Policy & Positions Manual
Provincial Issues - Finance
Small Business Access to Capital (2009)
In the fall of 2008, the global financial crisis began to impact on the Canadian economy. Since then, there has been a significant amount of concern amongst small businesses regarding access to capital.
The banking environment has changed and issues regarding access to capital are multi-layered. More than a trillion dollars has been written off in the markets. Since Canadian banks leverage their capital at a rate of 10-20:1, the removal of a trillion dollars in capital on the world market has had the effect of removing ten to twenty trillion dollars from capital available to lend out. By law, Canadian institutions are not allowed to lend out funds that they do not have. Simply put, banks have less money to make loans and lines of credit available than they have in previous years.
On top of this, because of the decreased amount of capital available on the world market, the cost to the bank for borrowing has increased. Those costs need to be reflected in higher interest rates on loans and lines of credit to borrowers.
Finally, third party lenders have retreated from the markets, making capital for new innovations more difficult to access. Borrowers who would normally access third party capital are joining in competition for the decreased funds available through the banks.
Notwithstanding the change in environment, commercial lenders indicate that they are actively lending to stable borrowers and that their lending policies have not changed, though they may be applying the rules more stringently then they may have been when the economy was more buoyant. Because of the nature of supply and demand, with increased demand for financing and decreased supply of capital, banks are picking the best deals they can find and taking care of existing clients with solid repayment financial dealings and good asset backing.
All of this puts pressure on the smaller financial needs of small business. Small business represents 98% of private sector companies in BC, and of those 83% have fewer than five employees. These companies are a good portion of the provincial private sector and make up the bulk of chamber membership. Though they may have viable businesses, the change in market conditions is making it difficult or more expensive for them to access the credit they need. All businesses require some access to credit. However, tightening credit conditions are restricting the entrepreneurship and flexibility of a number of small businesses at the very time that economic recovery is dependent on such attributes.
The Federal Government recognized that there was a role for government to address the gap in credit availability. On November 27, 2008 the Federal Ministry of Finance announced that it would provide up to $3 billion in new credit to Canadian businesses most affected by the financial crisis. Such credit was to be made available through Export Development Canada and the Business Development Bank of Canada. The Chamber is confident that upon implementation of the Extraordinary Financial Framework, medium and large Canadian companies will have improved access to credit. We are, however, concerned that the program will not adequately address the needs of smaller businesses.
Given the prominence and importance of small business to the economy of British Columbia, the Chamber calls upon the Provincial Government to work with financial institutions to develop a program that would ensure that established small business can attain the credit amounts below $250 thousand dollars that they need to continue uninterrupted business operations. Such a measure is important to maintain a stable business environment, employment security and may serve to significant increase British Columbia’s competitive advantage.
THE CHAMBER RECOMMENDS
That the Provincial Government develop a short-term program to ensure access to credit through existing financial institutions for established small businesses in British Columbia.
