Regulations Amending the Canada Small Business Financing Regulations: SOR/2022-157

Canada Gazette, Part II, Volume 156, Number 14

Registration
SOR/2022-157 June 24, 2022

CANADA SMALL BUSINESS FINANCING ACT

P.C. 2022-817 June 24, 2022

Whereas, under subsection 14(3) of the Canada Small Business Financing Actfootnote a, the Minister of State (Small Business) caused a copy of the proposed Regulations Amending the Canada Small Business Financing Regulations, substantially in the annexed form, to be laid before each House of Parliament;

Therefore, Her Excellency the Governor General in Council, on the recommendation of the Minister of State (Small Business) and the Minister of Finance, under section 14 of the Canada Small Business Financing Act footnote a, makes the annexed Regulations Amending the Canada Small Business Financing Regulations.

Regulations Amending the Canada Small Business Financing Regulations

Amendments

1 Subsection 1(1) of the Canada Small Business Financing Regulations footnote 1 is amended by adding the following in alphabetical order:

intangible asset means a non-monetary asset without physical substance that can be sold, transferred, licensed, rented or exchanged or that arises from a contractual or other legal right. (bien incorporel)

working capital costs means costs to fund the day-to-day operating expenses of a business. (frais liés au fonds de roulement)

2 Subsection 1.1(2) of the Regulations is repealed.

3 Section 2 of the Regulations is replaced by the following:

2 A loan must be registered within six months after the day on which

4 (1) Paragraph 3(1)(b) of the Regulations is replaced by the following:

(2) Subparagraphs 3(1)(c)(ii) and (iii) of the Regulations are replaced by the following:

(3) Paragraph 3(1)(d) of the Regulations is replaced by the following:

(4) Paragraphs 3(1)(h) and (i) of the Regulations are replaced by the following:

5 (1) Subsections 4(1) and (2) of the Regulations are replaced by the following:

4 (1) The registration fee is

(1.1) If the borrower and the lender renew a loan referred to in paragraph 5(1)(e) within five years after the day on which the line of credit is opened, the lender must pay an additional registration fee of 2% of the renewed authorized amount.

(1.2) If the borrower and the lender agree to an increase in the authorized amount of a loan referred to in paragraph 5(1)(e), the lender must pay a registration fee of 2% of the increase in the authorized amount.

(2) The annual administration fee is payable quarterly within two months after the end of each quarter and is calculated at the annual rate of 1.25% applied

(2) The portion of subsection 4(10) of the Regulations before paragraph (a) is replaced by the following:

(10) On application by a lender, made within one year after the day on which a loan referred to in any of paragraphs 5(1)(a) to (d) is made, the Minister must

(3) Section 4 of the Regulations is amended by adding the following after subsection (10):

(11) On application by a lender, made within one year after the day on which a loan referred to in paragraph 5(1)(e) is opened, the Minister must

6 (1) Subsection 5(1) of the Regulations is amended by striking out “or” at the end of paragraph (c) and by replacing paragraph (d) with the following:

(2) Subsection 5(6) of the Regulations is replaced by the following:

(6) A loan referred to in any of paragraphs (1)(a) to (d) may not be used to finance the payment of any refundable taxes.

7 Section 6 of the Regulations is replaced by the following:

6 (1) A loan referred to in any of paragraphs 5(1)(a) to (e) may not be used to finance an expenditure or commitment that

(2) The maximum loan term is

Criteria for Eligibility

6.1 For the purposes of paragraph 4(2)(e) of the Act, a borrower is eligible for a loan on application to a lender if

8 (1) The portion of subsection 9(1) of the Regulations before paragraph (a) is replaced by the following:

9 (1) The borrower must, before the loan is disbursed, provide to the lender from, subject to subsection (2), an appraiser who is a member of any professional association that is recognized under a federal or provincial law and who is at arm’s length from the borrower, and, in the case of assets described in paragraph (c), from the lender, an appraisal, made within 365 days before the loan is disbursed, of the value of the assets or services intended to improve the assets, as the case may be, if a borrower uses, or intends to use, all or part of a loan to purchase

(2) Subsection 9(2) of the Regulations is replaced by the following:

(2) In the case of a loan to purchase equipment, leasehold improvements or intangible assets or to finance working capital costs, the appraisal must be made by an appraiser who is at arm’s length from the borrower and, in the case of equipment or leasehold improvements that are assets referred to in paragraph (1)(c), the lender.

9 (1) Subsection 10(2) of the Regulations is replaced by the following:

(2) The lender and the borrower may, at any time, agree to amend the terms of the loan or, at the end of a loan term, to renew the loan, to an aggregate maximum term of 15 years for a loan referred to in any of paragraphs 5(1)(a) to (d), beginning on the day on which the first payment of principal and interest is due.

(2) Section 10 of the Regulations is amended by adding the following after subsection (5):

(6) Before the end of the five year period that begins the day after a loan referred to in paragraph 5(1)(e) is opened, the lender and the borrower may

10 (1) The portion of section 12 of the Regulations before paragraph (a) is replaced by the following:

12 (1) The maximum annual rate of interest payable in respect of a loan referred to in any of paragraphs 5(1)(a) to (d) on the day on which the loan is made or renewed or on which the loan term is amended, or on which a document is signed that sets out the terms of the loan that is made or renewed or that sets out the amended loan term, must not exceed

(2) Section 12 of the Regulations is amended by adding the following after subsection (1):

(2) The maximum annual rate of interest payable in respect of a loan referred to in paragraph 5(1)(e) is the aggregate of 5% and the prime lending rate that is in effect at the lender on each day of the line of credit term, beginning on the day on which the line of credit is opened.

11 (1) Subsection 14(1) of the Regulations is replaced by the following:

14 (1) A lender must, when making a loan referred to in paragraph 5(1)(a) or (c), take valid and enforceable first-ranking security in the assets of the small business whose purchase or improvement is to be financed by the loan.

(2) Subsection 14(3) of the Regulations is replaced by the following:

(3) In the case of a loan referred to in paragraph 5(1)(b), (d) or (e), or a loan referred to in paragraph 5(1)(c) for the financing of computer software, the lender must take security in any assets of the small business in respect of which the loan is made.

(3) The portion of subsection 14(4) of the Regulations before paragraph (a) is replaced by the following:

(4) If, within 30 days before or after the day on which a loan is made or opened, the lender makes or opens one or more conventional loans to the same borrower to finance a purchase or improvement that would be eligible for a loan, the lender

12 Section 21 of the Regulations is replaced by the following:

21 A lender may release a guarantor or surety from a guarantee or suretyship only if the loan is in good standing.

13 Paragraph 25.1(1)(b) of the Regulations is replaced by the following:

14 Subparagraph 25.3(c)(i) of the Regulations is replaced by the following:

15 Section 25.4 of the Regulations is replaced by the following:

25.4 If the non-compliance was inadvertent with respect to an outstanding loan amount referred to in any of paragraphs 4(2)(b) to (e) of the Act or in section 6.1, the Minister must pay the lender the amount of any loss, calculated in accordance with subsection 38(7), on the portion of the amount of the principal outstanding on the loan to which the non-compliance does not relate.

16 Paragraphs 28.1(a) and (b) of the Regulations are replaced by the following:

17 Subsection 29(1) of the Regulations is replaced by the following:

29 (1) A lender may assign a loan to another lender at the request of the borrower if the Minister’s liability under subsection 6(2) or (3) of the Act in relation to the remaining loans of the transferor does not, as a result of the transfer, exceed the amount already paid by the Minister to the transferor.

18 Subsection 30(3) of the Regulations is replaced by the following:

(3) For the purpose of paragraph (1)(a),

19 (1) Paragraph 33(1)(a) of the Regulations is replaced by the following:

(2) Paragraph 33(2)(a) of the Regulations is replaced by the following:

(3) Paragraph 33(3)(a) of the Regulations is replaced by the following:

20 Subsections 37(1) and (2) of the Regulations are replaced by the following:

(2) If a borrower is in default under section 36, the lender must demand repayment of the outstanding amount of the loan within the period specified in the demand before submitting a claim for loss sustained as a result of a loan under section 38.

21 (1) The portion of paragraph 38(4)(a) of the Regulations before subparagraph (ii) is replaced by the following:

(2) Subsection 38(4) of the Regulations is amended by adding the following after paragraph (a):

22 (1) The portion of paragraph 38.1(3)(a) of the Regulations before subparagraph (ii) is replaced by the following:

(2) Subsection 38.1(3) of the Regulations is amended by striking out “and” at the end of paragraph (a) and by adding the following after that paragraph:

23 The portion of subsection 39(1) of the Regulations before paragraph (a) is replaced by the following:

39 (1) A lender may make an interim claim to the Minister in accordance with this section for loss sustained as a result of a loan where the lender has taken all of the measures described in subsection 37(3) that are applicable and

Coming into Force

24 These Regulations come into force on the day on which section 205 of the Budget Implementation Act, 2021, No. 1, chapter 23 of the Statutes of Canada, 2021, comes into force, but if they are registered after that day, they come into force on the day on which they are registered.

REGULATORY IMPACT ANALYSIS STATEMENT

(This statement is not part of the Regulations.)

Executive summary

Issues: Canadian small businesses increasingly need access to financing, particularly flexible financing options for intangible assets and working capital, to help them start up and scale up in a modern digital economy and to recover following the COVID-19 pandemic.

Description: The Canada Small Business Financing Regulations are amended to establish the parameters for a new line of credit financing product, expand the loan classes, increase the maximum loan amount and coverage period for equipment and leasehold improvements, establish maximum amounts for loan products and loan classes, and make other minor technical, consequential and administrative changes.

Rationale: As a long-standing program, the Canada Small Business Financing Program requires enhancements in order to continue to effectively help Canadian small businesses access the type and the amount of financing they need to start up and grow in a digital and knowledge-based economy. In particular, stakeholders have expressed the need for higher maximum loan amounts, financing for intangible assets and working capital, and a flexible financing product (i.e. line of credit) for short-term needs. Small businesses are also in need of additional sources of liquidity to help them recover from the effects of the COVID-19 pandemic. The regulatory amendments would contribute $520 million in new annual lending and benefit the economy and the business community. Many of the initiative’s costs amount to transfers within the economy, thus counterbalancing each other in the overall economy. Total quantifiable net benefits amount to $286 million in present value terms from 2022–2023 to 2040–2041.

Issues

While the Canada Small Business Financing Program (CSBFP) has remained an effective program for facilitating small business financing, it is currently restricted to offering term loans for the financing of real property, equipment and leasehold improvements. The structure of the program and the three loan classes have remained largely unchanged since the program’s inception in 1961. However, small businesses have evolved and there is a reduced emphasis on fixed asset financing in a digital and knowledge-based economy. In addition, as the economy recovers from the effects of the COVID-19 pandemic, small businesses increasingly require low-cost sources of liquidity.

Through stakeholder consultations, both borrowers and lenders have identified that there is a need to enhance and modernize the program by introducing a flexible financing option and expanding eligible loan classes in order to better address the financial needs of Canadian small businesses. Modern businesses require flexible financing to help them meet their day-to-day needs. The ability to access a line of credit and/or secure capital for intangible assets and working capital under the CSBFP would address the long-standing need for this type of funding, while also strengthening the government’s commitment to provide better support and services to Canadian entrepreneurs.

Finally, the $350,000 maximum loan amount for equipment and leasehold improvements has remained unchanged since 2009 despite the rising costs of these assets. Both financial institutions and small business borrowers have requested an increase to $500,000 to better reflect the current costs of equipment and leasehold improvements. The coverage period of these loans also needs to be increased to ensure that loan payments remain affordable.

Many of the CSBFP’s parameters are legislated within the Canada Small Business Financing Regulations (CSBFR); therefore, regulatory amendments are required to enhance the CSBFP and ensure that it continues to effectively provide access to the type of financing needed by modern small businesses.

Background

The CSBFP is a long-standing statutory program that is governed by the Canada Small Business Financing Act (CSBFA) and the CSBFR. The program’s main objectives are

Small businesses face many challenges accessing financing for a variety of reasons, including having little or no credit history, few assets to use as collateral, and more volatile sales and earnings. Through the CSBFP, the Government of Canada facilitates greater access to financing by sharing the risk with financial institutions. Currently under the program, small businesses can obtain term loans of up to $1 million for real property, of which $350,000 can be used for equipment or leasehold improvements. In the event that a registered loan defaults, the government will reimburse 85% of the net eligible loss to the lender.

Every five years, the CSBFP undergoes a comprehensive review, which is informed by an independently conducted program evaluation and several research studies. As part of the Canada Small Business Financing Act Comprehensive Review Report (2014-2019), many financial institution and small business stakeholders expressed the need for program enhancements, including higher maximum loan amounts, financing for intangible assets and working capital costs, and a flexible financing product (i.e. line of credit) for short-term needs. As a result, these items were included as recommendations within the report, which was the tabled in both Houses of Parliament in Fall 2020.

In order to better meet the changing needs of Canadian businesses, Budget 2021 announced plans to enhance the CSBFP by expanding loan class eligibility to include lending for intangible assets and working capital purposes such as start-up assets and expenses; increasing the maximum loan amount from $350,000 to $500,000 and the loan coverage period from 10 to 15 years for equipment and leasehold improvement loans; expanding borrower eligibility to include not-for-profit and charitable social enterprises; and introducing a new line of credit product. These changes go hand-in-hand to ensure that small business and independent entrepreneurs can access the capital they need to recover, innovate, and grow in the long-term. The Budget Implementation Act, 2021, No. 1 implemented the legislative amendment to expand borrower eligibility and set out a number of provisions, which include modifying the definition of a loan; establishing the overall maximum loan amounts for loan products and loan classes; and setting liability limits for lenders term loans and lines of credit, to be brought into force by Order in Council at the same time as the regulatory amendments. Amendments to the CSBFR are required to expand the eligible loan classes, establish the parameters for the new line of credit product (e.g. maximum amount, interest rate, loss sharing ratio), increase the maximum loan amount and coverage period for equipment and leasehold improvements, as well as to delegate sub-maximum amounts for other loan classes.

Objective

The regulatory amendments aim to enhance the CSBFP to better assist new and established Canadian small businesses access the financing they need to start up and expand, as well as to assist those businesses that have been hardest hit by the COVID-19 pandemic to increase their liquidity and recover. This will be achieved through introducing a line of credit financing option, expanding eligible loan classes under the CSBFP, and increasing the maximum loan amount and coverage period for equipment and leasehold improvements.

Description

The CSBFR are amended to establish the parameters for the line of credit financing product, expand the loan classes, increase the maximum loan amount and coverage period for equipment and leasehold improvements, establish maximum amounts for loan products and loan classes, and make other minor technical and administrative changes.

The CSBFR are amended to establish the maximum loan amounts by loan product and by loan classes as follows:

Intangible assets and working capital costs, including working capital under the line of credit financing product, are added to the list of eligible loan classes and include the following conditions:

For claims submitted for lines of credit, lenders will not be required to substantiate the cost and proof of payment for costs financed by the line of credit. Instead, the lenders will be required to submit an Attestation and Acknowledgement form signed by the borrower when the line of credit was originally registered.

The amendments also make technical, housekeeping, and administrative changes to the CSBFR, including

Regulatory development

Consultation

Innovation, Science and Economic Development Canada (ISED) has conducted extensive consultations with stakeholders regarding these regulatory amendments to the CSBFR over the last several years.

In fall 2014, ISED held a series of roundtable discussions on small business financing with a diverse cross-section of small business owners and representatives. They indicated that the majority of financing still favours “brick and mortar” industries and many small businesses, particularly service or technology-based businesses, face difficulties with obtaining financing since their needs are not tied to fixed assets (e.g. property). They indicated support for any program changes that would facilitate access to financing for a wider range of assets and costs related to start up or growth. This sentiment was repeated in 2017 when the CSBFP consulted with social enterprise and social financing experts and advocates, who confirmed that this growing segment of the economy increasingly requires flexible financing for items other than real property and equipment.

In 2016, ISED held a series of consultations with lenders about potential changes to the CSBFP. During these discussions, many lenders indicated that the ability to offer financing for additional business assets, such as intangibles, and working capital costs would be a welcome change to the program. The regulatory amendments, specifically the expansion of loan classes, the introduction of a line of credit product, and the increase to the maximum amount for equipment and leasehold improvement loans had all been included as recommendations for future directions in the Canada Small Business Financing Act Comprehensive Review Report (2014-2019). Following its publication, ISED received correspondence from the Canadian Bankers Association, the Canadian Franchise Association and several lenders expressing their support for the implementation of the report’s recommendations.

In May 2021, ISED officials held discussions with the Canadian Bankers Association, the Canadian Credit Union Association, and the Fédération des caisses Desjardins du Québec and collected written feedback regarding the parameters of the new line of credit product (e.g. interest rate, maximum amount). The purpose of these consultations was to ensure the new line of credit will be an attractive product for financial institutions to offer their small business clients. The discussions were productive and a general agreement was achieved on the final line of credit parameters.

The results from these previous consultations were instrumental in developing the assumptions and the variables used to forecast the cost and benefits of the regulatory amendments. Stakeholders clearly articulated that the changes would increase the availability of small business financing, which would have anticipated benefits for Canadian businesses and the overall economy. Discussions with financial institution partners also assisted with estimating the expected impact of these changes on program take-up and loss rates, which served as important assumptions in the calculation of benefits and costs to lenders, small businesses, and the Government of Canada.

The regulations were published in the Canada Gazette, Part I, on April 2, 2022, followed by a 30-day comment period. Two submissions were received during the comment period. The feedback expressed general support for the regulations and included some comments and questions about the operationalization of the changes and implementation timelines, which were answered and clarified by ISED. One aspect of the feedback, which was the need to increase/combine the Minister’s liability limits in respect of each lender, is beyond the scope of the regulatory proposal as it is legislative in nature. ISED has noted this feedback and will consider further improvements and amendments in the next comprehensive review of the program and/or updates through the Annual Regulatory Modernization Bill.

Another stakeholder submission, which was received after the prepublication period closed, also expressed overall support for the changes and included some clarification questions which will be addressed in the program guidelines or legislative items which are outside the scope of these changes. One comment, however, suggested maintaining the maximum interest rate for the line of credit at prime + 3% to be in line with the current maximum interest rate for term loans rather than the proposed prime + 5%. ISED has decided to not make this change as there is a strong policy rationale for the proposed rate. Lines of credit are inherently riskier products than term loans and the incremental 2% difference is commensurate with the level of risk. Financial institutions have indicated that the current rate for term loans is not as profitable as alternatives and they would require a higher interest rate in order to offer a line of credit product. The flexibility to charge a higher interest rate for the line of credit will ensure that financial institutions offer this new product option to their small business clients, and although borrowers may be paying a higher interest rate, they would be getting access to much needed flexible financing that would otherwise be unavailable.

In the end, no changes were made to the regulatory amendments following prepublication.

Modern treaty obligations and Indigenous engagement and consultation

The Initial Assessment of the Modern Treaty Implications examined the geographical scope and subject matter of the initiative in relation to modern treaties in effect and did not identify any potential modern treaty impacts. The CSBFP is a national program and, therefore, falls within the scope of modern treaty areas; however, the initiative does not have any direct implications within modern treaty areas.

Instrument choice

Most of the CSBFP’s parameters are outlined in the CSBFA and the CSBFR, therefore, regulatory amendments are required to either modify the existing parameters or to introduce new parameters. The baseline scenario entails not making any enhancements to the CSBFP, under which the program would continue to facilitate only term loans for the financing of fixed assets and the maximum loan amount for equipment and leasehold improvements would remain at $350,000 over a maximum 10-year term.

Regulatory analysis

Benefits and costs

For a detailed Cost-Benefit Analysis Report, including all calculations and assumptions, please contact csbfr-rfpec@ised-isde.gc.ca.

The total quantifiable costs and benefits amount to $620 million and $905 million in present value (PV) terms, respectively. The total quantifiable net benefit amounts to $286 million in present value terms, with a benefit-cost ratio of 1.46. In other words, for every dollar spent in the regulatory scenario, approximately $1.46 in benefits are generated to ISED, lenders, and the Canadian public. Many of the costs associated with the regulatory amendments, such as the 2% registration and 1.25% administration fees paid by borrowers and collected by ISED, and interest paid by borrowers and collected by lenders, amount to transfers within the economy, thus counterbalancing each other in the overall economy.

Methodology

This analysis follows the methodology set out by the Treasury Board of Canada Secretariat’s Cost-Benefit Analysis Guide. The incremental impacts (benefits and costs) attributable to the regulatory amendments are determined by comparing a baseline scenario, where the amendments are not in force, to a scenario with the amendments. Unless otherwise stated, all monetary values are expressed in 2021 dollars, discounted to 2022 using a discount rate of 7% over a 19-year period (2022–2023 to 2040–2041).

The following data sources were used:

Assumptions

This analysis uses a similar methodology used in previous cost-benefit analyses conducted by KPMG (2009), Seens (2015), and Huang and Rivard (2019), as well as economic forecasting models developed to estimate and quantify the benefits and costs of future revenue and expense streams in the regulatory scenario. This includes a 19-year period of analysis, which forecasts the benefits and costs of a five-year lending period (2022–2023 to 2026–2027) out until 2040–2041, as costs in the form of claim payments can still materialize up to 15 years after the final lending year in 2026–2027.

Economic forecasting models were developed for each regulatory amendment. These models used assumptions based upon the estimated average loan amounts and the percentage of existing loans that would incorporate the regulatory changes in order to arrive at the estimated lending amount for each amendment. These assumptions assisted in the estimation of the revenues and expenses, and were derived using CSBFP’s most recent lending experience prior to the COVID-19 impact as a benchmark — i.e. the expected lending volumes, loan sizes, and loss rates, in absence of the changes. The revenues and expenses presented take into consideration the nature of CSBFP loans, in which the majority of fee revenues are received within the first three to five years (e.g. for a 10–15-year term loan), and expenses (i.e. claim payments on defaulted loans) are typically incurred two to eight years after a loan has been made. To account for differences in the timing of program revenue and expense streams, the economic models provided the present value of the total cash flows discounted at 7% for a given annual cohort of lending as recommended by the Treasury Board of Canada Secretariat’s Canadian Cost-Benefit Analysis Guide.

Increasing the maximum loan amount and coverage period for non-real property loans is expected to lead to a higher average loan amount, which would lead to a higher average claim amount. It is assumed the average loan amount would increase from $350,000 in the baseline scenario to $425,000 in the regulatory scenario.

Loss rates (i.e. the proportion of loans that go into default) related to expanding eligible loan classes to include intangible assets and working capital costs are assumed to be similar to those of equipment and leasehold improvement loans (10%). Additionally, lines of credit are assumed to have a higher loss rate than term loans since loans for working capital are inherently more risky than fixed assets such as real property and equipment.

Baseline and regulatory scenarios
Baseline scenario

In the baseline scenario, the CSBFP would continue operating as normal, facilitating loans under the existing term loan product for real property, equipment, and leasehold improvements. There would not be a revolving line of credit product, expanded loan classes, increased maximum loan amounts and coverage period for equipment and leasehold improvement loans. Based on this baseline scenario, the program would continue to facilitate an estimated $1.3 billion in lending annually on an ongoing basis. ISED would receive 2% in registration fees from these loans and an annual 1.25% administration fee based on the monthly outstanding loan balance amounts.

Regulatory scenario

In the regulatory scenario, increasing the maximum loan amount for non-real property loans to $500,000 and extending the maximum government coverage period for these loans to 15 years is expected to result in lenders making an additional $69 million in loans to borrowers per year.

Expanding eligible loan classes to include intangible assets and working capital is expected to result in lenders making an additional $151 million in loans to borrowers per year, which includes a maximum term of 10 years.

Finally, introducing a flexible revolving line of credit product is expected to facilitate an additional $300 million in lending to borrowers per year with a maximum coverage period of 15 years.

In total, lenders are expected to issue an additional $520 million in lines of credits and non-real property loans (i.e. loans for equipment, leasehold improvements, working capital and intangible assets) with a loan coverage period of 15 years for a total of $1.82 billion in annual lending.

The regulatory scenario is measured in full incrementality and assumes that the same amount of loans (in number and value) would be made in each fiscal year for five years (from 2022–2023 to 2026–2027), until government coverage on the last cohort of loans expire in 2040–2041 (given the 15-year coverage period). Under this scenario, it was assumed that the rate at which borrowers defaulted on loans was 10% for non-real property term loans and 15% for lines of credit. In addition, ISED would receive 2% in registration fees from loans made in the five-year period and an annual 1.25% administration fee based on the monthly/daily (term/ line of credit) outstanding loan balance amounts until fiscal year 2040–2041.

Benefits of the regulatory amendments

The benefits of the regulatory amendments include

Benefits to ISED

The CSBFP collects a one-time 2% registration fee on the loan amount and an annual 1.25% administration fee on the outstanding loan balance, which can be up to a maximum of 15 years. These fees are used to offset the cost of claims resulting from defaulted loans. The benefits to ISED can be attributed to the transfer of costs from fee payments paid by borrowers. Specifically, fee revenues received as a benefit to ISED comes directly from borrowers, which comes at an equal cost. As a result, the benefits and costs counterbalance each other.

Benefits to lenders

Lenders benefit from interest revenues resulting from interest charges on outstanding loan balances and lending fees. This benefit to lenders can be attributed to the transfer of cost from interest payments and lending fees paid by borrowers, which comes at an equal cost. As a result, the benefits and costs counterbalance each other.

Benefits to the Canadian public

The Canadian public will benefit from additional lending made to small businesses which will result in additional direct GDP impacts. The additional direct GDP impacts quantify the effect of increased production and imports necessary to meet the demand for capital investment due to CSBFP loans. The Canadian public will also benefit from deposits/funds contributed to capital markets and lent to financial institutions in order to issue loans to small businesses under the CSBFP. Financial institutions borrow funds from the capital markets (e.g. deposits, bonds, debentures, commercial paper, etc.) in order to issue loans to small businesses. There is a cost of capital for financial institutions to have access to these funds. This analysis uses the prime lending rate as a proxy for the cost of capital which gets paid to the Canadian public through the capital markets.

Quantified impacts (non-dollar terms)

ISED estimates that these regulatory amendments will result in the order of $520 million in new lending per year. Historically, CSBFP loans average $230,000 in size. This implies roughly 2 261 new CSBFP borrowers each year. Borrowers anticipate, on average, 2.9 jobs created due to their CSBFP loans. As noted in the 2019 Cost-Benefit Analysis, since expectations may fall short and some hires represent displacement rather than net job creation, reducing this figure by 75% to 0.725 jobs per loan offers a more conservative estimate.

Qualitative impacts

Borrowers will have increased cash flow as a result of greater liquidity through access to financing through term loans and lines of credit. Borrowers will use CSBFP financing to make investments in machinery, equipment, property, leasehold improvements, working capital and intangible assets. These investments can contribute to new jobs and expansion, which will result in greater productivity and efficiency. This additional cash flow could result in increased profits and the growth of these firms. The amount of this impact could not be monetized with accuracy.

Costs of the regulatory amendments

The costs of the regulatory amendments include

Costs to ISED

The main costs of the program are claim payments to lenders when a loan defaults. Loans made in any given year can default at any time over the potential 15-year life of the loans. These future expected loan defaults will be accounted for in the fiscal framework and reported as loss provisions in the Public Accounts of Canada. ISED reviews all claims and pays the lender up to 85% of eligible losses.

Within the first two years of the regulatory amendments, three additional full-time equivalents (FTEs) are required to help with loan and claim processing due to an expected uptake in program use. In year 3, the FTEs will decrease to two on an ongoing basis. Moreover, additional operating costs are also required to effectively increase program awareness and promote these changes to lenders and borrowers.

Costs to lenders

The main cost for lenders, which include banks, credit unions and caisses populaires, is the result of borrowers defaulting on loans. Although ISED is responsible for paying 85% of the eligible loss, the lender is responsible for the remaining 15% of the loss when a CSBFP loan defaults.

Costs to borrowers

Borrowers are required to pay a 2% registration fee on the loan amount upon registration and an annual 1.25% administration fee on the outstanding loan balance, which can be up to a maximum of 15 years. Borrowers are also charged lending fees by financial institutions during the disbursement of the loan, and can include set-up and account management fees. The administration fee is paid by lenders, but the cost is passed down to borrowers and reflected in their interest rate. Borrowers will effectively be paying a maximum of 6% in interest charges on term loans and a maximum of 8% in interest charges on lines of credit.

Cost-benefit statement
Table 1: Monetized costs ($M)

Impacted stakeholder

Description of cost

2022–2023
Base year

2031–2032
Midpoint

2040–2041
Final year

Total
(present value)

Annualized value

ISED

Claim payment on loan defaults and operating costs

$1.06

$2.13

$0.39

$175.44

$17.44

Lenders

Lender’s losses on defaults

$0.09

$0.34

$0.00

$30.16

$3.00

Borrowers

Fees and interest payments

$21.05

$17.76

$0.06

$414.19

$41.18

All stakeholders

Total costs

$22.20

$20.23

$0.45

$619.79

$61.62
Table 2: Monetized benefits ($M)

Impacted stakeholder

Description of benefit

2022–2023
Base year

2031–2032
Midpoint

2040–2041
Final year

Total
(present value)

Annualized value

ISED

Fee revenues

$10.10

$2.79

$0.01

$98.33

$9.78

Lenders

Interest revenues

$6.26

$7.59

$0.03

$158.44

$15.75

Canadian Public

GDP Impact, CDN Capital Markets

$116.63

$7.38

$0.02

$648.54

$64.47

All stakeholders

Total benefits

$133.00

$17.76

$0.06

$905.31

$90.00
Table 3: Summary of monetized costs and benefits ($M)

Impacts

2022–2023
Base year

2031–2032
Midpoint

2040–2041
Final year

Total
(present value)

Annualized value

Total costs

$22.20

$20.23

$0.45

$619.79

$61.62

Total benefits

$133.00

$17.76

$0.06

$905.31

$90.00

NET IMPACT

$110.80

−$2.47

−$0.39

$285.52

$28.38
Broader economic impacts

In addition to the benefits of the regulatory amendments as a result of the impacts described above, incremental loans made under the CSBFP have a number of broader economic and indirect impacts. Several of the impacts described in this section are considered benefits if an alternate perspective for the cost-benefit analysis were taken (i.e. a broader scope analysis).

Additional salaries and wages of within-firm employment

ISED estimates that the regulatory amendments will result in $520 million in new lending per year. Historically, CSBFP loans average $230,000 in size. This implies roughly 2 261 new CSBFP borrowers each year. Borrowers anticipate that on average, 2.9 jobs created as a result of the CSBFP loans they receive. As noted in the cost-benefit analysis of Huang and Rivard (2019), since expectations may fall short and some hires represent displacement rather than net job creation, reducing this figure by 75% to 0.725 jobs per loan offers a more conservative estimate. Based on these assumptions, 1 639 (2 261 × 0.725) within-firm jobs are estimated to be created annually as a result of the new lending.

The total estimated salaries and wages from the within-firm employment represent a benefit of $32.9 million annually to the Canadian public. Given the five-year lending period used in this analysis, the present value of additional salaries and wages of within-firm employment is estimated to be $144 million as a result of the regulatory amendments.

Tax remittances due to additional salaries and wages of within-firm employment

The federal income tax on salaries and wages for within-firm employment creation is estimated to be $3.6 million annually. Given the five-year lending period is used in this analysis, the present value of tax remittances due to additional salaries and wages of within-firm employment is estimated to be a $16 million benefit to the Canadian Government as a result of the regulatory amendments.

Indirect GDP impacts

For every dollar of program lending made to small businesses, it was estimated that it will result in $0.52 (i.e. 52%) of additional GDP impacts (both direct and indirect). Roughly 40% of these impacts are estimated to be the result of indirect impacts, implying that 21%, or $0.21 per dollar of lending result in benefits to the Canadian economy attributed to indirect GDP impacts.

Given the five-year lending period used in this analysis, the present value of the indirect GDP impacts is estimated to be a $327.4 million benefit to the Canadian public as a result of the regulatory amendments.

Sensitivity analysis

This section examines two additional scenarios (high and low) using the same methodology as the central scenario; however, it factors in changes to the assumptions to allow for a lower bound and an upper bound for the net benefit and benefit-cost ratio.

In the low benefit scenario, the annual lending value for each loan class is 50% lower than the central scenario. The loss rates for term loans and lines of credit are both set to their respective caps (12% and 15%). The incrementality rate is 51% fully incremental and is derived from the latest Lender Awareness and Satisfaction Study (2018), acting as the low bound for the incrementality rate.

In the high benefit scenario, the annual lending value for each loan class is 50% higher than the central scenario. The loss rates for term loans and lines of credit are 8% and 12%, respectively. The high scenario is 90% fully incremental, which is set as the high bound for the incrementality rate.

The benefits and costs are discounted at a rate of 7% in both the high and low scenarios.

The direct GDP impact rate is 28% in the low scenario and 34% in the high scenario. These amounts were estimated using the Cost-Benefit Analysis (Huang and Rivard, 2019) bounds as a proxy, and factoring in an overall 60% direct GDP impact rate applied to the low and high bounds.

Net benefits for the low scenario totalled $80 million with a benefit-cost ratio of 1.34. The central scenario results in a net benefit of $286 million with a benefit-cost ratio of 1.46. Finally, the high scenario shows a net benefit of $716 million with a benefit-cost ratio of 1.63. In all scenarios of the sensitivity analysis, findings show that the regulatory scenario is expected to provide significant social benefits in which the benefits exceed the costs.

Table 4: Assumptions for sensitivity analysis

Variable

Low Scenario

Central Scenario

High Scenario

Annual Line of Credit Lending ($M)

150

300

450

Annual Equipment and Leasehold Improvement Lending ($M)

34.5

69

103.5

Annual Working Capital and Intangible Asset Lending ($M)

75.5

151

226.5

Loss rate — Term loans (%)

12

10

8

Loss rate — Line of credit (%)

15

15

12

Incrementality

51% full incrementality

69% full incrementality

90% full incrementality

Direct GDP impact (%)

28

31

34

Discount rate (%)

7

7

7

Present Value Benefit ($M)

317

905

1,845

Present Value Cost ($M)

237

620

1,130

Net Present Value ($M)

80

286

716

Note: The net present value (NPV) is an endogenous variable, and lending amounts, loss rates, incrementality, direct GDP impact rates, and discount rates are exogenous variables.

To determine the impacts of discounting with respect to the costs and benefits, a separate analysis was conducted using different discount rates. The costs and benefits using the discount rate in the central scenario (7%) were compared with the costs and benefits using a lower discount rate of 0% (undiscounted) and a higher discount rate of 12%.

Based on this analysis, it found that the costs are more sensitive to changes in discount rates than the benefits. These results are consistent with the differences in the timing of program revenues and expenses, as the majority of fee revenues are received within the first three to five years, and expenses are typically incurred two to eight years after a loan has been made. For that reason, the benefit-cost ratio is highest when the discount rate is higher. It is worth noting that changes to the NPV are minimally affected as the discount rates change.

Distributional analysis

Historically, non-real property loans (and lines of credit) have predominantly been made to start-ups with young and less experienced owners. CSBFP borrowers also generally tend to be more diverse than all SMEs, with higher percentages identifying a non-official language as their first language and identifying as a visible minority. In addition, the CSBFP is available to all sectors (except farming) and the majority of CSBFP-supported enterprises tend to be located in Ontario, Quebec, and Alberta, in the accommodation and food services, retail trade or other services sector.

The regulatory amendments are not expected to alter the demographics of CSBFP borrowers. Regional impacts as a result of direct GDP impact are estimated using the distribution of CSBFP loan value by province in 2020–2021. Direct investment by borrowers backed by CSBFP loans on machinery and equipment, real property, leasehold improvements, intangible assets and working capital costs, is expected to have a positive direct impact on the economy by stimulating expenditures on goods and services and creating jobs as a result of the shock to demand. The direct GDP impacts are largest in Ontario and Western Canada, followed by Quebec and Atlantic Canada. Specifically, Ontario contributed to 45% of the total direct GDP impacts for a total of $220 million. Western Canada contributed to 29% of the total direct GDP impacts for a total of $141 million. Quebec and Atlantic Canada contributed to 22% and 4% of total direct GDP impacts for a total of $109 million and $22 million, respectively.

Small business lens

Analysis under the small business lens was conducted using the CSBFP’s definition of small business (i.e. gross annual revenues under $10 million). This definition differs from the Treasury Board Secretariat’s Policy on Limiting Regulatory Burden on Business, which defines small business as less than $5 million in gross annual revenues; however, given that the vast majority of CSBFP borrowers have gross annual revenues under $5 million (99%), the results of this analysis are expected to be in alignment.

The analysis concluded that the regulations would impact small businesses as they are the main clientele of the CSBFP. As the economy recovers from the effects of the COVID-19 pandemic, the regulations will help minimize adverse economic impacts to small businesses as they will have access to low-cost and flexible sources of liquidity to better address their needs. The compliance costs to small businesses, which are indicated in the table below and were reported in the Cost-Benefit Analysis, are a one-time 2% registration fee for the total amount of the loan and interest rate payments (1.25% administration fee included). The maximum interest rate for term loans is prime + 3% and the maximum interest rate for lines of credit is prime + 5%. There are no administrative costs to small businesses associated with the amendments.

While the compliance costs appear to be significant, many of these costs, specifically the interest rate, are normal costs for receiving financing from financial institutions and are calculated based on a percentage of the funds obtained over a five-year term for lines of credit or a 15-year term for term loans. Therefore, any new program lending will inevitably result in an increase in costs to small businesses. It is important to note that the costs would be the same or potentially higher if the borrowers were able to access financing through conventional lending since the CSBFP sets a maximum interest rate for its products whereas the interest rates for conventional lending are based on risk and can vary greatly.

It is estimated that the regulatory amendments will result in the order of $520 million/year in new lending to small businesses. As program loans historically average $230,000 in size, it is estimated that 2 261 new borrowers will receive funding through the CSBFP each year due to the amendments. The economic impact analysis of the CSBFP (Huang and Rivard, 2019) found that CSBFP borrowers, when compared with non-borrowers, experienced significant growth in terms of revenues, profits and employment. These benefits to small businesses, however, could not be quantified with accuracy.

It is important to note that small businesses were not consulted with these estimates, as these amounts are strictly the estimated cost of fee and interest payments paid by small businesses (i.e. borrowers) developed using robust economic models.

Small business lens summary
Table 5: Compliance costs ($M)

Activity

Annualized value

Present value

Borrowers’ fees and interest payment

$41.18

$414.19

Total compliance cost

$41.18

$414.19
Table 6: Administrative costs

Activity

Annualized value

Present value

Total administrative cost

$0

$0
Table 7: Total compliance and administrative costs ($K)

Totals

Annualized value

Present value

Total cost (all impacted small businesses)

$41,175.21

$414,185.03

Cost per impacted small business

$3.64

$36.64

One-for-one rule

While the regulatory amendments will set the parameters for a line of credit, expand the eligible loan classes, and increase the maximum amount and term for equipment and leasehold improvement loans, there are no changes to the existing loan registration, claims or audit processes. Financial institutions will continue to make all loan decisions based on their own internal policies and risk assessments. These regulatory amendments are not expected to result in an increase or a reduction to the administrative burden on Canadian financial institutions or small businesses. No regulatory titles are being repealed or introduced. Therefore, the one-for-one rule does not apply.

Regulatory cooperation and alignment

The CSBFP is a national program aimed at helping Canadian small businesses; therefore, there are no linkages with international agreements nor formal regulatory cooperation initiatives. ISED has reviewed the parameters of other international government loan guarantee programs and the regulatory amendments will bring the CSBFP more in line with the United States’ Small Business Administration, which has offered government guarantees on flexible financing for working capital through their CapLines Program for well over a decade. However, given that international government loan guarantee programs vary greatly in size, structure and scope, achieving full regulatory cooperation and/or alignment is difficult.

Strategic environmental assessment

In accordance with the Cabinet Directive on the Environmental Assessment of Policy, Plan and Program Proposals, a preliminary scan concluded that a strategic environmental assessment is not required.

Gender-based analysis plus

ISED conducted a gender-based analysis plus (GBA+) preliminary scan of the regulatory amendments and concluded they are expected to have a direct positive impact on women and younger small business owners. No negative direct nor indirect impacts are expected.

Overall, CSBFP borrowers have not been found to differ significantly from all Canadian small- and medium-sized enterprises (SMEs) with respect to gender and education. According to the Survey on Financing and Growth of Small and Medium Enterprises (2017), about 63% of CSBFP borrowers are small businesses majority owned by men (64% for all SMEs), while 11% and 5%, respectively, are wholly or majority owned by women (13% and 3% for all SMEs). Women and men have an equal stake in ownership about 21% of the time across both groups of firms. Similarly, both groups have similar proportions of individuals with less than a high school diploma (5% and 7%), a high school diploma (17% and 24%), a college/trade school/CEGEP diploma (34% and 30%), a bachelor’s degree (32% and 26%), or a master’s degree or above (13% and 15%).

While the amendment to improve access to working capital financing is expected to benefit small businesses across all industries, service-based businesses will likely benefit the most. By their nature, businesses in service-based industries generally require more flexible financing options for working capital and less financing for more tangible assets such as real property, machinery and equipment relative to small businesses in goods-based industries. Through consultations, both business and lender stakeholders shared that an increasing number of service-based businesses do not require property or large equipment to carry out their business in a digital economy; however, they do require financing for their day-to-day expenses, such as inventory, supplies and marketing. This amendment will better enable businesses to use the CSBFP to finance their working capital needs. As women-owned businesses are more prevalent in service industries such as retail trade, accommodation and food services, and tourism, while men-owned businesses are more prevalent in goods-producing, construction, transportation and warehousing industries, the introduction of a line of credit and access to working capital financing will likely have a greater benefit for women. As a result, these regulatory amendments are expected to have direct positive impacts on women-owned businesses.

Younger small business owners are also expected to benefit as, according to the Survey on Financing and Growth of Small and Medium Enterprises (2017), CSBFP borrowers are younger and less experienced than small businesses at large. This can be attributed to the fact that a significant proportion of program borrowers are start-up firms of less than a year old. Young entrepreneurs and start-up businesses will particularly benefit from the ability to finance intangible assets and working capital costs through the expanded loan classes and the new line of credit as these costs are typically considered to be riskier to finance, but are essential to a young businesses’ ability to start up and grow.

Given that not-for-profit and charitable organizations have become eligible program borrowers through legislative amendments, the regulatory amendments are also expected to benefit this sector. Through previous consultations, social enterprise experts stated that these organizations generally have a greater need for flexible financing for working capital and business expenses to enable them to provide services to their communities rather than traditional loans for fixed assets. As a result, the amendments will allow social enterprises to better carry out their work and may have indirect benefits for the communities and clients they serve, which are often diverse and disadvantaged groups.

Implementation, compliance and enforcement, and service standards

Implementation

The regulatory amendments will be implemented following their coming-into-force date and publication in the Canada Gazette, Part II, which will align with the coming in force of the Order in Council to implement the remaining provisions of the Budget Implementation Act, 2021, No. 1.

The CSBFP is delivered in partnership with private sector financial institutions. Government officials will provide financial institutions with the updated Canada Small Business Financing Program Guidelines, which will also be posted online, to ensure that they have the necessary information to offer the new financing options to their small business clients. Lender uptake will be gradual as they have indicated that it may take them a couple of months to adapt their processes and procedures (including IT systems) to start using the regulatory changes.

Service standards

The CSBFP has two service standards:

Contact

Innovation, Science and Economic Development Canada
Canada Small Business Financing Program
235 Queen Street
Ottawa, Ontario
K1A 0H5
Email: csbfr-rfpec@ised-isde.gc.ca