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Canada Small Business Financing Program
CRFA Response to Proposed Changes

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February 5, 2010

 

The Canadian Restaurant and Foodservices Association (CRFA) welcomes changes to the Small Business Financing Program that will increase access to credit and loans for entrepreneurs wishing to start or expand a restaurant or foodservice business.  Entrepreneurs in the foodservice sector have typically had difficulty accessing loans through financial institutions and relied on the SBFP.  However, in recent years they have found financial institutions increasingly reluctant to use the SMFP for restaurant loans and they are frustrated by their lack of options. 

While most restaurant operators are aware of the SMFP there is a great deal of confusion about how it works.  They are seeking a clear understanding of the parameters of the program and enhanced promotion of the program for both financial institutions and restaurant operators.

 

Canada’s restaurant and foodservice industry represents one of the largest industries in the Canadian economy with annual sales of $60 billion, representing nearly 4% of Canada’s GDP.

With over one million Canadians on its payroll, foodservice is also one of the country’s largest private sector employers.  The industry’s workforce represents 6.4% of the country’s employment, more people than agriculture, forestry, automotive manufacturing and mining, oil and gas extraction combined, and they do so without government hand-outs, bailouts or subsidies.  An additional 250,000 Canadians are indirectly employed by the foodservice industry as suppliers, distributors and consultants.

More than two-thirds of Canada’s restaurants are locally owned and operated by independent entrepreneurs.  They often begin their careers in the industry as youth or new immigrants and through hard work, training and experience, learn every aspect of the business, and eventually start their own businesses and become significant employers and contributors in their communities.  Franchisees, who represent a large portion of chain operations, are also small business people who invest heavily in their neighbourhoods and communities.

It is important to recognize that every one million dollars in restaurant sales creates nearly 27 jobs, making our industry one of the top five job creators in Canada. Every dollar spent at a restaurant generates an additional $1.85 in spending in the rest of the economy – well above the average for all industries in Canada.  And the diverse nature of our industry means the benefits are felt in every community, not just in major centers.

 

Issue #1 - Expanding Eligible Loan Classes under CSBF Program

Restaurant operators are not overly concerned about adding soft costs to SBFP loans.  The program is already too slow and too burdensome and they don’t want to add to the complexity and further limit their ability to access loans.

The possible exception would be franchise fees if there was a simple way of valuing and recovering them (i.e. buy-back from the franchisor).

 

Issue #2 – Measures to Make the CSBF Program More Appealing for Lenders to Use

• Should lenders be allowed to charge conventional lending fees for CSBF loans?  For loan set up? Renewal? Administration?
  
  Restaurant operators would be open to making the parameters and procedures for the SBFP more in keeping with regular loan programs, including fees, provided the fees are reasonable in cost and that this measure will improve accessibility.  Lenders have indicated that SBFP loans do not count toward the bonus targets of loan officers and that by making the parameters and procedures as close to conventional loans as possible, usage of the program will increase.  CRFA would like a commitment from the banking sector that they will include the SMFP as part of their compensation incentives and they will do more to promote usage of the SBFP if these changes are made.
  
  
• Would allowing SBFP loans to be used to finance up to 100 percent of purchase costs change how lenders and borrowers currently use the Program?
  
  This change, together with reducing the proof of purchase documentation to the outstanding loan amount, have been proposed to lessen the government’s legal accountability requirements and in turn administration for lenders.   This change would also benefit borrowers.  Going to 100% would reduce administration time and make it easier for borrowers to track their spending for eligible leaseholds.
  
  
• Removing 2% registration fee and increasing annual administration fee to 2%.
  
  Restaurant operators are not opposed to this change provided it is revenue neutral.  It would reduce the capital required initially but would be more costly the longer the amortization period.   CRFA recommends dropping the interest payment charge after the 5th year (break-even point) to ensure revenue neutrality.
  
  
• Increasing the maximum interest rate on program loans.
  Restaurant operators are primarily concerned with access so are not overly concerned about the upper limit on interest rate charges if it means more institutions lending through the program.  It is understood that it has to be worthwhile for the lenders but not unreasonable for the borrowers.

 

Issue #3 - Measures to Rebalance Risks to Government, Lenders, and Borrowers

Reducing the loss-sharing ratio to 75:25 from 85:15 is a concern because it will result in lenders further retreating from use of the program.

The industry response to increasing the unsecured personal guarantee is mixed.  It is recognized that the risk of fraud decreases as the percentage of the personal guarantee increases and that fraud risk is a significant deterrent for financial institutions. It is also recognized that there must be some “skin in the game” from borrowers.  An unsecured personal guarantee sends a clear signal that could tip the balance on some loans that would otherwise be denied.

On the other hand, restaurant owner/operators are already frustrated that loan assessments seem to be based primarily on the personal assets of borrower and not on track record of the individual within the industry or the performance and profitability of the business.  Requiring additional personal guarantees, particularly if a portion of them have to be secured, may further aggravate this situation.

 

CRFA was surprised to learn that the average bank only makes one SMFP loan per year and that many financial institutions are not interested in understanding the program better, promoting it, or investing in it because it is divorced from their regular loan program and because of its administrative complexity. 

As representative of an industry that is one of the largest users of the program and dependent on the viability of this program, we are prepared to support some of the recommendations by the financial institutions, including some that may increase costs marginally in order to ensure greater access. 

At the same time the industry is looking to Industry Canada and the financial institutions to promote understanding and usage of this program.

As indicated previously the industry is seeking greater clarity about the parameters of the program and recommends the establishment of an industry-specific tool kit or brochure for borrowers that will provide absolute clarity about what is and is not covered and how to qualify.  The information pieces should assume that borrowers do not have a lot of financial experience and should provide examples and practical advice.

In addition, the industry is looking for an increase in the maximum loan amount available to borrowers.  The increase last year from $250,000 to $350,000 for leased premises and to $500,000 for land and buildings was appreciated but a further increase to $500,000 and $750,000 respectively is recommended.

 

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