Ottawas loan program for small business still troubled: report

The Canadian Press ~ The News
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OTTAWA - An Industry Canada loan program for small business continues to lose money and annoy bankers a decade after it was redesigned to avoid those very problems.
A new report on the Canada Small Business Financing Program has found a loan-guarantee portfolio in sharp decline even as losses to the federal treasury mount.
The program, which reimburses financial institutions for losses on defaulted loans, is a tangle of red tape and inflexible terms that has lenders fleeing, says the KPMG study, commissioned by Industry Canada.
"Lenders have identified a heavy administrative burden, which includes a paper-based system, and difficulties with the claim process, as major obstacles," the consultants' report concludes. "It is not profitable to them."
The result has been a sharp drop in the number of loans, hitting a new low of 9,000 - about half the number the program supported in 1999 when it was overhauled to put it on a more business-like footing.
The program has so far guaranteed about $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.
The revenue paid to Industry Canada was supposed to cover the default claims paid out, but the math has never worked in Ottawa's favour.
Claims paid out have risen steadily over the decade, and now top $100 million annually, while revenues have consistently lagged, costing taxpayers a net $335 million so far.
Put another way, cost recovery is currently at only about 60 per cent rather than the 100 per cent that was planned, and is in steady decline.
"The gap between claims and fee revenues will continue to exist and most likely expand," predicts the KPMG report, dated Oct. 30 and obtained by The Canadian Press under the Access to Information Act.
The program's portfolio of loans has become ever more risky over the decade, now catering especially to newly established small firms with weak credit scores and little collateral, many in the food-and-beverage sector.
Few small-business borrowers have even heard of the program, so lending institutions have effectively become gatekeepers, able to recommend the option if a standard loan application fails.
But loans officers have generally soured on the program.
"They mention the high amount of forms that need to be filled out ... as a major nuisance," say the KPMG investigators, who interviewed bankers and others.
"It is the lender's perception that the claim staff at the ... program is very strict and focus mostly on reasons not to pay the claims." Some of the loans officials interviewed were "very passionate about not offering the program."
Virtually all the problems cited by KPMG repeat the findings of earlier studies. An Industry Canada report in early 2002 cited the paperwork burden, lack of profit and trouble collecting claims as driving financial institutions away.
The same year, the auditor general of Canada expressed doubts that the program as designed could ever recover its costs.
And a 2004 report the department commissioned from another consultant repeated the findings about the administrative load, disappearing profits and cost-recovery problems.
The 2009 federal budget changed two rules in the program, raising the maximum loan amount by $100,000 to $350,000 and adjusting a claims calculation limit. There was also a vague promise to ease the administrative burden, with no details.
The Finance Department predicted the changes, which came into effect March 31, will increase annual borrowing under the program by $300 million from the current $1 billion.
The KPMG report quizzed bankers and others about the 2009 budget changes. The new loan limit won praise, though with a warning that default levels might also rise. The claims adjustment got a lukewarm response.
A spokeswoman for Industry Canada did not respond immediately to a request for comment.
The Canada Small Business Financing Program covers 85 per cent of loan defaults, and sets the maximum interest rate that can be charged as the prime lending rate, plus three percentage points. Industry Canada collects registration and administration fees set as a percentage of the loan.
An earlier incarnation of the program, the Small Business Loans program, lost at least $275 million between 1995 and 1999 and was scrapped that year.

Organizations: Industry Canada, KPMG, Canadian Press Finance Department Small Business Loans

Geographic location: OTTAWA, Canada

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