Big problem for small business
Pandemic exploits weaknesses in government intervention plans,
COVID-19 has not just pushed healthcare systems to their limits, but it threatens the economy by exploiting the significant blind spots and weaknesses of government intervention and our bank lending system.
Instead of leading in the crisis and giving clear direction to the banks on how they are to help Canadians and small businesses, the Canadian government has instead improvised financial relief programs and come up with policies where they have effectively handed control over to the big banks.
Business relief initiatives such as the $40 billion Business Credit Availability Program (BCAP) were trumpeted by the federal government to help vulnerable businesses with financing needs due to COVID-19. However, the BCAP program is being underwritten as if the banks were still lending to businesses under normal circumstances.
While the government through Export Development Canada (EDC) is backing 80 per cent of the BCAP loans, the big banks administer the program while providing only 20 per cent for the remainder of the loan.
The loan guarantee by the government is only for two years, and then the loan is underwritten entirely by the bank.
The government guarantee is not as deep or long lasting as the government PR efforts portray to the public.
Importantly, the bank will treat the loan application as if it is underwriting (or guaranteeing) 100 per cent of the loan and taking on all of the risk, so that all the normal lending and underwriting is the same as it was pre-pandemic. A struggling business, then, would not be financeable under BCAP.
For most banks, it is necessary that the business needs to be profitable for at least two years to qualify for BCAP, which eliminates startups, new businesses, or businesses that have only been profitable for the one year before the pandemic.
Notably, the banks are more interested in lending money to the business if the business is financially sound and even profitable due to the crisis (in this case, if it was a grocery store).
As it stands now, BCAP is geared toward large and medium enterprises with high revenues and not the small businesses that drive Canada’s economy and are the lifeblood of our communities, which earn $1 million or less in sales and are asking for relatively small loans of up to $100,000 to survive the next six months of the pandemic.
For instance, the minimum loan for BCAP at TD Bank has to be at least $500,000, which effectively eliminates mom-and-pop businesses.
Because of a lack of direction by the federal government on how to administer the loans, the commercial lending departments of each of the banks set their criteria, favouring medium and large enterprises, and freezing out small businesses.
Small businesses and Canadians deserve better and transparency from the banks.
Just as was the case with mortgage deferrals where 500,000 Canadians applied for deferrals to avoid the risk of losing their homes, Canadian homeowners only discovered the banks capitalized or added the deferred interest onto the mortgage, which ultimately profits the banks as they get to charge interest on top of the deferred interest.
The other twist from the banks was that many Canadians who are small landlords who own a rental property would not qualify for the six month mortgage deferral. The government had failed to mandate or specify the terms of the mortgage deferrals, a policy oversight that was exploited by the banks who proceeded to limit their exposure to helping these Canadians in need.
As we have seen with BCAP and mortgage deferrals, the banks always ensure they come out on top and make more money, particularly if the government puts them in the driver’s seat on lending.
On the horizon, there is a new colending program between The Business Development Bank of Canada (BDC) and the banks about to be announced for small to medium businesses.
It is important for the government to establish clear rules for banks to give the money to small businesses and struggling Canadians and to ensure those loans are being properly administered by the banks.
This also requires the federal government to provide clear direction to the banks by forcing the banks to expand their underwriting policies to take on more risk to help those businesses that are in need and vulnerable.
If the government fails to lead, we have seen the banks tend to just enrich themselves and their large clients.
This has happened with the business lending programs in the U.S. where all of the relief loans for small businesses went to large corporations and chains, requiring a second bailout. It can and will happen in Canada if we do not have proper oversight and government policies on lending and guidelines for banks in place.