Finance Minister Chrystia Freeland’s department yesterday approved taxpayer-guaranteed lines of credit for small business borrowers at 9% interest. “Lines of credit are inherently riskier,” wrote staff..“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,” the finance department wrote in a Regulatory Impact Analysis Statement. The department estimated about 15% of borrowers approved for guaranteed lines of credit will default..According to Blacklock's Reporter, changes came with final amendments under the Canada Small Business Financing Act first drafted last April 2. New regulations would offer taxpayer-guaranteed lines of credit up to $150,000 at prime plus 5% interest. The Bank of Canada prime rate is currently 3.7%. Regular loans under the program are charged at prime plus 3%..“The flexibility to charge a higher interest rate for the line of credit will ensure financial institutions offer this new product option to their small business clients,” said the Analysis Statement. “Although borrowers may be paying a much higher interest rate they would be getting access to much needed flexible financing that would otherwise be unavailable.”.The program guarantees 85% of eligible small business loans approved through banks and credit unions. Borrowers pay a 2% registration fee and 1.5% annual registration fee..Loan defaults under the program cost $176.4 million after the 2008 recession, according to accounts. Figures on losses due to the COVID recession have not been disclosed..New rules approved yesterday also raised limits on loans for equipment and fixtures from a maximum $350,000 to $500,000 “to better reflect the current costs,” wrote staff. Terms of traditional loan repayment schedules were extended from 10 to 15 years..“In total lenders are expected to issue an additional $520 million in lines of credit and non-real property loans with a loan coverage period of 15 years for a total $1.82 billion in annual lending,” said the Analysis Statement, adding: “It was assumed the rate at which borrowers defaulted on loans was 10% for non-real property term loans and 15% for lines of credit.”.The loan program dates from 1961 and has “remained largely unchanged since the program’s inception,” wrote staff. “However, small businesses have evolved.”.The largest known fraud under the program was a 2017 scheme involving a group of Toronto criminals who borrowed $2.8 million for equipment loans using false invoices and financial statements. Four people were imprisoned in the fraud..“Banks and the taxpayers were all victims,” the Ontario Court of Appeal wrote in judgment in the case in 2020. “There were multiple victims, the principal ones being the Canadian taxpayer.”
