Debates of Nov. 28th, 1995

Small Business Loans Act

[The Deputy Speaker]

Is the House ready for the question?

[Some hon. members]

Question.

[The Deputy Speaker]

The question is on Motion No. 2. Is it the pleasure of the House to adopt the motion?

[Some hon. members]

Agreed.

[Some hon. members]

No.

[The Deputy Speaker]

All those in favour will please say yea.

[Some hon. members]

Yea.

[The Deputy Speaker]

All those opposed will please say nay.

[Some hon. members]

Nay.

[The Deputy Speaker]

In my opinion the nays have it.

[Some hon. members]

On division.

[The Deputy Speaker]

I declare Motion No. 2 lost on division. Therefore, Motions Nos. 4 and 6 are also lost.

(Motion No. 2 negatived.)

[Yves Rocheleau, Bloc, Trois-Rivières, QC]

moved:

Motion No. 3

That Bill C-99, in Clause 4, be amended by replacing line 6, on page 4, with the following:

"ty taken".

Mr. Speaker, we welcome this opportunity to discuss the third and last group which deals with the above amendment and for which some background may be useful.

Clause 4(1) of the bill reads as follows:

4(1) Subsection 7(1) of the Act is amended by adding the following after paragraph (e): e .1) prescribing the terms and conditions on which a lender may release any security, including a personal guarantee, taken for the repayment of a business improvement loan;

That is a sore point with us, and that is what we want to change through this amendment. In fact, the proposed amendment is entirely in line with the message we got during the last federal election campaign, when the Liberal Party of Canada had already said in its famous red book that if it were elected, it would ensure that no personal guarantees were required for loans under the Small Business Loans Act.

However, whether it was divine or some other kind of intervention, whether it was a lack of political will or loss of memory-Alzheimer's not being restricted to humans, even institutions will forget, and I think this is very disturbing in the present case-I think the government forgot a promise that must have been welcomed by the business community, especially small business entrepreneurs who are directly affected by the Small Business Loans Act. The promise was that from now on, the Small Business Loans Act would no longer require personal guarantees.

The Liberals forgot, and it is our job to remind them of one of the few promises in the red book that made sense. Asking the borrower for a personal guarantee under the Small Business Loans Act is, like the hon. member for Champlain said earlier, like having a belt-the government guarantee-and asking for suspenders because you are afraid the belt will break and the loan will otherwise be a write-off.

With the 90 per cent guarantee the lender used to have and which will now be 85 per cent, the lender could still expect to avoid severe losses after agreeing to lend money to a small business. However, if the lender can also ask for a personal guarantee, in most cases a home, a bank account, a car or part of the assets of the entrepreur and business owner, we are seeing a kind of security that may be unnecessary and provides what may be excessive guarantees for the lender.

As the hon. member for Durham mentioned earlier, there is always an element of risk involved, and the lender should be prepared to share the risk. In this area, 15 per cent may be riskier than 10 per cent, especially in the case of new or high tech businesses, as we pointed out, but to ask for personal guarantees as well is something to which we object, and we hope the government considers and endorses this amendment.

Another direct advantage is that, if personal guarantees such as a house were not required as security under the Small Business Loans Act, because the government provides a guarantee to the bankers-these assets in the possession of the borrower, in the possession of the manager of the small business, particularly in the case of high tech or exporting companies, which make lenders feel insecure-if those assets were freed up and not used as security, they could be presented to lenders to facilitate obtaining a loan, as security in any negotiations or transactions other than those under the SBLA, the Small Business Loans Act.

The borrower could therefore use these personal assets not required as security to plan future business development, particularly in the case of small high tech or export businesses, where lenders might justifiably feel insecure about the operation or the very nature of the business' activities. Often lenders are not familiar with high tech and export businesses, whose accounts receivable are outside the country and not always easily checked.

The Export Development Corporation is involved as well, but here again with additional administrative costs and delays.

Thus, by eliminating the personal guarantees now required under the SBLA, they could be placed in another context for use by the borrower as security with a lender. This is what we hope the government will accept, and that is why we have presented this amendment.

[Dennis Mills, Liberal, Parliamentary Secretary to Minister of Industry]

Mr. Speaker, it is important for people to understand that to be eligible for a small business loan under the current system the loan has to be applied toward certain conditions. For example, it is not to be used for working capital; it is to be used for the purchase of equipment, leaseholds, things that have true and sustained value.

If a loan is in default under the Small Business Loans Act, that equipment has a value. It can be sold. When the value of that equipment or leaseholds that have been sold has been realized, the

amount that is left over is subject to a 25 per cent personal guarantee.

For example, if you have a loan of $100,000 for equipment, under the Small Business Loans Act you have to have a minimum of approximately 15 to 20 per cent. The amount of exposure right off the bat is $80,000. Of course, you are in the process of paying it down almost immediately because it is always part of a programmed return. If your business goes bad and you at least realize half of the value of the equipment, then your exposure on that $100,000 is approximately $30,000. Then, from a personal guarantee you are only exposed to 25 per cent of that.

Because of the way banks have been dealing in Canada traditionally, there is this mindset right now that when you go to get a loan they want your home, they want your RRSPs, they want your life insurance as security. They want four and five times security for the loan. That is not what we are talking about here.

We are saying under the Small Business Loans Act the personal guarantee is limited to 25 per cent of the amount that is left over after everything has been liquidated. From a normal commercial business point of view I do not see that as a bad thing. It is a big improvement over the traditional type of security that banks would want on most other small business loans.

We are not going to support this motion. The bill is designed in a way that gives much greater flexibility. Once the loan repayment reaches a certain level, where there is security in the assets to cover the exposure, under the current act the personal guarantee, the25 per cent, can be released. Once their exposure was reduced most banks would release the personal guarantee. I believe that is fair and that we should not change that aspect of the bill.

The member for Trois-Rivières has put forward good ideas and thought provoking points. However, on balance the design of the bill is quite solid and will probably do the job we intend it to do.

As this is the last motion, I should like to say that the industry committee is very good. It has had a very tight focus on the issue of access to capital by small business. This is the third time in less than three years the bill has been through the House of Commons. It was amended three years ago by the then Conservative government. By the way, it went through all three readings in the House in one day. We supported the Conservative government in amending the bill three years ago because we believed in the importance of the issue of access to capital and some kind of instrument that would act as a catalyst to sensitize the banks and to push the banks forward.

As much as I support the bill, I am becoming a little concerned that we are creating too much of a crutch for the banking institution. I listened to the critic from the Reform Party this morning. He mentioned that the float capacity in the last two years under the legislation had gone up from $3.5 billion to $12 billion. The total small business float last year for all financial institutions and small businesses in Canada was $28 billion. Now we are suddenly letting the small business float go up to $12 billion, and this is the one the crown guarantees.

In my judgment we are doing the work the banks should be doing. We are taking all the risks of decision making away from banks.

[Elwin Hermanson, Reform, Kindersley—Lloydminster, SK]

Why?

[Dennis Mills, Liberal, Broadview—Greenwood, ON]

The member asks why we are doing it. It is because we realize that small business represents our greatest hope for taking people off unemployment insurance, taking them off welfare and getting them back into a productive state in life where they have dignity and are paying taxes. When we get this fiscal framework together small business represents our greatest hope. The greatest difficulty of small business is getting access to capital.

We are urging, hoping and coaxing banks to get into the small business game, but it is not easy. We have to be a catalyst along the way. I am being very candid in my belief that we must have a heads up on the issue because we are essentially making the work of banks a lot easier by increasing the float to such a large amount and giving that guarantee. We had to do it to spark small business loans activity. It was not happening. What else are we to do? Are we to bring back the Bank Act and dictate to the banks to whom they should lend money? We cannot do that.

[Chuck Strahl, Reform, Fraser Valley East, BC]

We need more banks, more competition.

[Dennis Mills, Liberal, Broadview—Greenwood, ON]

Mr. Speaker, I hear from the Reform Party that we need more banks. I could not agree more. We need more competition in the banks. The problem is how we do that. If they know of a way or have a formula to create more competition for major financial institutions without putting the treasury of Canada at any greater risk we would be the first to listen. The minister responsible for financial institutions is in the House. He would love to hear how to create more competition for financial institutions within the framework of ensuring the financial exposure of the treasury is not put at greater risk.

The minister responsible for financial institutions is from the banking community but he is not from the establishment. He has always been a reformer-

[Some hon. members]

Oh, oh.

[Dennis Mills, Liberal, Broadview—Greenwood, ON]

-and a challenger of the status quo of banks. He has always been there for small business. Speaking of the word reform, a number of us over here are quite proud to be called Liberal reformers.

[John Williams, Reform, St. Albert, AB]

Mr. Speaker, we may have to stray again from the narrowness of the debate on the motion to amend the clause regarding security. Getting back to the motion before us, we must recognize that we need some rules or guidelines by which security may be varied as the loan is reduced. As the hon. member mentioned, it is only prudent after a loan has been reduced by a reasonable amount that we may want to release some of the security taken to grant the loan such as the person's house, car, equipment, office building and everything else.

These types of comments are appropriate to ensure that the financing of small businesses, if they want to raise additional capital at a later date, can be accommodated without being ground down by inappropriate rules and regulations when the loans have been reduced in an orderly fashion.

Speaking in a wider context on the bill, I mention again that I still do not think the point got across to hon. members opposite. They talk about the treasury's involvement as a catalyst for small business lending; about not wanting to put the treasury at too much risk but nonetheless having a role to play; and about the banks perhaps getting off too easy because of the Small Business Loans Act.

I reiterate that the bill will turn the Small Business Loans Act into a no cost service by the government. That strikes me as being strange. I cannot really understand the logic of it. The amendments to the act will require that borrowers carry the cost. Borrowers will have to pay a fee to the banks. The banks will take the fee and pass it on to the government. The government will take the money it has collected and reimburse the banks for what they have lost. That is the end of the line.

Who is left with the tab? The borrowers, the guys who are trying to create jobs, will be left holding the bill to subsidize those that tried but failed, to subsidize the banks that made a wrong decision and to let the government off the hook so that it can say what a wonderful service it is providing in that $12 billion of loans to small business have been guaranteed. Who is paying? It is not the government. It is a tax on successful small business borrowers who have had to pay an administrative fee in addition to interest to subsidize banks and let the government off the hook.

As I said before, and I will say it again, a dollar in the hands of an investor, a businessman or a consumer is far better spent than a dollar channelled through a bureaucrat. I cannot think of any greater illustration of the bill. It has been designed to fulfil the process we are absolutely opposed to. It will channel the money through a bureaucrat and back to the private sector at no cost to the government. Who ends up paying the bill? It is the private sector. The small businessman is being asked to carry an additional loan in the name of allowing the government to take credit for providing something it is not providing.

I am fully in favour of helping small business. I had an accounting business before I became a politician. I served small business people in my community. I was a fan and still am a fan of small businesses. They are the generators of employment. They are the innovators, the creators and the people who see a niche, develop it and make money. They are the ones who are the driving force of the economy, the ones we depend upon to employ people so that taxes can be paid. They are the people who have given us our standard of living and our prosperity.

Again they are being loaded down with another tax so the government can take credit for helping small business. Small businesses certainly need a hand. They need to be motivated as much as possible. We have to encourage lower taxation and encourage them to meet the new challenges because they are the ones who ultimately accept the risk. They are the ones who lose their life savings, their houses, their businesses and their investments; they lose everything. They are the ones who are prepared to put their financial lives on the line. Many do and unfortunately many fail.

As I have also said before and will say again, the cost of eliminating failure is equal to the price of success. We cannot have a success story without having some failures. Our challenge is to try to reduce the failures but we will never eliminate them.

If the government thinks by churning money through its books the system will be made better, I suggest we have a new method of rethinking how we are to motivate society, to live up to the challenges of the 21st century, to live up to the global economy, to market Canadian expertise and talent around the world and to generate an increased gross domestic product which will allow us to come to terms with our debt and our deficit.

These are the challenges we should be addressing, not the idea of smoke and mirrors through the SBLA.

[The Deputy Speaker]

Is the House ready for the question?

[Some hon. members]

Question.

[The Deputy Speaker]

Is the House ready for the question?

[Some hon. members]

Question.