Evidence of meeting #44 for Finance in the 43rd Parliament, 2nd Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was program.
A recording is available from Parliament.
3:05 p.m.
Manager, Policy, Canada Small Business Financing Program, Department of Industry
On default rates, I would make the distinction between a default rate and a loss rate, default being the number of loans that default—
3:05 p.m.
Manager, Policy, Canada Small Business Financing Program, Department of Industry
—and loss rate being the value of money.
The default rates are traditionally at about 11% to 13% in number. On the loss rate, it's usually between 6% and 8% on the value overall. You need to take into consideration, too, that there are revenue streams that come in on this program as well. We have a 2% registration fee, we have a 1.25% registration fee, and over the last five-year period this program has been net-positive from a cost-recovery perspective. It hasn't been a drain on the fiscal framework per se. We're averaging over the last five years probably about a $5-million to $10-million surplus each year.
During COVID—
3:05 p.m.
Conservative
Ed Fast Conservative Abbotsford, BC
Yes, during COVID, has that loss rate remained the same or has it increased?
3:10 p.m.
Manager, Policy, Canada Small Business Financing Program, Department of Industry
It has remained the same to a large extent. We are on track and it's business as usual. That said, we certainly realize and are planning for higher than expected losses. One of the big beneficiaries of this program is in the accommodation and food and beverage services sector. As you know, those guys have been the hardest hit, so we're expecting quite a number of claims to come in.
As you can imagine, when the loans go into default, the financial institution has to realize the assets, realize on the personal guarantees, and at that point in time, submit a claim to us. We go through the claim and then process the payments. There's probably a six- or 12-month lag period between businesses going into default and us realizing and paying the claims.
At this point in time, we're flat or maybe a tiny bit up, but we're expecting this year and next year, particularly as some of the government support programs decline, that those numbers and values of claims will increase.
3:10 p.m.
Liberal
The Chair Liberal Wayne Easter
Just before I go to Peter Julian, I have a question.
Steve, on the personal guarantees, you might not know the answer to this, but given COVID, have personal guarantees gone up? I hear from businesses that are giving the personal guarantees now to the financial institutions that they didn't have to two years ago. When you have to personally guarantee everything you own, it's a problem.
Are you finding they're going up, or do you know?
3:10 p.m.
Manager, Policy, Canada Small Business Financing Program, Department of Industry
I'm not 100% sure on the numbers, but I do know it's an optional personal guarantee that the financial institution can ask of the small business borrower. It's not a mandatory requirement of the program. I think it's an individual financial institution requirement and decision, and I think it depends on a case-by-case basis.
3:10 p.m.
Liberal
The Chair Liberal Wayne Easter
Yes, I agree with you that it's optional, but as one who has signed them many times, it's not optional if you want the money. It's that simple.
You put your family, your house, everything at risk when you sign a personal guarantee. For you as a business, you have to have the money, so you're going to do it. That's the situation in our heads from the business end.
Peter Julian, please go ahead.
3:10 p.m.
NDP
Peter Julian NDP New Westminster—Burnaby, BC
Thanks, Mr. Chair.
We haven't talked about the net of assets in terms of loan loss, and I'm quite stupefied by this. Did I hear correctly that 100% of assets in the case of a loan-loss provision or guarantees go to the banks, and then whatever is left over is picked up 85% by the federal government?
3:10 p.m.
Manager, Policy, Canada Small Business Financing Program, Department of Industry
The way it works is this. I'll give you an example. They register the loan with us. If the loan goes into default, they have to realize on all the assets to minimize the loss and maximize the recoveries. Then they have to realize on the personal guarantees. Let's just say, for example, it was a $500,000 initial loan, and it goes into default right away. The bank would realize on the assets and bring that loss down to perhaps $200,000 or $300,000. Then they'd realize on the personal guarantees and bring it down again to $200,000 or $100,000. Then that $100,000 loss, net of assets and personal guarantees, would be submitted to the government, and we would pay 85% of that.
3:10 p.m.
NDP
Peter Julian NDP New Westminster—Burnaby, BC
Thank you for that, but the federal government actually provides the money in the first place.
3:10 p.m.
Manager, Policy, Canada Small Business Financing Program, Department of Industry
No. It's the financial institution's money.
3:10 p.m.
Manager, Policy, Canada Small Business Financing Program, Department of Industry
We facilitate it. It's a loan guarantee program, so it's their money. It's giving out dollars that would otherwise not be available in the absence of the program.
3:10 p.m.
Manager, Policy, Canada Small Business Financing Program, Department of Industry
Yes.
3:10 p.m.
NDP
Peter Julian NDP New Westminster—Burnaby, BC
You're right. It would be pretty outrageous if it was federal government funding going to that same financial institution.
Generally speaking, you've given us a good example where 80% of the value of the loan and loan losses was actually picked up through personal guarantees and assets. Generally, do you have an average of what percentage of a loan loss is actually picked up through the guarantees and through assets?
3:15 p.m.
Manager, Policy, Canada Small Business Financing Program, Department of Industry
I don't have that figure readily available, Peter. I do know that the vast majority of these loans get paid down and that the average claim sizes coming in are in the order of about $50,000 to $60,000 on the claims. The loans, on average, are about $250,000 to $300,000, so it's probably about one-sixth, either paid down through paying off or through realizing on the assets and the personal guarantees. The remainder is about one-sixth.
3:15 p.m.
NDP
Peter Julian NDP New Westminster—Burnaby, BC
Thank you. That's helpful. It's not a program I know a lot about, so that's a helpful detail.
3:15 p.m.
Conservative
Tamara Jansen Conservative Cloverdale—Langley City, BC
I want just a clarification. This is a program that is meant to encourage banks to help struggling small businesses. Is that correct? So, there's a bit more risk involved in these loans than there is in a regular small business loan.
3:15 p.m.
Manager, Policy, Canada Small Business Financing Program, Department of Industry
That's exactly right. It's designed specifically to facilitate access to financing that would otherwise be unavailable from the financial institutions. If they were a good prospect, etc., we would imagine that they would be financed through conventional sorts of purposes. It's only when they get through the risk tolerance level, which is a little bit higher than what they would accept, that would they tend to use this program.
3:15 p.m.
Conservative
Tamara Jansen Conservative Cloverdale—Langley City, BC
What constitutes a riskier loan? Is that something that you have set the parameters of, or has the bank?
3:15 p.m.
Manager, Policy, Canada Small Business Financing Program, Department of Industry
The parameters wouldn't necessarily be established on that, but I will tell you that a riskier loan would be one where the small business is a start-up. It doesn't have any collateral. It doesn't have any credit history. With it being a start-up with very little money to put into the game.... The banks have these credit-scoring models that they assess risk with. It could be the industry sector; there are certain industry sectors that are a little more risky than others. The types of assets that are being financed could be a little riskier than others. If you're financing real property, for example, that's a lot less risky than if you're going to finance leasehold improvements in the accommodation, food and beverage services sector.