Canada Small Business Financing Act
Comprehensive Review Report (2004-09)

Appendix A: Canada Small Business Financing Act Research for the Comprehensive Review

Program Evaluation

  • Bearing Point. Evaluation of the Canada Small Business Financing Program, 2004.
  • KPMG. Evaluation of the Canada Small Business Financing Program, 2009.

Economic Impact and Benefit

  • Canada Works Limited. Canada Small Business Financing Program: Updated Analysis of Incrementality, 2009.
  • Equinox Management Consultants Limited. Incrementality of CSBF Program Lending, Volume 1: Insights from SME FDI Data, December 2003.
  • Equinox Management Consultants Limited. Incrementality of CSBF Program Lending, Volume 2: Findings from Aligned Interviews, February 2004.
  • Equinox Management Consultants Limited. Incrementality of CSBF Program Lending, Volume 3: Findings from Survey Data, March 2004.
  • Equinox Management Consultants Limited. Sources of Portfolio Risk and Revenue Generation of the Canada Small Business Financing Program — Final Report, Phase 1, March 2008.
  • Equinox Management Consultants Limited. Sources of Portfolio Risk and Revenue Generation of the Canada Small Business Financing Program — Final Report, Phase 2, December 2008.
  • KPMG. Study of the Economic Costs and Benefits of the Canada Small Business Financing Program, 2009.
  • Phoenix Strategic Perspectives Inc. Canada Small Business Financing Program (CSBFP) Awareness and Satisfaction Survey, 2007.
  • Statistics Canada. Longitudinal Economic Impact Study of the Canada Small Business Financing (CSBF) Program, 2008.

Cost Recovery

  • Riding, Allan. Forecasting Expenses Related to SBLA and CSBFA Debt Financing Loans, January 2005.

Stakeholder Discussions and Surveys

  • Canadian Federation of Independent Business. Banking Matters, 2007.
  • Circum Network Inc. Lender Awareness and Satisfaction Survey, June 2004.
  • Compas Inc. Canada Small Business Financing Act Loans Decline Study, January 2002.
  • Heron & Company. Small Business Loans Administration Discussions with Financial Institutions, June 2004.
  • Industry Canada. Key Small Business Statistics, January 2009.
  • Statistics Canada. Survey on Financing of Small and Medium Enterprises, 2007.
  • Statistics Canada. Survey of Suppliers of Business Financing, 2007.

Appendix B: Key Canada Small Business Financing Program ParametersFootnote 22

Borrower eligibility:
To ensure the program is targeted at small businesses, only firms with annual sales of $5 million or less are eligible to use the program.Footnote 23
Loss-sharing ratio:
The government shares in eligible losses after realizations on security. Its share of eligible losses for loans in default is 85 percent. Lenders are responsible for the remaining 15 percent.
Cap on claims:
Each lender has a separate account of registered loans. The Government of Canada's obligation to an individual lender is to pay eligible claims (i.e., 85 percent of the eligible losses) on defaulted loans in its account, up to a maximum of the aggregate of 90 percent of the first $250 000 in loans registered, 50 percent of the next $250 000 and 10 percent of all loans in excess of $500 000.
Assets financed:
Loans are restricted to financing:
  1. purchase of leasehold improvements, equipment, software and real property or immovables;
  2. improvement to equipment and real property; and
  3. program registration fees.
Percentage of asset cost financed:
The maximum amount of financing available is 90 percent of the cost of the assets.
Fees:
A one-time, up-front fee of 2 percent of the amount financed is paid at the time of registration. This fee can be included in the CSBF loan. In addition, the lender is charged an annual fee of 1.25 percent on outstanding loan amounts. Lenders may pass this fee on to borrowers only as part of the interest rate charged on loans.
Maximum interest rate:
The maximum floating rate is the lender's prime rate plus 3 percent (including the 1.25 percent annual fee). The maximum fixed rate is the lender's residential mortgage rate plus 3 percent (including the 1.25 percent annual fee).
Maximum financing amount:
A borrower cannot have more than $250 000 in total loans outstanding under both the SBL and CSBF programs.

Appendix C: Canada Small Business Financing Program Activity Review

Figure C-1: Number and Value of CSBF Loans and Claims, 2004–09

Figure C-1: Bar chart - Number and Value of CSBF Loans and Claims, 2004–09
Description of Figure C-1: Number and Value of CSBF Loans and Claims, 2004–09
Number and Value of CSBF Loans and Claims, 2004–09
Year Number of Loans Total Value of Loans
($ millions)
Average Loan Size
($)
Number of Claims Total Value of Claims
($ millions)
Average Claim Size
($)
2004–05 11,143 1,041 93,500 1,620 77 47,452
2005–06 10,789 1,088 100,800 1,598 72 45,097
2006–07 9,595 1,025 106,800 1,681 81 48,160
2007–08 8,930 988 110,600 1,835 97 52,814
2008–09 7,846 916 116,800 1,979 107 53,787

CSBF Program lending has decreased from 11,143 loans in 2004–05 to 7,846 in 2008–09. Lending has also declined from $1.041 billion to $0.916 billion. Average loan value has increased from $93 500 in 2004–05 to $116 800 in 2008–09.

Figure C-2: Percentage of CSBF Loans by Age of Borrower Firm, 2004–09

Figure C-2: Pie chart - Percentage of CSBF Loans by Age of Borrower Firm, 2004–09
Description of Figure C-2: Percentage of CSBF Loans by Age of Borrower Firm, 2004–09
Percentage of CSBF Loans by Age of Borrower Firm, 2004–09
Age of Borrower Firm Percentage of CSBFP Loans
Less than 1 year 54
1 to 3 years 13
More than 3 years 33

Roughly 54 percent of CSBF loans were to start-ups and businesses less than one year old.

Figure C-3: Percent of Total Value of CSBF Loans and Claims by Industry Sector, 2004–09

Figure C-3: Bar chart - Percent of Total Value of CSBF Loans and Claims by Industry Sector, 2004–09
Description of Figure C-3: Percent of Total Value of CSBF Loans and Claims by Industry Sector, 2004–09
Percent of Total Value of CSBF Loans and Claims by Industry Sector, 2004–09
Industry Sector Percent of Total Value of Loans Percent of Total Value of Claims
Food and Beverage Services 29 34
Retail Trade 15 17
Manufacturing 6 11
Transportation and Warehousing 9 2
All Other Sectors 41 35

Four industry sectors accounted for 59 percent of the value of loans and 65 percent of the value of claims.

Figure C-4: Percent of Total Value of CSBF Loans and Claims by Asset Type, 2004–09

Figure C-4:  Bar chart - Percent of Total Value of CSBF Loans and Claims by Asset Type, 2004–09
Description of Figure C-4: Percent of Total Value of CSBF Loans and Claims by Asset Type, 2004–09
Percent of Total Value of CSBF Loans and Claims by Asset Type, 2004–09
Asset Type Percent of Total Value of Loans Percent of Total Value of Claims
Equipment 52 60
Real Property 19 9
Leasehold Improvements 29 31

Over the review period, equipment loans, which account for 60 percent of claims, declined. Leasehold improvements as a percent of loans and claims both increased.

Appendix D: Canada Small Business Financing Act—Background on Cost Recovery

In 1995, the SBL Program was given a cost recovery mandate. The importance of carefully monitoring the financial performance of the loans portfolio and regularly updating the program's cost recovery model was reinforced by the Auditor General in 1997 and 2002.

Methodology

Forecasting program revenues and costs is a complex task. First, sufficient data on loan risk and lender behaviour takes nearly four years to accumulate from the time of a parameter change. This is essential to a forecasting model. Second, the cost recovery model must cover the entire life of all loans made in a given year, which can be as much as ten years. Third, there is a significant lag time between the receipt of revenues and the payment of claims. Finally, lenders are allowed up to three years after default to submit a claim for loss, so the period can be extended to as much as 13 years. As a result, revenues and claims need to be forecast long into the future, making estimates of cost recovery difficult and subject to variance according to economic conditions and other factors. For this reason, Industry Canada updates its forecast and forecasting models on a regular basis to ensure they reflect the most recent experience.

Using a multivariate analysis of the claims received in a given month combined with statistical and econometric-based forecasting models, Industry Canada is able to project future claimsFootnote 24 against the forecast revenues to arrive at the cost recovery forecast for the program.

Findings

Table D-1 below illustrates the current cost recovery forecasts for the first two lending periods of the CSBF Program (1999–2004 and 2004–09). These tables provide a summary of the revenue and expense streams associated with each of the aforementioned annual cohorts.

In aggregate, for the CSBF Program (see Table D-1 below):

  • Revenues (registration and administration fees) for the five years of loans during the current review period are expected to reach approximately $281 million.
  • Expenses (claims) are expected to be approximately $477 million, for a net cost of $196 million.
  • Revenues are expected to offset expenses by 58.9 percent.
  • From an overall loans portfolio perspective, the net cost to government is expected to reach 3.9 percent of the total loans made, up from 2.6 percent for loans made during the C1 (1999–2004) period.
Table D-1
Cost Recovery Model Summary: CSBF Program Period C1 (1999–2004) and Period C2 (2004–09)

Table D-1 shows the current cost recovery forecasts for the first two lending periods of the CSBF Program (the first cohort is from 1999 to 2004 and the second is from 2004 to 2009). This table provides a summary of the revenue and expense streams associated with each of the aforementioned annual cohorts. For the first cohort, the program's net cost is estimated to be $139 million, while for the second the net cost is estimated at $196 million. Cost recovery for the first cohort is estimated at 68 percent, while for the second cohort it is estimated at 59 percent.

Cohort Loans
($ Millions)
Revenues and Expenses % Cost Recovery Footnote a Net Cost/
Loans (%)
Reg Fees
($ Millions)
Admin Fees
($ Millions)
Claims
($ Millions)
Net Cost
($ Millions)
1999–2000 1352.3 26.8 48.5 −118.7 −43.5 63.4 −3.2
2000–01 1159.0 22.9 42.1 −101.0 −35.9 64.4 −3.1
2001–02 899.2 17.8 31.8 −66.1 −16.5 75.0 −1.8
2002–03 951.2 18.8 31.8 −65.5 −14.9 77.3 −1.6
2003–04 999.9 19.8 31.2 −79.1 −28.1 64.5 −2.8
Total
(1999–2004)
5361.6 106.1 185.5 −430.5 −138.9 67.7 −2.6
2004–05 1041.3 20.6 39.9 −85.1 −24.6 71.1 −2.4
2005–06 1087.5 21.5 40.5 −101.4 −39.4 61.2 −3.6
2006–07 1024.5 20.2 36.5 −102.1 −45.4 55.6 −4.4
2007–08 987.7 19.5 34.6 −95.7 −41.6 56.5 −4.2
2008–09 918.4 18.1 29.5 −93.2 −45.6 51.1 −5.0
Total
(2004–2009)
5059.3 99.9 181.0 −477.4 −196.4 58.9 −3.9

Note: Highlighted figures are estimates.

Table D-2 provides the same summary of the revenues and expense streams associated with each of the CSBF annual cohorts. This table takes into consideration the three- to five-year lag between when the revenues are received and when the expenses are paid (i.e., presented on a net present value [NPV] basis).

In aggregate, on an NPV basis:

  • Revenues (registration and administration fees) for the five years of CSBF loans are expected to reach approximately $254 million.
  • Expenses (claims) are expected to be approximately $404 million for a net cost of $150 million over the term of the loans.
  • On a percentage basis, revenues are expected to offset expenses by 62.8 percent.
  • From an overall loans portfolio perspective, the net cost to government is expected to be approximately 3 percent of loans made, up from 1.8 percent for loans made during the C1 (1999–2004) period.
Table D-2
Cost Recovery Model Summary: CSBF Program Period C1 (1999–2004) and Period C2 (2004–09) (NPV Footnote b Basis)

Table D-2 provides the same summary of the revenue and expense streams associated with each of the CSBF annual cohorts. This table takes into consideration the three- to five-year lag between when the revenues are received and when the expenses are paid, it is presented on a net present value (NPV) basis. For the first cohort, the program's net cost is estimated to be $94 million, while for the second the net cost is estimated at $150 million. Cost recovery for the first cohort is estimated at 74 percent, while for the second cohort it is estimated at 63 percent.

Cohort Loans NPV Revenues and Expenses % Cost
Recovery Footnote c
Net Cost/
Loans (%)
Reg Fees Admin Fees Claims Net Cost
1999–2000 1352.3 26.1 42.0 −99.1 −31.0 68.7 −2.3
2000–01 1159.0 22.4 36.6 −84.3 −25.3 70.0 −2.2
2001–02 899.2 17.4 27.7 −55.1 −10.1 81.7 −1.1
2002–03 951.2 18.3 27.7 −54.7 −8.6 84.3 −0.9
2003–04 999.9 19.3 27.2 −66.0 −19.5 70.5 −2.0
Total
(1999–2004)
5361.6 103.4 161.3 −359.1 −94.4 73.7 −1.8
2004–05 1041.3 20.1 34.6 −71.2 −16.5 76.9 −1.6
2005–06 1087.5 20.9 35.2 −85.9 −29.7 65.4 −2.7
2006–07 1024.5 19.7 31.7 −86.8 −35.4 59.2 −3.5
2007–08 987.7 19.0 30.0 −81.2 −32.2 60.3 −3.3
2008–09 918.4 16.9 25.4 −78.9 −36.6 53.6 −4.0
Total
(2004–2009)
5059.3 96.6 157.0 −404.0 −150.4 62.8 −3.0

Note: Highlighted figures are estimates.

Conclusion

A comparison of the results for the first two lending periods of the CSBF Program indicates that cost recovery during 2004–09 has declined. Lower levels of cost recovery during this period can be partially attributed to higher levels of incremental lending through the program as well as slightly higher risk lending among a few of the major financial institutions. Industry Canada will continue to update its forecasts and refine its forecasting models on the basis of the latest available data, to ensure appropriate monitoring of this program objective.

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