This report presents the results of the 2004 evaluation of the Canada Small Business Financing (CSBF) program. This evaluation is an element of the comprehensive review of the program, the results of which will be completed by March 31, 2005, and tabled in Parliament.

The study was based on a results-based management and accountability framework for the program, which specifies the questions that are to be addressed in the evaluation study. The most important of these questions and the key study findings related to each question are presented below.

Program rationale. Is there a valid rationale for government involvement in facilitating access to asset-based debt financing for small and medium-sized enterprises (SMEs)?

Findings. There is an on-going need to facilitate access to asset-based debt financing for SMEs. SMEs have more difficulty obtaining financing than large firms, primarily because loans to SMEs are riskier. Because of this higher degree of risk, lenders limit the availability of financing for SMEs, so there is a need to fill this “financing gap”. In addition:

There are no viable alternatives to a federally managed program;

The CSBF program is consistent with government-wide and Departmental priorities; and

There is no significant degree of overlap and duplication between the CSBF program and other government loan support programs.

Incrementality. To what extent has the program facilitated the availability of financing to SMEs that would not have been available to these businesses in the absence of the program?

Findings. The loans made under the CSBF program have been highly incremental. In particular:

50 to 55% of these loans have been “fully financially incremental” – i.e., in the absence of the CSBF program, no loan at all would have been granted to the borrower.

Approximately an additional 25% of CSBF loans have been “partially financially incremental” – i.e., in the absence of the CSBF program, the borrower would have been granted a smaller loan.

Cost recovery. To what extent are the claims and interest paid by the program counter-balanced by the fees paid by borrowers? In other words, to what extent is the program cost recoverable?

Findings. The CSBF program, as it is currently structured, is not cost recoverable in an accounting sense (i.e., in the sense that program revenues would be greater than or equal to program costs). In particular:

The net cost to government (claims plus interest paid minus fee payments received) of loans made under the predecessor program between 1995 and 1999 is $275 million as at March 31, 2004.

The net cost to government of CSBF loans that have been made over the period 1999/00 through 2003/04 are estimated to be approximately $330 million ($250 million on a net present value basis).

Employment impact. What has been the impact of the CSBF program on job creation?

Findings. The most defensible available estimate of the direct employment impact of the CSBF program at participating firms is 2.7 jobs (on a full-time equivalent basis) of employment per loan. Note, however, that the issues of job displacement and indirect (supplier-related) and induced (re-spending-related) job creation have not been measured, so it is not possible to assess their impact on the net employment created.

Possible program improvements. Are there alternative ways of delivering the CSBF program that would increase the degree of cost recovery and/or incrementality?

Findings

The program cannot be restructured in a way that would make it cost-recoverable if any sort of “reasonable” degree of loan incrementality is maintained that is consistent with the program’s raison d’etre to facilitate high-risk loans to small and medium-sized enterprises.

The challenge for Industry Canada is to structure the program in such a way that both the degree of loan incrementality and the degree of cost recovery are “acceptable” – i.e., finding the point at which the net costs of the program are justified by the benefits associated with the resulting degree of incrementality. While this study did not determine what that point is, there are some indications that the degree of cost recovery should be higher and the degree of incrementality should be lower than currently exists.

There are ways of restructuring the program to increase the degree of cost recovery that would be acceptable to the stakeholder community (lenders and borrowers). These include some combination of the following:

a) allowing financial institutions to charge higher interest rates (a portion of which could be returned to the government as a restructured administration fee);

b) changing the government fee structure (e.g., eliminating the registration fee and increasing the administration fee); and

c) reducing the percentage of loan losses covered by the government.

Final Report (PDF - 1,130KB - 87 pages)
Management Response (PDF - 10KB - 3 pages)

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