Small business challenges continue

Recent report indicates small businesses are borrowing more and more taxpayer-backed loans from the government. Photo credit: Pexels/Andrea Piacquadio


Despite some economic indicators that Canada’s economy is not doing too badly considering a general global slowdown, the state of small business does not seem to be very positive. A recent report from the federal Industry Department found that in 2022, data from the principal federal small business loan guarantee program showed a whopping 41 per cent increase from the previous year in the value of taxpayer-backed loans to small businesses under the Canada Small Business Financing Act. 

The Industry Department report attributed this significant change to the fact that pandemic-related business support programs wound down in 2022 relative to the previous year, but there is likely much more involved in the growth of small business borrowing needs. 

Throughout the pandemic, smaller firms were treated much more negatively than larger businesses, typically shut down or greatly restricted in their operations while big businesses were permitted to continue to stay open. As well, some of the major government programs to support small businesses were poorly designed or overly complex such that many businesses could not take advantage of them. Many smaller businesses only survived by taking on debt, while many did not survive at all. 

Furthermore, businesses only access the Small Business Financing program if they are truly desperate, as these loans are more costly than a conventional bank business loan. The program underwrites loans of up to $1.15 million and includes access to $150,000 lines of credit. The cost of these loans is the prime rate plus three per cent – currently about 9.7 per cent, and the lines of credit cost 11.7 per cent at current rates. This is considerably higher than a standard small business bank loan, which is not inappropriate considering that the cost should be higher to obtain a taxpayer guarantee. For 2022, the average size of the loan was just under $250,000. 

Small businesses represent about half of Canada’s Gross Domestic Product and total employment, and account for about 75 per cent of the net new jobs created in the economy.  The Small Business Financing program has historically had a relatively low rate of default considering the large sector of the economy they support. For instance, following the 2008 economic meltdown, defaults were just over $176 million, which is not unreasonable considering the depth of that downturn. Data show that at any given time, only about 50 per cent of small businesses owe money in the form of loans or lines of credit. 

A majority of small businesses are supported by personal finances or funds from family. Most small firms do not believe they are well served by the banking community, so do their best to avoid bank financing. Accessing government loan guarantee programs is equally distasteful to most small businesses, which makes the recent jump in applications to the Small Business Financing program even more worrisome. 

Many economists, including those at the Bank of Canada, are continuing to forecast a recession for Canada this year. Considering the fragile state of the small business sector, this is going to be a challenging time. Canadian small businesses have shown their resilience consistently in the past, and will undoubtedly do so again. However, this sector has not been given many breaks from governments in terms of tax reductions, red tape alleviation or other helpful measures in recent years, while we have seen many billions in corporate welfare meted out to highly profitable large companies. 

It might be a good time for governments at all levels to consider that large chunk of the economy that doesn’t get those big subsidy dollars but creates lots of jobs and wealth for Canada. 

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