ARCHIVED—Comprehensive Review Report (2004–09)

2. Executive Summary

Small and medium-sized enterprises (SMEs), which account for nearly 98 percent of all businesses in Canada,¹ are significant drivers of economic growth and productivity. To realize their full potential, SMEs require a favourable environment in which to grow and prosper. Access to sufficient and appropriate financing is a critical element for SMEs to succeed in the marketplace.

The Canada Small Business Financing Act (CSBFA) was created in 1999 as the successor to the Small Business Loans Act (SBLA), which had helped small businesses obtain debt financing since 1961. The CSBF Program aims to increase the availability of financing for the establishment, expansion, modernization and improvement of small businesses. Under the CSBF Program, Industry Canada and commercial lenders share the risk of providing small businesses with term loans for acquiring real property and equipment and making leasehold improvements. The Minister is liable to pay 85 percent of eligible losses on defaulted loans registered under the program. By sharing the burden of risk on loans, the Government of Canada and private sector lenders are able to increase the amount of financing extended to small businesses.

The overall purpose of the current review is to examine how successful the CSBF Program has been during the past five years of operation in facilitating small business' access to financing. Specifically, the review considers the degree to which the program has achieved its two objectives:

1. Incrementality — the extension of financing that would otherwise have been unavailable to small businesses, or available only under less favourable terms; and
2. Cost recovery — the ability of program revenues (in the form of fees paid on loans over the life of the loans) to offset its associated cost of claims.

A significant number of background studies were prepared in support of the review, including an independent program evaluation conducted under the direction of a public–private sector committee in accordance with the program's results-based management and accountability framework.² Research conducted in preparation for the Comprehensive Review is listed in Appendix A. Reports are also available at the CSBF Program Research and Studies web page.

Key findings from the research are as follows.

Program Rationale

• There is an ongoing need for facilitated access to asset-based debt financing for small businesses, particularly for start-ups and businesses operating in higher risk sectors.
• There are no attractive alternatives to a federally managed program along the lines of the CSBF Program.
• Lenders believe that the CSBF Program has a role to play and does indeed make financing available to firms that would otherwise be denied.
• The recent downturn in the global economy has increased the importance of programs such as the CSBF Program, which provide affordable sources of financing to SMEs.
• The CSBF Program is consistent with both Departmental and government-wide priorities.

Program Activity and Benefits

• During the review period, the CSBF Program registered approximately 48 000 loans with a value of nearly $5.1 billion.
• Program usage declined from 11 143 loans, worth $1.04 billion, in 2004–05 to approximately 7850 loans worth $900 million in 2008–09.
• Loans made under the CSBF Program were highly incremental:
  • Approximately 54 percent of CSBF loans went to new or start-up firms; and
  • 80 to 85 percent of the loans were financially incremental³ (i.e., they would not have been made, would have been made for a lesser amount than sought by the borrower or would have been made under less favourable conditions).
• An analysis of changes in employment growth between CSBF firms and comparable SMEs found that in the five subsequent years after receiving a CSBF loan, firms using the program were able to retain an average of 18 600 more employees than comparable SMEs.
• The 2008 Longitudinal Economic Impact Study of the CSBF Program found that CSBF Program loans delivered major economic benefits, including:
  • Higher levels of sales growth for CSBF Program borrowers than for non-CSBF Program borrowers (11–24 percent higher for each year during the four-year study period);
  • Higher employment growth than other firms (5–9 percent higher);
  • Higher investment growth than the comparison group (ranging from 14.5 percent to 68.0 percent vs. 15.0 percent to 59.1 percent annually);
  • Higher average and total sales growth than their peers (35.8 percent vs. 33.0 percent, and 28.5 percent vs. 15.9 percent respectively); and
  • Slightly higher business survival rates than for non-borrowers (ranging from 70.9 to 93.5 percent compared to 69.7 and 91.7 percent annually).
• Analysis of the costs and benefits of the CSBF Program indicate the presence of significant benefits to Canadian society. Based on a nine-year time frame analyzed, from 1999–2000 to 2007–08, total costs of the program were estimated to be $728.5 million whereas total benefits were $5598.2 million, resulting in total net benefits of $4869.7 million.⁴
• Benefits have been realized throughout Canada. During the period under review, borrowers residing in rural areas accounted for 17.2 percent of total CSBF Program lending by value.

Cost Recovery

• As at March 31, 2009, the net cost to government of CSBF Program loans made during the reporting period is estimated to be $150.4 million on a net present value basis over the maximum ten-year life of the loans. This estimate is derived by forecasting net revenues, from fees paid by lenders and borrowers to the Crown, and deducting forecasted claims from loan losses for which the government must pay.
• Compared to the first five-year lending period of the CSBF Program, the overall net cost to government (as a percentage of total lending) has increased from 2.6 percent to 3.9 percent.
• While the program is not fully cost-recoverable when strictly using revenues from the administration and registration fees it charges, it is cost-recoverable when additional federal income taxes and GST remittances from CSBF borrowers are considered. Since 1999–2000, additional federal income tax remittances resulting from incremental salaries and wages being paid by CSBF Program firms averaged $39 million each fiscal year while GST remittances averaged $24 million annually.⁵
• A 2002 report by the Auditor General, as well as the third-party evaluations carried out in 2004 and 2009, have concluded that full cost recovery could not be achieved without unduly compromising the program objective of facilitating financing to small businesses that would not likely obtain it otherwise.

Program Administration

• While financial institutions recognize the value of the CSBF Program, they have consistently expressed dissatisfaction with the administration practices associated with CSBF Program loans. As lenders continue to implement measures to streamline (through the increased use of credit scoring) and automate lending practices, government-established practices for administrating CSBF Program loans are becoming increasingly obsolete.
• A number of regulatory and non-regulatory measures have been implemented since the 2004 CSBF Program Comprehensive Review Report, in an effort to simplify delivery functions, improve communications with lenders and decrease administrative burden. These improvements were made without altering the program's key parameters. While these measures have improved some areas of program administration, lenders continue to cite a lack of profitability and continued administrative burden as the key barriers to program usage.
• Administrative burden must be addressed by modernizing the design of the CSBF Program (with due consideration given to accountability to Parliament and the needs of lenders and borrowers) in order to ensure the long-term viability of the CSBF Program as an affordable source of financing for SMEs.

Undoubtedly, SMEs will continue to play a key role in Canada's economic growth while continuing to face challenges in accessing the financing they need to do so. This review confirms the importance, efficiency and effectiveness of the CSBF Program in helping address these challenges. It concludes with a commitment to strengthen stakeholder relations and develop a package of changes aimed at addressing stakeholder concerns and modernizing the CSBF Program, thereby securing its continued success.

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¹ Industry Canada. Key Small Business Statistics, July 2009.
² KPMG. Evaluation of the Canada Small Business Financing Program, 2009.
³ Canada Works Limited. Canada Small Business Financing Program: Updated Analysis of Incrementality, 2009.
⁴ KPMG. Study of the Economic Costs and Benefits of the Canada Small Business Financing Program, 2009.
⁵ KPMG. Study of the Economic Costs and Benefits of the Canada Small Business Financing Program, 2009.