and future loans – this is estimated by means of a “forecasting model” developed by an independent third party.

It should be noted that administrative costs to Industry Canada (e.g. approximately $3M for staff employed by the Canada Small Business Financing Program Directorate ) related to the operation of the program are not included in the cost-recovery definition. There are also costs related to ongoing data collection, additional research and the evaluation plan which continue to be funded through Industry Canada's budget.

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² SME Financing in Canada, 2002, Industry Canada, 2003.

³ The government's contingent liability under the program is the maximum amount of money that the government may be called upon to pay lenders if all CSBF loans were to default simultaneously without repayments, recoveries from guarantees or sales of assets.