A $20-billion loan program designed to ensure banks kept lending to small- and medium-sized businesses throughout the coronavirus pandemic has attracted little interest from borrowers more than six weeks after its launch.
The co-lending program was designed to allow the Business Development Bank of Canada (BDC), a Crown corporation, to share the risk with large banks making loans to struggling businesses. Finance Minister Bill Morneau announced the initiative on March 27 as part of a relief package.
The first of the measures from that package to roll out was the Canada Emergency Business Account (CEBA), which offers interest-free and partly forgivable loans of up to $40,000 through banks, guaranteed by government. That program received a rush of applications, with more than $5-billion in loans to vulnerable businesses approved in its first five days in early April. But with the race to launch CEBA, it took BDC and the banks until late April to create the co-lending program.
Only a small fraction of the funds earmarked for that program have been doled out since then. The precise number is difficult to measure, as BDC has yet to release data about the uptake. But Royal Bank of Canada, the country’s largest lender, has approved and advanced 79 loans through the BDC co-lending program, for a total of $30-million – less than two-tenths of 1 per cent of the allotted $20-billion. And at Toronto-Dominion Bank, uptake is still low, although the bank did not disclose details.
“To our surprise … we got less [credit requests] than expected,” said David Pinsonneault, executive vice-president of business banking at TD. “And I think it’s because [businesses are] focused on cash management and reducing expenses.”
On Tuesday, BDC chief executive officer Michael Denham told a parliamentary committee that the agency depends on the 18 financial institutions that are partners in the program to provide the data, “so I don’t have the volume information just yet.”
There may be several reasons why few businesses have applied. Companies have turned first to programs that offer some form of grant or subsidy, such as CEBA, federal wage support and a commercial rent relief program. By contrast, the BDC co-lending arrangement has no enticements for the borrower, and exists instead as an incentive for banks to keep credit flowing.
In addition, when banks feel comfortable lending to companies with a relatively strong footing, they would prefer to make the entire loan and collect all of the interest payments. “When it’s helpful, we use the government programs,” Mr. Pinsonneault said. “We don’t go to market with the government programs."
The co-loans were originally capped at $6.25-million each, to a maximum of $20-billion in total, but BDC raised the per-loan limit to $12.5-million. BDC funds 80 per cent of the loan using government money, taking on most of the risk, and the bank funds the rest.
Banks are responsible for underwriting the co-loans, and BDC has asked lenders to apply their normal standards and risk guidelines, while also taking into account the extraordinary upheaval created by the novel coronavirus pandemic. That means each bank’s approach to the loans could differ, and some applicants will be turned down.
“[The BDC co-loans] exist for clients that need that little bit extra to get a good deal approved,” said Mike Cussen, vice-president of business credit at Royal Bank of Canada. “It’s not going to make a bad deal good, but it’ll make a good deal bankable."
Some technology companies that applied to the BDC co-lending program have still found they don’t qualify. Like many startups, Toronto-based Bonsai Inc., which facilitates e-commerce for publishers, hasn’t reached profitability yet. So when the company asked RBC about a co-loan, the account manager told them the bank couldn’t underwrite it unless Bonsai could show profits and a clear plan to sustain them, according to CEO and founder Saad Siddiqui.
The company then tried to access a working capital loan directly from BDC, but was warned it could take months to underwrite. Mr. Siddiqui also said Bonsai wasn’t prepared to meet BDC’s onerous loan covenants including personal guarantees, or its detailed requests to prove the impact the pandemic has had on his business.
“It’s such a narrow, impossible test," Mr. Siddiqui said. “We’ve entirely abandoned [asking BDC for relief]. There’s virtually no point.”
A BDC spokesperson, Shawn Salewski, said BDC has made nearly 10,000 direct loans to companies for a total of almost $2-billion since mid-March, separate from the co-lending program.
Some large chain retailers also feel shut out because they rely on financing from U.S.-based lenders, not the Canadian banks taking part in BDC’s program. “If you have a primary banker, and you don’t have an existing financing relationship with a Canadian bank, it can be difficult to generate one in these circumstances," said Karl Littler, senior vice-president of public affairs at the Retail Council of Canada.
Spokespeople for Bank of Montreal and Canadian Imperial Bank of Commerce did not disclose how many loans their banks have made through the program, but both said they are expecting demand will increase in the coming months.
In late May, after banks reported earnings for the fiscal quarter that ended April 30, National Bank of Canada said it had made five loans under the co-lending programs, and Bank of Nova Scotia said it had “approved a number of applicants, but has not extended any loans under this program.”
A large share of the BDC co-loans that have been granted have gone to especially hard-hit sectors that sell discretionary consumer products and services, like retail stores and restaurants. As shuttered businesses prepare to reopen, some will need to install barriers, stock up on personal protective equipment, and re-hire staff – all of which will increase their need for cash and credit.
“You can see this pipe starting to fill. I wouldn’t think this is a failure or it’s taking too long,” Mr. Cussen said. “I think it’s coming and the more we start to re-open, the more parts of the economy turn back on and the businesses open their doors, that’s when we’re going to see the volume come through.”
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