Despite problems, small-business program wins support

CFIB supports the government handouts when it is given to them and their lobby but criticizes every other subsidy from government. If the private sector and industry is so good at managing affairs and making profits then why do they need a government handout. If the businesses were a good risk and likely to be profitable the banks would provide provide the loans without the program but apparently these are high risk loans to risky ventures that have a 90% failure rate. Sounds like the mortgage predicament in the US to me! Government should get out of the business of backing these loans.

The Globe and Mail
February 24, 2011

Despite problems, small-business program wins support
Federal guarantees on loans to start-ups more than break even with additional income taxes, GST
Richard Blackwell

Tony_Clement_CSBFA.jpg

Industry Minister Tony Clement describes the CSBF as 'helping to fill a gap' in lending. CHRIS WATTIE/REUTERS

One of Industry Canada’s key small business lending programs helped pump $957-million into startups and other small and medium-sized enterprises last year.

But the Canada Small Business Financing program (CSBF), which has been criticized for its high costs and messy red tape, also took a hit of $113-million last year from companies that defaulted on their loans.

The program essentially encourages traditional lenders such as banks and credit unions to make loans to small businesses, by providing a government guarantee to cover 85 per cent of their losses if there is a default.

More than 7,400 businesses took advantage of the program last year – the lowest number ever – and the average loan was $128,561. More than half went to startups and new businesses, and the biggest chunk – almost 30 per cent – went to companies in the hospitality and food sectors.

The program was designed to be self-funding – generating enough fee income to balance off its costs. With loss claims on the rise, that’s clearly not happening, although the government says the benefit of boosting small businesses more than outweighs the expense. In his introduction to the program’s annual report, tabled last week, Industry Minister Tony Clement describes the CSBF as “helping to fill a gap” in lending, allowing companies to start new businesses and expand existing ones, “thereby creating jobs and retaining employees.”

Corinne Pohlmann, vice-president of national affairs at the Canadian Federation of Independent Business, said the CSBF is valuable, despite its problems, because it encourages more lending for startup companies.

“In Canada it has always been a lot more difficult for smaller companies and brand new startups to find financing, and this allows banks to take that extra step.”

It makes sense to have the banks administer the loans, she said, because they are in a position to assess the risks of each applicant. That’s far better than having government bureaucrats make those judgments.

One problem with CSBF is that many small business managers don’t know that the program exists, she said. And the paperwork is onerous for the banks, making them hesitant to take advantage of it.

Ms. Pohlmann said it is very difficult to know if the overall benefits offset the costs – especially given the rising defaults. But she noted that roughly one-in-five new small businesses ends up collapsing, so the rate of claims is not surprisingly high.

In a five-year review, published in 2009, Industry Canada acknowledged that the program is not recovering anywhere near its overall costs through administration and registration fees. However, the department said that if Ottawa counts the additional income taxes and GST generated by small businesses that used the program, it more than breaks even.

Ms. Pohlmann said CSFB “needs a few tweaks here and there,” but is valuable to the small-business community and should remain in place. “We believe it does fill a gap in the marketplace, especially for those newer, smaller, startup type of firms,” she said.

It is no surprise that the overall number of loans under the CSFB is falling, she said, because many small businesses now go beyond traditional lenders for funding “They are looking at other options [such as] creating more equity for themselves, getting angel investors, or [asking their] families to invest.”

Peter Hambly, senior director of the Grey-Bruce commercial lending centre for Ontario’s Meridian Credit Union, said the CSBF can be a good fit when a small company doesn’t quite qualify for a loan under normal circumstances.

“It’s a bit similar to an insured mortgage,” he said, in that it can support lending when otherwise “the deal is a bit thin.”

If a small-business owner is a new borrower, has a limited net worth, or doesn’t have much of a track record, the government guarantee “allows you to make a loan that you might otherwise not make,” he said.

It makes sense that the program is heavily weighted toward the hospitality industry, Mr. Hambly said, because that sector has “a big ‘don’t go there’ sign” over it, from a lender’s point of view. Companies in the food sector often have little inventory or equipment to use as collateral, but the government guarantee can allow a financial institution to approve a loan, he said.

Still, Mr. Hambly said, the fees and red tape associated with the CSBF often make lenders and borrowers balk, so the program is rarely used by his clients.

COMMENTS as of February 24, 2011
1. guernst
the hypocracy of the cfib on this issue is astounding.

on a weekly basis we are assaulted by the leather lunged bags from the cfib over the issue of business subsidisation; and how inappropropriate it is for gov't to pick winners and losers, blah,blah, blah. However, when it involves micro businesses in the hospitality sector, subsidies suddenly become "investments" in job creators.

this program, like farm and ag supports, tourist sector capital expansion supports, energy sector tax credit and royalty holidays (to name but a small fraction of programs) is corporate welfare no matter how much you dress it up.

2. brazeauboy
And the banks are off the hook with us taxpayers footing 85% of the cost of defaulted loans. The banks, I am sure, also have a way of recovering the other 15% but Clement is not telling us about that. Maybe Flaherty will.
I feel like I am living in the US more and more every day and we know what the lending practices over there have caused to the entire world.
We will probably end up losing more than we did in ad scam but we will be told that it is alright because it created jobs. BS

3. Anonymouse
CFIB supports the government handouts when it is given to them and their lobby but criticizes every other subsidy from government. If the private sector and industry is so good at managing affairs and making profits then why do they need a government handout. If the businesses were a good risk and likely to be profitable the banks would provide provide the loans without the program but apparently these are high risk loans to risky ventures that have a 90% failure rate. Sounds like the mortgage predicament in the US to me! Government should get out of the business of backing these loans.

4. ?Impact
The loses have to be compared against the successes. This is an investment in building small business in Canada, and that is a very worthy goal. It would be a bonus if the program was self sustaining based solely on fees, but if the net effect is a stronger thriving business sector, especially one that feeds additional revenue back into the public purse, then I am all for it.

5. neilpk70
I can't believe that we're both agreeing with a Con program. Scary!

6. Anonymous
These businesses have a 90% failure rate. Why should taxpayer money be given to banks to make a profit from what is clearly an unprofitable risk.

7. Alistair McLaughlin
You're ignoring opportunity costs. I'm not just talking about the losses. I'm talking about the entire $900 million loans portfolio. Money spent/lent in one place cannot be spent'/lent anywhere else. You add up the best foregone alternative, PLUS the losses, and the "successes" start to look pretty small. Of course, we can never truly know what the opportunity costs are. So the supporters of such programs are safe from any true accounting of the costs. We're just asked to accept that the benefits do indeed outweigh the completely unmeasurable and therefore unknowable opportunity costs.

8. neilpk70
Sounds like a good program. Small business is the engine of our economy, so it makes sense to invest in it.

9. Alistair McLaughlin
If small business is such a growth engine, then that negates the need for the government to prop it up. Your statement is therefore contradictory. A true growth engine has no need nor patience for government red tape. This is not nuturing entrepreneurs so much as it is creating a new generation of zombie corporations. Start 'em on the government teat when they are small, and they'll be lining up for billion dollar bailouts before you know it.

10. LesS
The Canada Small Business Financing program is an incubator for dubious deals and outright crime. Within the franchise context, lenders bait new Canadians into loser systems and then self-finance the predictable losses via wonky appraisals. Franchising is the most lucrative form of commercial lending.

— see Franchising Opportunism paper

Les Stewart MBA
Midhurst ON Canada
WikidFranchise.org

11. sensiv
The paperwork makes it cumbersome.
To qualify one should have been in business for some time
Small Businesses enjoy a tax break some times as much as 50%. Small Business Tax rates
Accountants make good money and the enterprising entrepreneur has just no time for this program going from post to pillar.
It’s good for government statistics and politicians to boast about.
Those who "use" the system to benefit do a good job (Bankrupt and start afresh with your wife’s name -bankrupt again and now the son has grown up to do the "good" work).
When one calculates the costs associated with a SBL and equate it to interest one ends up paying 4-5% more than borrowing money on a line of credit on ones house or a second mortgage.
DO WE NEED THIS?

12. AZ_Superdude
It is a good program, though the government should be backing about 75%, the bank needs some skin in the game otherwise they will make loans to anyone. If anyone complains about the $113 million dollar loss, wait until interest rates rise and CHMC hands the government a bill for about seven times that!

13. Alistair McLaughlin
Oh, I'll complain loudly about losses from BOTH government boondoggles.

http://www.theglobeandmail.com/report-on-business/your-business/start/financing/despite-problems-small-business-program-wins-support/article1917101/


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