August 2009, vol. 11, no. 2 - Business Development Bank of Canada (BDC)

Brief History

The BDC is a wholly-owned Crown corporation created to provide managerial and financial support to small and medium-sized Canadian businesses. The BDC was originally formed in 1944, under the name Industrial Development Bank (IDB), to help soldiers returning from World War II start their own businesses. In 1975, the IDB was transformed into the Federal Business Development Bank (FBDB) and again in 1995 into the Business Development Bank of Canada. Although the BDC has changed in name and structure, the underlying purpose for creating the bank has remained essentially the same over the years, that is, to serve the financing needs of eligible credit-worthy Canadian businesses when the market fails to do so.

Post-Recession

The recession of fiscal years 2008 and 2009 has represented two years of significant challenge for Canadian businesses. A major concern of the government has been that smaller firms have a more difficult time gaining access to financing. As smaller firms typically have less collateral and shorter credit lives than their larger counterparts, gaining access to financing has been more difficult.

Funding Commitment

In response to this challenge, the federal government has committed $700 million to the BDC to help increase businesses' access to funds, of which $250 million is being used to increase the BDC's term lending activities, and $100 million is being used to set up an Operating Line of Credit Guarantee (OLCG) program. An OLCG program is similar to an insurance program that protects financial institutions from non-payment (up to 80 percent) in the event that clients default on their lines of credit. This essentially allows lenders to transfer default risk from their loan portfolios to the BDC, which should increase lenders' willingness to lend funds to businesses, or at least discourage them from lending fewer funds.

To qualify for coverage under the OLCG program, a business must satisfy the following criteria:

• The business must be commercially viable
• The business must have an operating line of credit of between $400 000 and $40 million that can be secured by short-term assets, such as inventories and accounts receivable
• The business must satisfy the eligibility criteria set by its financial institution

The remaining $350 million is being used to increase the BDC's venture capital (VC) investments. VC represents a form of private equity investment that does not trade on an organized stock exchange. It is generally used to fund young small and medium-sized businesses that have significant growth potential (typically associated with positive net sales and greater assets).

Of the $350 million, $260 million is being provided to the BDC's existing venture capital businesses (those that have the highest likelihood of success), and to new early-stage and late-stage technology companies.^{Footnote 1} The remaining $90 million is being invested directly in various VC funds.

Finalizing all VC investments, term loans and OLCGs will take some time. Although the effect of these initiatives will be substantial, their full impact remains to be determined.

In summary, of the $700 million that has been committed to the BDC:

• $250 million is being used for term lending activities
• $100 million is being used for setting up an OLCG program
• $350 million is being used to increase venture capital investments
  • $260 million is being provided to existing VC businesses
  • $90 million is being invested in other VC funds

For more information on the BDC, please visit www.bdc.ca.

^{Footnote 1} An early-stage firm is defined as a firm that has begun initial marketing and related development and needs financing to achieve full commercial production and sales. A late-stage firm is defined as an established or nearly established company that needs capital to expand its productive capacity, marketing and sales.

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