Comprehensive Review Report (2004–09)

4. Overview of the Canada Small Business Financing Act

The CSBFA aims "to increase the availability of financing for the establishment, expansion, modernization and improvement of small businesses." It replaces the former Small Business Loans Act (1961), received Royal Assent on December 10, 1998, and came into effect for loans made after March 31, 1999.

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.

4.1 Program Objectives

One of the key objectives of the CSBFA is to increase the availability of financing for small businesses. This objective of extending financing that would have otherwise been unavailable, or would have only been available under less favourable terms (higher interest rates, greater collateral requirements, etc.), is commonly referred to as "incrementality."

The other main objective of the program is "cost recovery."¹³ This essentially refers to revenues generated by the program in the form of fees paid on the loans in a given year, offsetting the total claims paid on those loans over their term (up to a maximum of 10 years).

It is important to note that program objectives are contradictory in nature, as achieving full cost recovery would significantly decrease the degree of incrementality, and vice versa. The challenge is to have the program achieve a relatively high level of incrementality while, at the same time, maintaining an acceptable level of cost recovery. The fact that full cost recovery under the CSBF Program is not expected to occur was raised in the 2005 Comprehensive Review of the program and was reviewed by Parliament at that time.

4.2 Program Parameters

It should be noted that only businesses¹⁴ with annual revenues of $5 million or less are eligible to use the program. Details on other key parameters of the CSBF Program are listed in Appendix B.

The parameters are interrelated, which is to say that modifying one can impact on others. In addition, changing the parameters can involve trade-offs between the degree to which the program's policy objectives of incrementality and cost recovery will be achieved.

4.3 Program History

Through the CSBF Program, and its predecessor, the Small Business Loans (SBL) Program, Canada has nearly 50 years of experience with facilitating debt financing for small businesses through an innovative public–private partnership. The program has helped establish and grow some half-million Canadian businesses that have received cumulative private sector financing worth some $35 billion.

Small businesses seeking a loan under the program have always needed to apply directly to any approved or designated financial institution, such as a chartered bank, trust company, Caisse populaire or credit union. Lending institutions evaluate the creditworthiness of an applicant, with the same diligence applied to any other loan application.

If the lending institution agrees to extend credit, the lender can choose to register the loan with Industry Canada, which is responsible for accepting the registration from the lender provided it meets the eligibility requirements under the Act. Where registered loans go into default and claims for a loan loss have been made, the government absorbs part of the loss (currently 85 percent, after recoveries on security).

The program has evolved over time in response to changing conditions in the marketplace and the evolving needs of small businesses. For example, the maximum loan size started at $25 000, reached $100 000 by 1980, was increased to $250 000 in 1993 and remained at this level until the end of the current review period (March 31, 2009). The maximum loan size was again increased on April 1, 2009 to a maximum of $500 000 (of which no more than $350 000 can be used for leasehold improvements and equipment purchases). Fees and charges to borrowers and lending institutions using the program have also varied over time.

In response to the recession of the early 1990s, the program parameters were significantly broadened. For example, the government's loss-sharing ratio was raised from 85 to 90 percent. The result was significant growth in program activity between 1993–94 and 1994–95. Lending increased from a norm of about $500 million annually to a peak of $4.4 billion in 1994–95. At this time a 1.25-percent annual administration fee was introduced and some of the changes were reversed in an effort to begin moving the program toward cost recovery. This spike in uptake was followed by a spike in claims for loss. The total value of claims rose to peak at $230 million in 1998–99. Figure 2 displays the relationship between program changes and growth and claims up to the end of 1998–99, when the SBLA was repealed.

Long description for Figure 2: Changes in SBL Program Lending and Claims from 1985–86 to 1998–99

While these changes resulted in a significant decrease in program lending, they also helped re-establish a more sustainable balance between program costs and expenses.

Capital Leasing Pilot Project (April 1, 2002–March 31, 2007)

In 2002, Industry Canada launched a five-year pilot project to identify and test the viability and utility of the CSBF Program for capital leasing. There was a low participation rate with about 1500 leases worth $136 million being registered over the five-year pilot project. This uptake was less than 7 percent of expected activity.

Moreover, research shows that in 2007, 17 percent of SMEs sought capital lease financing and, of these firms, 92 percent had their application authorized. This research and the results of the pilot project have shown that the vast majority of Canadian small business' capital leasing needs are being met in the marketplace without government assistance. As such, the Capital Leasing Pilot Project was discontinued on March 31, 2007.

4.4 Changes to the CSBF Program Announced in Budget 2009

In response to the recession, which began in late 2008, the Government of Canada announced Budget 2009: Canada's Economic Action Plan. One of the initiatives was to support small business growth through the implementation of changes to the CSBF Program. As a result, the following changes to the CSBF Program were enacted as of April 1, 2009:

• The eligible loan amount was increased from $250 000 to $500 000 (of which no more than $350 000 can be used for purposes other than the purchase of real property);
• Financial institutions with a portfolio above $500 000 are allowed to claim reimbursement on losses of up to 12 percent of the value of their portfolio, up from 10 percent; and
• A package of regulatory amendments aimed at easing the administrative burden of the program was implemented.

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¹³ Cost recovery does not include Industry Canada's operating costs (approximately $3 million per year) associated with administering the program.
¹⁴ Businesses involved in farming and businesses having as their principal objective the furtherance of a charitable or religious purpose are excluded from the program.