Break-even likely to elude small-business program

The Canada Small Business Financing Program has a 8% default rate. Losses for 1995-1999 will exceed $200-million and could hit $250-million, an official in the Auditor-General’s office said.

National Post
October 9, 2002

Break-even likely to elude small-business program
Auditor-General Report
Ian Jack

OTTAWA-Industry Canada’s small-business financing program will lose as much as $250-million on loans made between 1995 and 1999 and will likely never reach its goal of breaking even, the Auditor-General reported yesterday.

The program, which guarantees 85% of the value of some small business loans made by financial institutions, ahs been substantially improved since a similar probe five years ago but still has no accurate way to forecast future losses, said the latest report from Sheila Fraser, the Auditor-General.

The average loan for just over five years, so it is too early to say for sure that defaults will continue to outstrip the fees the government collects from borrowers for loads, but Ms. Fraser said “it will be very difficult to recover the cost of loans made after 1999.”

An Industry Canada official said it is too early to reach any conclusions about whether the program can break even in the future.

The Canada Small Business Financing Program has a 8% default rate. Losses for 1995-1999 will exceed $200-million and could hit $250-million, an official in the Auditor-General’s office said.

Industry Canada has only two ways to break out of the continuing losses, the official said: raise the fee borrowers pay, or cut the default rate by moving into lower-risk loans. But the program is aimed at businesses that cannot get conventional bank financing without the guarantee, so raising rates too high would make the cost comparable to a commercial loan, while shifting the borrowing focus could render ineligible the high-risk businesses the program is meant to serve.

Allan Rock, the Industry Minister, defended the program but said changes to the fee formula may be needed. The government last made major changes three years ago.

“Based on the three years’ experience we had, we’ll be in a position to adjust the fees and get the formula right. But I wouldn’t say the program is without value. It does permit many people to open and start small businesses, and 92% of the loans are repaid.”

Financial institutions are responsible for making the loans and covering the other 15% of any default, giving them some incentive to loan carefully.

Industry Canada said an improved forecasting model “is a high priority.” The Auditor-General gave the department credit for improving the way it measures past performance and program administration.

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Risks: Government guaranteed loans, Canada, 20021009 Break-even likely

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