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 Saturday.
“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 2010-11, 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. Annual loan
amounts are currently about $1 billion. The projections also cite other
benefits to the economy, such as job maintenance and creation.
Most of the proposed changes were panned
Monday 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
2010-11, 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.
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