Study of the Economic Costs and Benefits of the Canada Small Business Financing Program

III. Estimated Costs of the CSBF Program

The key costs of the CSBF Program addressed in the study include:

• Administrative costs of the program to Industry Canada including salaries, wages, and benefits; operating and maintenance activities; and capital expenditures;
• Direct costs of the program to Industry Canada (payment of claims); and
• Loan default costs to lenders.

A. Salaries and Benefits of Staff Administering CSBF Program

1. Methodology

The costs to manage and administer the program are needed to assess the full annual costs of the program to the Government. The cost of salaries and benefits of staff who manage the CSBF Program, register loans and claims, process claims, and are responsible for program policy and research for the CSBF were estimated and analyzed.

1. Total Salary Costs Attributable to the CSBF Program. Data were obtained from the Small Business Financing Directorate financial management system for the time period 1999/2000 to 2007/08 on the total salaries of all staff within the Small Business Financing Directorate (SBFD) that includes staff from the following teams: Director's Office; CSBFP Policy / BDC / OECD; Economic and Policy Analysis; Operations; and Registration, Program Integrity and Revenues.
2. Estimate costs of other staff activities not attributable to the CSBF program. Staff within the Small Business Financing Directorate also spent a portion of their time on activities other than the CSBF loan guarantee program. As a result, salary costs of staff time spent on these activities over the study period have been removed to isolate the costs of administering the CSBF loan guarantee program. In particular, the costs of administering the Small Business Loans Program (SBLP), the Capital Leasing Pilot Project (CLPP), and support for Business Development Canada have been estimated and subtracted from total CSBF salaries as follows:
   • The share of staff time spent on the ongoing administration of the SBLP and the CLPP was approximated by calculating the number of claims registered and processed for the CLPP and SBLP, compared to the overall number of claims processed and registered for the CLPP, SBLP and CSBFP combined. The estimated share of total costs was subtracted from total salary costs.
   • The classifications of staff involved in BDC support and the approximate share of their time spent supporting BDC were obtained through interviews with program staff and management. The share of the mid-range salary costs were subtracted from total salary costs.
3. Estimate corporate management costs. Corporate management costs, the costs of senior management (including DG, ADM, and DM) time to oversee the CSBFP were approximated at 2 per cent of salaries for staff within the SBFD. Actual costs are difficult to measure, and the costs to do so outweigh the benefits
4. Estimate employee benefit costs. Total benefits were calculated at 20 percent of total salary costs after all adjustments have been made. This is the standard benefit calculation used across the federal government.

2. Findings

CSBFP salary, benefit and corporate management have grown from about $987,692 in 1999/2000 to about $2,338,557 in 2007/08 (Table III-1) as a result of an increase in the combined total of new loans registered and claims made against the CSBF Program relative to the number of registrations and claims made under the SBLP and CLPP programs.

Table III-1
Total Salary, Benefit, and Corporate Management Costs attributable to CSBF Loans

($000)	1999/ 2000	2000/ 01	2001/ 02	2002/ 03	2003/ 04	2004/ 05	2005/ 06	2006/ 07	2007/ 08
	988	890	1,154	1,852	2,404	2,521	2,581	2,039	2,339

Figure III-1
Estimated Salary, Benefit and Corporate Management Expenditures of the CSBF Program

Long Description

Although the greatest number of new loans were issued in 1999/2000, expenditures in the first two years following the introduction of the CSBF are relatively low as a result of few claims being processed during that time. Generally, for each cohort of loans issued under the CSBF program, the majority of loan default claims are submitted two to four years after loans are made². Staff time required to register a new loan is significantly lower than the total time required to register, process and audit a claim for a CSBF loan. Between 1999/2000 and 2002/03, SBFD staff processed a greater number of claims against the SBLA program, the loan guarantee program that preceded the CSBFP, than the CSBFP (Table III-2). In 2006/07, there was a reduction in the gross salary costs of the SBFD. At the same time, a high number of CLPP leases, 551 in total, were registered which resulted in a dip in salary and benefit costs attributable to the CSBFP.

Table III-2
Number of Claims Processed, CSBF, SBLA and CLPP Programs

Claims Processed:	1999/ 2000	2000/ 01	2001/ 02	2002/ 03	2003/ 04	2004/ 05	2005/ 06	2006/ 07	2007/ 08
CSBF	19	307	915	1,409	1,553	1,620	1,598	1,681	1,843
SBLA	4,673	3,680	2,664	1,708	807	377	182	112	43
CLPP						1	17	16

B. Direct Operating Expenditures of the CSBFP

1. Methodology

Administrative costs of the program include overhead costs (such as training for staff, etc.) and direct operating costs (such as resources, products, contracting, and IM/IT). Industry Canada reports against these items together as Operating & Maintenance expenditures (the following costs do not account for office space leasing provided by PWGSC).

Annual data were obtained from the Industry Canada financial management system for the time period 1999/2000 to 2007/08 on the total Operating & Maintenance budget of the Small Business Financing Directorate (SBFD). The O&M expenditures include:

• Transportation & Communications (including travel; postage & freight; computer telecommunications; and other telecommunications);
• Information (including publishing, printing & exposition; communications professional services);
• Professional and Special Services (including legal services; training; other professional services; hospitality; temporary help; other special services/fees; translation services);
• Rentals;
• Repairs and maintenance (including repairs of buildings);
• Utilities, materials & supplies;
• Other machinery acquisition (including informatics equipment and parts; machinery, furniture and parts); and
• All other expenditures (including other expenditures; accounts payable interest).

The O&M annual expenditures were adjusted to include only the share of costs attributed to the CSBF loan guarantee program. The share of total O&M costs attributable to the SBLP, the CLPP, and support for BDC were assumed to be the same as calculated in Section III-A, above. Professional Fees were included in their entirety (excluding professional fees for tourism policy & research where these appear) and not prorated since it is understood that these fees were paid towards activities supporting the CSBF loan program.

2. Findings

Operating and maintenance costs for the CSBF program averaged about $850,000 during the study period and ranged between a low of $335,000 in 1999/2000 and a high of $1.212M in 2002/03 (Figure III-2). Operating and maintenance expenditures were highly variable from year to year since they include costs that are not generally tied to the number of loans issued under the program nor claims made. Costs for professional services was the most variable component of O&M costs that was responsible for the majority of the variation. In particular, costs for professional services were highest between 2002/03 and 2004/05, which accounts for the peaks in total operating and maintenance expenditures during those years.

Estimated O&M expenditures attributable to the CSBF program were relatively low in 1999/2000 and 2000/01 as a result of two factors. Total O&M expenditures of the SBFD were about half that of subsequent years. In addition, a high number of claims were processed during that time against the SBLA program when compared to loan registration and claims activities for the CSBF program. There was a slight decline in O&M costs in 2007/08 as a result of an overall decrease in both professional services costs and other O&M costs.

Figure III-2
Estimated Operating and Maintenance Expenditures of the CSBF Program

Long Description

C. Capital Expenditures

1. Methodology

Data on the capital expenditures of the SBFD were obtained from the Industry Canada financial management system. Capital expenditures were reported separately for the SBFD only for 2005/06, 2006/07, and 2007/08. For 1999/2000 to 2004/05, capital expenditure data for the SBFD were recorded with capital expenditures for other programs and it is not possible to accurately separate out the costs attributable only to this program. As a result, program costs may be underestimated for 1999/2000 to 2004/05, if any capital expenditures were made during that time.

Since information on the type of capital expenditures made in 2005/06, 2006/07, and 2007/08 was not available, the capital expenditures have not been amortized over the useful economic life of the assets purchased, and therefore have been expensed in the year the expenditure was made. As a result, capital expenditures made may be overestimated for 2005/06 to 2007/08.

2. Findings

Capital expenditures between 2005/06 to 2007/08 were between $330,000 and $390,000 as shown in Table III-3. Since details about the nature of the capital expenditures made were not available (e.g. IT systems, vehicles, etc, it was not possible to amortize the costs over the useful life of the asset. As mentioned above, capital expenditures during this time may be overestimated.

Since program capital expenditures represent less than 0.5 per cent of total costs, any over or underestimation will have no tangible impact on the assessment of the net benefits of the program.

Table III-3
Capital Costs of the CSBF Program

($000)	1999/ 2000	2000/ 01	2001/ 02	2002/ 03	2003/ 04	2004/ 05	2005/ 06	2006/ 07	2007/ 08
	N/A	N/A	N/A	N/A	N/A	N/A	330	360	390

D. Claims Paid on Loan Defaults

Claims may be submitted to the CSBF program in several forms, as a regular, interim or incremental claim. A regular claim for loss is made after realization on all security, guarantees or suretyships and/or personal liability is complete, and all proceeds have been applied to the loan³. An interim claim for loss is made when realization on the primary security and any additional security on the business assets is complete, but before the lender has fully implemented a compromise or fully realized on the guarantees or suretyships or personal liability of the sole proprietor or partner.⁴ For an interim claim, a portion of the claim payment will be held back until a final claim is made and is based on estimated guarantees and amounts yet to be paid. Occasionally, a lender may realize a larger amount than was estimated at the time of the interim claim. In this case, the Industry Canada share of the amount must be refunded to the CSBF program⁵. An incremental claim can be made to request payment in addition to the total amount already claimed in the case where a lender incurs additional costs related to the loan.⁶

1. Methodology

Data on the annual volume and number of claims paid each year were obtained from the CSBF program database for 1999/2000 to 2007/08.

The cost of claims for any given fiscal year was calculated as the cost of claims submitted that year less refunds on previous years' interim claims.

2. Findings

Claims paid against CSBF loan defaults have been growing steadily since the introduction of the CSBF program. For any given cohort of loans, the majority of claims occur about two to four years after the loans were issued⁷. For example, 73 per cent of claims made during the study period for the 1999/2000 cohort of loans took place between 2001/02 and 2003/04. Net claims as a share of the outstanding loan balance have remained relatively stable in the range of 2.7% to 3.1% for 2002/03 to 2006/07. In 2007/08, however, net claims as a share of the outstanding loan balance grew to 3.62%. Although the loan balance decreased somewhat to $2,728M, claims have grown to $98.7M (Table III-4). Although the average loan amounts have been steadily growing over the study period, the average claim size has remained relatively stable in the range of $45,000 – $49,000 between 2000/01 and 2006/07, with a slight increase to about $54,000 in 2007/08.

Table III-4
Claims Paid on CSBF Loan Defaults

* After refunds on previous year's expenses.
($M)	1999/ 2000	2000/ 01	2001/ 02	2002/ 03	2003/ 04	2004/ 05	2005/ 06	2006/ 07	2007/ 08
Net Claims Paid*	0.5	14.8	43.4	68.8	71.7	76.5	71.7	80.3	98.7
Total Outstanding Loan Balance	1,099.9	1,934.0	2,231.4	2,234.8	2,660.7	2,669.9	2,800.7	2,753.0	2,728.2
Net Claims As Share of Outstanding Loan Balance	0.04%	0.76%	1.95%	3.08%	2.69%	2.86%	2.56%	2.92%	3.62%

Figure III-3
Average Claim and Loan Amounts, 1999/2000 to 2007/08

Long Description

Claims by Industry Sector

Table III-5
Claims Paid by Industry Sector

($000)	1999/ 2000	2000/ 01	2001/ 02	2002/ 03	2003/ 04	2004/ 05	2005/ 06	2006/ 07	2007/ 08
Accommodation services	-	61	264	532	76	398	772	838	534
Administration and support, waste management and remediation services	-	140	448	1,143	601	313	476	211	397
Agriculture (support activities), forestry, fishing and hunting	-	144	692	2,506	2,564	1,991	2,394	2,062	2,769
Arts, entertainment and recreation	80	570	2,249	2,331	3,495	3,279	2,643	3,060	3,695
Construction	8	387	1,431	1,702	1,504	1,628	1,251	838	1,423
Educational services	48	211	467	198	628	319	502	756	343
Finance and insurance	68	-	33	48	-	163	67	179	419
Food and beverage services	63	4,374	14,223	23,395	20,730	24,878	23,310	30,192	33,850
Health care and social assistance	-	76	258	1,119	1,395	2,356	1,549	902	1,662
Information and cultural industries	23	263	601	568	279	315	406	160	523
Manufacturing	4	2,552	6,431	8,946	11,864	9,937	8,479	9,426	12,201
Mining, and oil and gas extraction	-	9	45	186	179	299	48	114	353
Other services	21	870	3,025	6,767	10,381	11,468	11,219	12,652	16,512
Professional, scientific and technical services	22	367	1,360	2,836	2,734	2,838	1,327	932	1,306
Real estate, and rental and leasing	-	514	1,645	690	675	1,135	165	1,122	2,439
Retail trade	114	3,141	7,524	10,129	10,503	12,068	14,316	12,306	15,885
Transportation and warehousing	26	350	2,108	3,926	2,077	1,542	1,062	2,575	2,071
Utilities	-	197	50	75	30	-	-	239	223
Wholesale trade	17	546	610	1,792	2,232	1,945	2,079	2,290	2,692
Total	495	14,769	43,466	68,892	71,949	76,873	72,066	80,856	99,296

The largest total claims paid on loan defaults have been observed in the Food & beverage services, Other services, Retail trade, and Manufacturing sectors (33.1%, 13.8%, 16.3% and 13.2%, respectively). Although loans to these sectors represent a significant share of loans issued, the Food & beverage services, and Manufacturing sectors accounted for a proportionately higher share of claims. The share of loans for these sectors represent 24.9%, and 8.3% of the total value of loans issued. Furthermore, the Other services, and Transportation & warehousing sectors account for a proportionately lower share of claims. Other services accounts for 17.2% of loans and 13.8% of claims, and Transportation & warehousing accounts for 9.4% of loans and 3% of claims.

Claims and Age of Business

The largest share of total claims paid against defaulted loans were attributable to new SMEs that were less than one year old. Furthermore, the greatest number of loans granted under the CSBF was by far to SMEs less than one year old, so the total amount of claims paid to firms less than one year old is much greater than the amount of claims paid to older firms. Although the greatest share of loans were granted to firms less than one year old – 58.2% between 1999 – 2008, they accounted for a disproportionate value of claims at 79.3%.

Age of business continues to be an important factor for older firms. Firms that were more than three years old account for a disproportionately low share of claims. Although 30.0% of loans were issued to these firms, they accounted for only 10.7% of the total value of claims paid between 1999/2000 – 2007/08. On the other hand, for firms between 1 to 3 years old, the share of the total value of claims was comparable to the share of the total value of loans at 10.0% and 11.8%, respectively.

Figure III-4
Total Claims Paid, by Age of Firm

Long Description

Figure III-5
Total Number of Loans Granted, by Age of Firm

Long Description

Claims By Asset Type

The greatest number of claims were made by borrowers who received loans for equipment purchases. Loan default claims for equipment and leasehold improvement loans were disproportionately greater than default claims for real property loans.

Although equipment loans represented up to 89 per cent of loan default costs early in the study period (1999/2000), this may be due to equipment loans defaulting earlier than other types of loans. Towards the end of the study period, equipment loans account for between 55 and 64 per cent of loan default costs to Industry Canada. Over the nine year study period, the value of equipment loans represents about 56 per cent of all loans issued whereas claims made represent about 65 per cent of all claims made.

Over the study period, the value of leasehold improvement loans account for about 23 per cent of loans issued and 26 per cent of loan default costs. Although real property loans represent about 21 per cent of the total value of loans issued, they represent the lowest share of default claims each year at 9.4 per cent.

Table III-6
Share of Claims by Asset Class of Loan

	1999/ 2000	2000/ 01	2001/ 02	2002/ 03	2003/ 04	2004/ 05	2005/ 06	2006/ 07	2007/ 08
Equipment	89%	76%	73%	71%	68%	63%	60%	55%	64%
Real Property	1%	5%	8%	10%	10%	9%	11%	9%	10%
Leasehold Improvements	10%	19%	20%	18%	22%	28%	30%	35%	27%

Figure III-6
Share of Loans by Asset Class, 1999/2000 – 2007/08

Long Description

Figure III-7
Share of Claims by Asset Classn, 1999/2000 – 2007/08

Long Description

E. Loan Default Costs to Lenders

According to the CSBF Program Guidelines, a lender cannot avoid absorbing its 15% share of the loss by taking compensatory security of any kind or by making a claim against the borrower/guarantor after payment of the claim.⁸ Therefore, the claims that lenders are eligible to make are based on the loan amount after all repossession actions, personal guarantees, etc. are realized. In addition, once the loan is subrogated to Industry Canada, lenders cannot take further action to recover losses.

1. Methodology

The loss sharing ratio between the government and the lender is 85% and 15% respectively. The lender loss was estimated as 15 per cent of loan principal outstanding on defaulted loans after any realizations were made.

2. Findings

As presented in Figure III-8, lender losses were comparatively low between 1999/2000 and 2001/02 as a result of few claims being submitted during that time. During that time, lender losses were between $0.091M and $6.86M. Increases in lender losses observed in 2006/07 and 2007/08, to $12.65M and $14.70M, respectively, were due to an increase in the number of claims made and the average claim size per defaulted loan, rather than an increase in the size of the total loan portfolio.

The assessment of claims paid to lenders is based on an assessment of eligible claims by Industry Canada. The amount requested by lenders may be reduced, or in some cases, rejected based on an assessment of information submitted by lenders. On average, total eligible claims were about $6.1M lower per year than total requested claims between 1999/2000 to 2007/08.

The average loan principal outstanding after realizations has varied from a low of about $45,000 per loan in 2005/06, and a high of $53,000 per loan in 2007/08 (Table III-7). As a result, the average lenders' default costs per loan decreased from $8,109 in 2000/01 to a low of $6,799 in 2005/06, with a subsequent increase to $7,976 in 2007/08.

Figure III-8
Loan Default Costs to Lenders, Total and as Share of the Outstanding Loan Balance

Long Description

Table III-7
Average Default Cost per Loan

($)	1999/ 2000	2000/ 01	2001/ 02	2002/ 03	2003/ 04	2004/ 05	2005/ 06	2006/ 07	2007/ 08
Lenders (15%)	4,815	8,109	7,496	7,549	7,103	7,134	6,799	7,525	7,976
Industry Canada (85%)	27,284	45,949	42,480	42,780	40,248	40,426	38,530	42,643	45,196

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