Small biz, taxpayers to take hit as Ottawa revamps loan program

OTTAWA—Small business will pay more, the banks will earn more and taxpayers will lose more under an Industry Canada plan to revamp the rules for a troubled lending program.

The proposal, issued on the weekend after years of consultations, would bump up the maximum interest rate charged on federally guaranteed small-business loans by three-quarters of a percentage point.

And financial institutions would be free to charge administrative fees not currently allowed under the Canada Small Business Financing Program.

The proposal estimates financial institutions will be better off by $141 million over 10 years, while small business borrowers face additional costs of $233 million over the same period.

In the meantime, the program—which is supposed to break even—would see its losses grow by about $41 million over 10 years.

The changes are to come into effect April 1 next year, following a 30-day consultation period that began Oct. 13.

“Lenders’ use of the program to make loans to small businesses is declining due to the high level of administrative burden and lack of profitability of loans associated with the program,” says a rationale for the changes, issued by Industry Canada and the Finance Department.

The long-standing program was given a major overhaul in 1999, when it was put on a more business-like basis to staunch the flow of red ink. Ottawa guarantees up to 85 per cent of the value of loans issued by private lenders.

But banks and others have balked at the red tape, low fees and anemic interest rates required under program rules and have shied away from offering these loans to clients ineligible for regular small-business loans.

As a result, only about 7,466 loans were issued in 2010-2011, a low point after a steady decline from almost 18,000 in its heyday in 1999-2000.

The revamp would increase the maximum interest rate to prime-plus-3.75 per cent from prime-plus-three per cent and allow lenders to charge the same fees levied on their commercial loans. Other “obsolete” red tape would be abolished.

The result, says Industry Canada, would be about 1,550 additional loans each year worth about $200 million and an improved jobs environment. Annual loan amounts are currently about $1 billion.

Most of the proposed changes were panned by Canada’s largest small-business group, the Canadian Federation of Independent Business.

President Dan Kelly welcomed moves to reduced the paper burden, but said the proposals favour financial institutions over small business.

“The banks are looking for motivation to offer more of these loans, but I actually think that what the regulations may do is end up drying up the demand for such loans from small business,” Kelly said in an interview from Toronto.

“So it does look like this document is very, very heavily weighted toward the banks.”

Kelly noted that the proposals were issued during small-business week, and thus “seem particularly ill-timed.”

The federation’s Corinne Pohlmann had written to Industry Canada in early 2010 asking that the program “not undergo any major changes at this time.”

The program so far has guaranteed more than $10 billion in small-business loans issued by banks, credit unions and others since 1999, and collects fees based on the size of the loan.

Loss claims were more than $80 million in 2010-2011, but historically only about 60 per cent of losses are covered by fees.

A KPMG report, commissioned by Industry Canada and delivered in late 2009, suggested the program would never break even as originally envisaged.

“The gap between claims and fee revenues will continue to exist and most likely expand,” the report concluded.