Canada Small Business Financing Act
Annual Report 2010–2011

1. Overview of the Canada Small Business Financing Program

The purpose of the Canada Small Business Financing (CSBF) Program is to help small businesses obtain access to financing that they may otherwise have difficulty in obtaining. 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.

Nature of the Program

Loans under the CSBF Program are available for the financing of real property, equipment and leasehold improvements. The assets financed must be used to carry on business in Canada. The program facilitates loans made by lenders to small businesses of up to $500 000 (of which a maximum of $350 000 can be used to finance the purchase of equipment and leasehold improvements). A loan registered under the program must satisfy certain requirements (see Section 2 "Program Requirements").

The Role of the Federal Government

Industry Canada administers the CSBF Program by registering loans, collecting fees and paying lenders eligible portions of losses on defaulted loans. Industry Canada, however, does not approve the borrower loan applications and is not involved in the administration of the loans. By registering loans with the CSBF Program, lenders are entitled to submit claims to Industry Canada in the event of default.

The Role of Lenders

Lenders include chartered banks, credit unions and Caisses populaires. These lenders provide service to Canadians in all provinces and territories.

Lenders are responsible for all credit decisions, approving the loans, disbursing the loan proceeds, registering the loans with the CSBF Program, administering the loans and, in the event of default, realizing on the security and the guarantees. Each lender establishes its own lending criteria subject to the requirements of the CSBF Program. Once the loan is approved, the funds that are advanced to the borrower are the funds of the lender and not the government.

How Lenders Are Compensated on Defaulted Loans

When a loan is in default, the lender must realize all security taken for the loan before forwarding its claim for loss to the CSBF Program, together with all the necessary documentation to justify the claim. Once the lender's information is reviewed and the claim is approved, the lender is paid 85 percent of its eligible loss. The claim can be adjusted or rejected if there is non-compliance with program requirements.

Incrementality

The CSBF Program aims to increase the availability of financing for small businesses. It extends financing that would have otherwise been unavailable, or would have only been available under less favourable terms (higher interest rates, greater collateral requirements, etc.). This is referred to as incrementality. A 2009 study, Canada Small Business Financing Program: Updated Analysis of Incrementality, found that 80 to 85 percent of the loans made under the CSBF Program were financially incremental.

New businesses and start-ups often lack a credit history and the collateral needed to secure a loan. As a result, they have difficulty in accessing capital. An indicator of incrementality is the number of start-ups and new businesses that receive loans. In 2010–11, these businesses borrowed on average 57 percent of the total loan value, another strong indicator that the program is achieving incrementality.

Job Creation

In 2010–11, borrowers estimated that loans created a total of 18,697 new jobs (2.5 jobs per loan) for their businesses. These job estimates are provided by borrowers on the loan registration form. However, these estimates have been found to vary significantly compared to actual job hirings related to CSBF loans. As such, some caution is necessary in deriving conclusions from these job estimates. Nevertheless, a 2009 report, Study of the Economic Costs and Benefits of the Canada Small Business Financing Program, found that small businesses that obtained loans under the CSBF Program had higher employment growth than non-CSBF firms, created more jobs and retained more employees than those that did not use the CSBF Program.