Ottawa eyes credit options to help hard-hit smaller businesses

The federal government is developing additional lines of support for Canada’s small and medium businesses, a sector hit hard and swiftly by the economic shutdown triggered by the coronavirus pandemic.

The measures, which are expected to include additional credit facilities for cash-strapped businesses, are in addition to the emergency stimulus package announced this week – which fell short of some economists’ and business’s expectations.

A source familiar with the discussions said the government is exploring ways to work with the country’s financial institutions to provide a range of financing options, including working capital and lines of credit, to help see companies through the upcoming months of crisis.

The source, who was not authorized to speak about the discussions publicly, said Canada is expected to follow other economies such as Germany, Britain and the United States that have moved quickly to backstop their small-business sectors, which also face decimation as their economies effectively shut down in an attempt to contain the pandemic.

The Big Six banks have already begun to announce measures on their own to support SMBs, including deferring mortgage and loan payments. In addition, the Business Development Bank of Canada said it would offer working-capital loans of up to $2-million with flexible repayment terms to hard-hit businesses, as part of a $10-billion bump to the Business Credit Availability Program announced by Ottawa.

A spokesman for Finance Minister Bill Morneau did not comment on the discussions but referred The Globe to the package announced Tuesday and said the government was prepared to do more.

“Having access to credit is an important part of helping businesses through these uncertain times,” Pierre-Olivier Herbert said.

The government has been in active discussions with hundreds of businesses from all sectors in recent days, ranging from restaurants to aerospace, to understand the effects on their industries amid growing concerns the pandemic’s economic impact could linger for months.

One proposal surfaced Thursday from Canada’s technology sector, which has been one of the bright lights of the Canadian economy. John Ruffolo, vice-chairman of the Council of Canadian Innovators (CCI) lobby group and former CEO of the Ontario Municipal Employees Retirement System’s venture-capital arm, urged the government and big banks to craft a stimulus program for SMBs.

The CCI’s proposal would see financial institutions immediately provide forgivable zero or low-interest loans to their SMB clients – not just in technology, but across all sectors – to tide them over for the next six months, he said. A key part of the proposal would require Ottawa’s support as a backstop for the banks.

Top executives with some of the banks are in favour of the plan, sources told The Globe – but only if the government agrees to backstop measures that would diminish their financial exposure. Any bank support would likely be weighed against prioritizing resources to help other affected sectors.

Small businesses typical operate on thin margins, and many will struggle to cover payroll, rent and loan payments as revenues decline. Ottawa announced measures on Wednesday to encourage businesses to keep employees on by covering 10 per cent of payroll expenses. However, small business advocacy groups called the move insufficient.

The sources are not being identified because they were not authorized to speak publicly about the discussions, which are continuing.

Ottawa announced measures on Wednesday to encourage businesses to keep employees on by covering 10 per cent of payroll expenses. However, small business advocacy groups called the move insufficient.

The CCI’s proposal would have banks skip their normal loan-adjudication process to get cash out the door quickly to help their existing SMB clients keep paying their employees and bills until economic activity picks up again.

At the end of the period, the loan would either be converted into a conventional bank loan with normal repayment terms, or would be purchased by the government at book value. The government could then forgive some loans and treat them as grants for those recipients still in financial difficulty. The idea is modelled after “good-bank, bad-bank” bailout measures that helped resuscitate the economy in the wake of the 2008-09 financial crisis.

“We need a massive injection of liquidity into the economic system and the only distribution channel that could do it immediately are the banks … that have pre-existing relationships” with SMBs, Mr. Ruffolo said, noting that banks have already benefited from a drop in Bank of Canada interest rates.

The idea quickly met with a positive response. On a conference call held by the CCI and open to the media Thursday, federal Small Business Minister Mary Ng told Mr. Ruffolo, “I absolutely am thinking that way as well … you’re not hearing disagreement from me” about the proposal.

When asked on Thursday about options for supporting SMBs, Minister of Innovation, Science and Economic Development Navdeep Bains said “all options are on the table. We need to recognize that the policies and programs that we’re putting in place may need to be adjusted as we deal with this crisis."

Many small businesses that have seen activity grind to a near or total halt amid the pandemic’s spread. That includes “dozens and dozens” of nascent and previously fast-growing companies in the technology sector that reached out to Mr. Ruffolo in recent days, he said.

That is corroborated by data collected this week by Canadian online small-business lender Lending Loop. CEO Cato Pastoll said of the roughly 100 domestic SMB survey respondents, almost two-thirds had seen revenues drop by more than half due to the pandemic, and 92 per cent were concerned about meeting their monthly obligations. Respondents had on average laid off four out of 10 employees.