EVALUATION OF THE LOAN AND INVESTMENT PROGRAM

Transcription

1 EVALUATION OF THE LOAN AND INVESTMENT PROGRAM Final Report Western Economic Diversification Canada April 2010 Prepared By: Ference Weicker & Company Ltd West Georgia Street Vancouver, BC V6B 4M9 Tel:

2 EXECUTIVE SUMMARY EXECUTIVE SUMMARY INTRODUCTION The Loan and Investment Program (LI Program) is designed to encourage independent Western Canadian financial institutions (Capital Providers) to make loans to higher-risk small businesses that may otherwise have trouble accessing capital. Under the Program, Western Economic Diversification (WD) enters into agreements with select Capital Providers and WD contributes funds to share in the loan or investment losses incurred when lending to higher-risk clients. The LI Program was established in 1996 and has carried on until present, subject to a number of modifications along the way. The current program authority ends on December 31, The purpose of this evaluation was to conduct a comprehensive evaluation of the LI Program to address a series of evaluation issues and questions in the areas of program relevance and performance (efficiency, effectiveness and economy). MAJOR FINDINGS AND CONCLUSIONS The major findings and conclusions arising from our review are as follows: 1. The majority of interviewed WD staff, Capital Providers, similar programs representatives, other stakeholders and clients reported there is a need for the Program. The strong need for this type of program was attributed to: The difficulties that target clients have in accessing capital because of the issues such as limited collateral, poor credit ratings, limited track records and experience of the business principals, and other characteristics of the businesses. The need to reduce the level of risk for Capital Providers before they are willing to fill the gap in funding by providing loans to the target groups. The economic impacts that can be generated from such loans for Western Canada in the form of economic growth, employment and exports. Interviews with key informants as well as the literature review confirm that the need for the Program has increased over the past few years, primarily as a result of the recent economic downturn and associated tightening in the credit markets. 2. The LI Program is consistent with the priorities of WD and the Federal Government and is widely considered to be a necessary and legitimate role for the Federal Government. The Program contributes to the WD Program Activity Architecture, particularly to the activity, Business Development and Entrepreneurship, as well as to the sub-activities of Access to Capital, Improve Business Productivity and Technology Adoption & Commercialization. All of these activities contribute towards building a competitive and diversified economy in Western Canada and a strengthened Western Canadian innovation system. In addition, the Program is consistent with the Government of Canada s current priorities of Stimulating the Economy and Strengthening our Financial System. Canada s Economic Action Plan includes initiatives aimed at strengthening the financial system and improving access to credit. Evaluation of the Loan and Investment Program Page i

3 EXECUTIVE SUMMARY 3. Overall, the LI Program is viewed as successful in achieving its objectives. WD staff, Capital Providers and other stakeholders noted that: The Program has encouraged Capital Providers to provide financing with flexible terms to small businesses that would have difficulty in accessing capital from conventional sources. From the beginning of the Program in 1996 until March 2009, over 3,400 loans and investments have been approved and $259 million has been disbursed. The Program has generated incremental economic activity in the form of capital investments, revenues, jobs and taxes. The Program has facilitated the establishment and further development of many small businesses, many of which have grown to become large and successful firms. Despite the high-risk nature of the loans, the default rates associated with most loan funds have not been unreasonably high. Some of the key factors that have contributed to the success of the Program include the presence of strong relationships between the Program partners, the commitment of Capital Providers and WD to the Program, the level of autonomy and flexibility built into the Program, and the availability of other support services to clients (e.g. business counseling and assistance with developing business plans). 4. By sharing the costs of loan losses, WD has encouraged Capital Providers to take on more risk and approve loans to target clients that they otherwise would not have provided. The results of the review indicate that: The characteristics of the target clients for the loan funds under the LI Program do vary from those of typical business loan clients. The approval criteria for the LI Program loan funds can vary significantly from the criteria used in approving conventional commercial loans. Capital Providers manage their LI Program loan portfolios differently than their other types of business loans. The interest rates for the loans under the LI Program tend to be higher than those for conventional commercial loans. The terms of the loans issued under the LI Program tend to be more flexible than those for conventional commercial loans. The results of the review indicate that most loan clients would not have been successful in obtaining a loan in the absence of the LI Program: Over 20% of the clients had applied unsuccessfully for funding from other sources while most others believed that it was unlikely that they could have obtained funding elsewhere. The clients were, on average, only 35% confident that they could have obtained their loans Evaluation of the Loan and Investment Program Page ii

4 EXECUTIVE SUMMARY elsewhere (e.g. from banks or other financial institutions) if the Program had not been available. Capital Providers stated that it was even less likely that clients could have obtained funding from their respective institutions (23%) or any other source (28%) in the absence of the Program. 5. As a result of taking on higher levels of risk, the percentage of loans written off tends to be significantly higher for the LI Program supported loans than for other types of business loans. The write-offs for the loan funds administered by the sampled Capital Providers averaged about 12%. From the inception of the Program through March 2009, about $33 million of the approximately $259 million in loans and investments had been written off (equal to about 13%). The default/write-off rate for loans supported by WD tends to be higher than that for commercial loan portfolios of the Capital Providers. The conventional business portfolios are managed quite conservatively and, as a result, default and write-off rates tend to be relatively low. Some Capital Providers indicated that the default/write-off rates for WD supported loans can be three to four times higher than their conventional commercial loans. 6. The clients are generally very satisfied with the loans and other assistance they have received from the Capital Providers under the LI Program. In addition to the loan or investment, 29% of the LI Program clients reported that they received additional assistance from the Capital Provider in developing their business. The most common types of additional services included one-on-one business counseling, assistance with the development of business plans, and participation in a training program or seminar. Capital Providers were credited with helpful and professional staff/service/support, flexible loan terms, and fast loan processing times. Clients who had been denied access to capital at other financial institutions and community organizations were able to secure the necessary capital through the WD supported funds and, as a result, were able to establish and develop their business. The flexible loan terms ensured that client businesses were not burdened with strict loan use and repayment requirements. The business counselling services provided to clients were considered particularly helpful in fine-tuning business plans and assisting in various aspects/operations of the business. 7. The loans and other assistance have generated significant economic impacts in terms of business development. The loans and other assistance provided by the Capital Providers to loan clients help businesses become more established and grow. Assessing the impact of this assistance is complicated by the fact that the impacts are not limited to one year (the businesses may continue to grow and prosper well into the future) and most clients receive more than one loan and service that impacts upon them (e.g. they may obtain one or more loans, receive business counselling and participate in training). The results of the research are summarized below. Vancity/Vancity Capital loan funds (36%) and Community Futures (17%) accounted for the majority of the sampled clients. The revenues of the businesses tend to grow each year that the operations continue. The majority of impacts are incremental in that they would not have occurred in the absence of the support provided by the Program. Evaluation of the Loan and Investment Program Page iii

5 EXECUTIVE SUMMARY Business survival rates decline over time. 8. The economic return on the investment made by WD has been significant. The costs of the LI Program to WD are low, consisting primarily of: Staffing costs at WD. Over a five-year period, the operating budget for the Program total $1.2 million (an average of $240,000 per year). The Program has only one full-time staff at the regional office in Manitoba. The Program Manager spends between 40% and 60% of his time on the LI Program. While there are no full-time staff in the three other Western Canadian provinces, WD staff who also work in other program areas serve as designated LI Program contacts in each of the three provinces and generally spend between 2% and 10% of their time on the LI Program. WD s share of the loan losses. From the inception of the Program through March 2009, $37.3 million of the $258.9 million in loans and investments had been written off (equal to 14.4%, the amount written off includes $4.4 million in estimated future losses), of which, WD s share was $26.9 million (equal to 10.4%, the amount written off includes $3.3 million in estimated future losses). At this rate, the cost to WD of the $90.1 million in loans provided between and would be $9.4 million. By using private sector expertise and loan capital, the LI Program creates more cost-effective access to risk capital than direct government lending. Including the operating costs and loan losses, the costs of the LI Program would be about $10.6 million over five years. The LI Program costs relatively little since WD does not directly provide funding to businesses. Instead, the Program taps into the resources and expertise of participating Capital Providers to stimulate the flow of capital to businesses that generally find it challenging to access funds. Program administration costs are low since Capital Providers handle bulk of the work associated with loan screening, processing, monitoring and reporting. Consequently, the Program provides an excellent return on investment for WD. Over a five-year period, the LI Program generates $9 in new loans for every dollar provided by WD and $19 in investments from other sources for every dollar provided by WD (a total investment of $28). RECOMMENDATIONS The recommendations arising from the evaluation are as follows: 1. The Department should coordinate opportunities for participating Capital Providers to discuss and share best practices related to fund administration. 2. The Department should formulate a performance measurement and tracking strategy for the Program. 3. The Department should give Capital Providers more flexibility over the funds they disburse as well as introducing new loan instruments. Evaluation of the Loan and Investment Program Page iv

6 TABLE OF CONTENTS Introduction 1 Background 1 Purpose of the Evaluation 3 Method of Study 3 Challenges and Limitations 4 Structure of the Report Summary of Findings 5 Issue #1: Continued Need for the Program 12 Issue #2: Alignment with Government Priorities 12 Issue #3: Alignment with Federal Roles and Responsibilities 14 Issue #4: Achievement of Expected Outcomes 27 Issue #5: Demonstration of Efficiency and Economy Recommendations 41 Recommendations

7 INTRODUCTION I. INTRODUCTION A. BACKGROUND 1. The Loan and Investment Program Under the suite of WD s entrepreneurship activities, the primary objective of the Loan and Investment Program (LI Program) is to increase access to risk capital for emerging and growth-oriented small and medium-sized enterprises in Western Canada. The LI Program enables WD to partner with independent Canadian financial institutions (e.g. credit unions, trust companies, venture capital firms, the Business Development Bank of Canada and Farm Credit Canada), to offset a portion of the risk they experience when lending to, or investing in, small businesses in Western Canada. WD contributes funds to share loan or investment loss expenses, which offset a portion of the higher risk associated with eligible loans and investments and leverages significant private sector financing capital by providing funds to Capital Providers to then finance higher risk clients who would otherwise have trouble accessing capital. Each Capital Provider funds its own program and makes the decision on all loan approvals. As part of the program, WD and the Capital Provider may enter into business alliances with other entities to share in the financial risk of the loans/investments. The LI Program was established in 1996 and has carried on until present, subject to a number of modifications along the way. Compared to direct government lending programs, the LI Program is costeffective in leveraging private sector loan and investment capital and expertise while limiting WD s costs to its share of losses on the loans and its own low operating expenses. From the beginning of the program in 1996 until September 2008, WD's loss support contribution of $37 million has leveraged 3,291 loans totalling $250 million. It is estimated that this financing has helped businesses create more than 7,200 jobs and increase revenues by $910 million. The current program authority ends on December 31, Program Logic Model A logic model summarizing the activities, outputs, and intended impacts of the LI Program over the immediate, intermediate, and longer-term is provided on the following page. As indicated, the major activity of the LI Program is to provide Loss Support Contribution in order to encourage private and public sector Capital Providers to finance higher risk Small and Medium-sized Enterprises (SMEs) in Western Canada who would otherwise have trouble accessing capital. The key outputs generated from this activity are a series of agreements with Capital Providers to facilitate the disbursement of loan or venture capital to SMEs. The immediate impact of the Program is incremental debt or equity financing (>$2 leveraged per $1 WD contribution) for Western Canadian SMEs that have difficulty in obtaining financing. In the intermediate term, the Program is intended to contribute to greater revenues, employment, and exports among its SME clients. Over the longer-term, the Program will result in a stronger economy in Western Canada and, therefore, in Canada as a whole. B. PURPOSE OF THE EVALUATION The purpose of this project was to conduct a comprehensive evaluation of the LI Program in order to address a series of evaluation issues and questions in the areas of program relevance and performance (efficiency, effectiveness and economy). Evaluation of the Loan and Investment Program Page 1

8 INTRODUCTION LI PROGRAM LOGIC MODEL Activity Provide loan or investment loss support to private and public sector Capital Providers in order to leverage funds in financing higher risk SMEs in Western Canada Output Agreements with Capital Providers to disburse loan or venture capital Immediate Impact Incremental debt or equity financing (>$2 leveraged per $1 WD contribution) for Western Canadian SMEs that have difficulty in obtaining financing Intermediate Impact Greater revenues, employment, and exports among SME clients of the LI Program Longer-term Impact Stronger economy in Western Canada and, therefore, in Canada as a whole Evaluation of the Loan and Investment Program Page 2

9 INTRODUCTION C. METHOD OF STUDY The evaluation was conducted in three major phases. The purpose of Phase I was to develop a detailed work plan which was then implemented in the subsequent phases. Phase II consisted of the field research while Phase III focused on analyzing the information and data collected and preparing reports. The specific steps that we undertook in Phase I of the project are as follows: Conducted an initial meeting with the Evaluation Working Group; Obtained a detailed understanding of the LI Program by reviewing program documentation as well as conducting preliminary interviews with representatives of WD involved in management and implementation; and Developed a detailed work plan which included a profile of the LI Program, defined the evaluation issues, questions, indicators, data sources, methodology, and data analysis plan, and presented the data collection tools which were used in the evaluation. The major components of the field research undertaken in Phase II included: An extensive literature review to address specific evaluation questions regarding the need for the LI Program; A literature review on alternative programs and models; Collection and review of Program data provided by Capital Providers and WD; Interviews with 82 key informants including 14 WD representatives, 24 Capital Providers, 15 representatives of similar programs and 29 other stakeholders (small business financing experts/program staff and economists in Western Canada); and A survey of 271 clients which received loans or venture capital under the Program. The specific steps we undertook in Phase III are as follows: Prepared a PowerPoint presentation and presented the preliminary findings to the Evaluation Working Group; Conducted a series of four focus group sessions in Winnipeg, Saskatoon, Edmonton and Vancouver. The focus group participants included representatives from Capital Providers, WD staff, similar programs and other stakeholders; Conducted eight case studies of companies that obtained financing from the LI Program Capital Providers; Conducted detailed data analysis to answer the evaluation questions and prepared the first draft of the evaluation report as well as a series of reports focused on each line of evidence; and Conducted additional data analysis and made necessary revisions to the report based on the comments received. D. CHALLENGES AND LIMITATIONS Obtaining the population lists of clients from Capital Providers had been a major challenge. We contacted a sample of 14 Capital Providers that disbursed loans and investments from 21 funds during the time frame covered under this evaluation. The majority of Capital Providers had privacy agreements in place with their respective clients, preventing them from sharing client contact and financing information with a third party. In order to comply with the privacy covenants, some Capital Providers had to contact their clients individually to obtain client consent prior to releasing contact and financing information to us. Some other Capital Providers sent mail-outs to give their clients the option to opt out of our survey by a certain date prior to releasing contact and financing information to us. As a result, the process of obtaining client population lists was prolonged. In addition, it had been difficult to locate the appropriate Capital Provider staff for the funds Evaluation of the Loan and Investment Program Page 3

10 INTRODUCTION that had expired. In many cases, the staff involved with the expired funds were no longer working at the Capital Provider organizations, making it challenging to locate the documents related to the expired funds. Furthermore, for pooled funds like the Community Enterprise Investment Fund and the Growth Start Fund, it was necessary to contact each participating Community Futures office individually to obtain client contact and financing information. While obtaining the population lists of clients took longer than expected, the delay was necessary to ensure a large enough client sample size in order to extrapolate the survey findings. The full economic impact of the program (in terms of revenues, employment, wages and exports) cannot be assessed from the data the program routinely collects. Although the client survey data provided some relevant sample information, the lack of comprehensive revenue and business survival information precluded any accurate estimation of economic impact. Until appropriate data is collected at baseline and at the end of the period for which the client receives assistance, we cannot measure success related to the intermediate outcomes outlined in the program s Performance Measurement Framework; the intermediate outcomes commit to increased revenue, employment and exports among small/medium sized businesses funded under the Loan and Investment Program. Furthermore, the LI Program is one of many factors influencing a company s success and this evaluation investigates the contribution of the LI Program to the achievement of outcomes. Another limitation or challenge was the length of time since the loans and other assistance were provided to some clients. The elapsed time made it difficult for some clients to recall certain data such as the total amount that was invested in their business at the time the loan was received or other details such as their revenues prior to receiving the loan. However, for most issues, clients were able to recall the importance and impacts of the loans and other assistance provided. E. STRUCTURE OF THE REPORT This report is divided into three chapters. Chapter I provides an overview of the evaluation in terms of its background, purpose, and methodology including challenges and limitations. Chapter II presents the major findings of our evaluation by the core five evaluation issues related to continued need for the Program, alignment with government priorities, alignment with federal roles and responsibilities, achievement of expected outcomes, and demonstration of efficiency and economy. Chapter III outlines the recommendations arising from our review. Evaluation of the Loan and Investment Program Page 4

11 II. This chapter summarizes the major findings of our evaluation by the core five evaluation issues related to continued need for the Program, alignment with government priorities, alignment with federal roles and responsibilities, achievement of expected outcomes, and demonstration of efficiency and economy. ISSUE #1: CONTINUED NEED FOR THE PROGRAM 1. The majority of interviewed WD staff, Capital Providers, similar programs representatives, other stakeholders and clients reported there is a need for the Program. When asked to rate how much of a need there is for a program like the LI Program, on a scale of 1 to 5, where 1 is no need at all, 3 is somewhat of a need and 5 is a major need, the majority of the WD staff, Capital Providers, similar programs representatives, other stakeholders, and clients we interviewed provided a rating of either 4 or 5, as indicated in the chart below. The average rating across the five groups was 4.8. How much of a need is there for a program such as this in Western Canada? Major need 4 Somewhat of a need 2% 5% 13% 14% 31% 38% 43% 48% 57% 69% 83% 91% 2 No need at all 1% 4% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Clients Capital Providers Similar program representatives WD staff Other stakeholders WD staff, Capital Providers, similar programs representatives, other stakeholders, and clients provided the following rationale for the need for the Program: Since the LI Program is designed to address financing gaps for incremental economic activity and does not replace existing sources of capital, the Program is highly needed by businesses that Capital Providers would usually not cater to due to higher risk factors. The Program compensates for traditional lenders reluctance to provide funding to ventures that are perceived as high-risk. Many of these potential clients have viable business plans, yet Evaluation of the Loan and Investment Program Page 5

12 have trouble accessing the financial resources needed to execute such plans due to various barriers they face (e.g. lack of security/collateral, poor credit rating, no track record of running a business, innovative/intangible/unconventional nature of products/services making it difficult to appraise etc.). Programs like the LI Program stimulate the economy through community economic development and self-employment. Small businesses make up a large proportion of the businesses in Canada and are drivers of the Canadian economy and, as such, programs like the LI Program are needed to help increase/facilitate access to capital for small businesses. The Program fosters entrepreneurship and allows small businesses to establish and grow. 2. The need for the Program has increased over the past few years. The majority of the WD staff, Capital Providers, similar programs representatives, other stakeholders, and clients we interviewed indicated that the need for the Program had increased, as indicated in the chart below. Would you say the need for this Program has increased, stayed about the same, or decreased over the past few years? Increased Stayed about the same Not sure 6% 4% 3% 13% 14% 21% 25% 31% 56% 66% 64% 76% 83% 13% Other 7% Decreased 7% 3% 7% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% Capital Providers Other Stakeholders Clients WD Representatives Representatives of Similar Programs The ongoing recession, exacerbated by a worldwide credit crunch, has caused Capital Providers to become more risk-averse. The corresponding decrease in the availability of capital has had an especially large impact on the small business sector. Finding capital for small businesses remains a huge challenge as banks and credit unions have tightened lending criteria in order to reduce their risk exposure. At the same time, the value of collateral that businesses can use to secure loans has decreased (e.g. lower property values, excess supply of machinery/equipment putting downward pressure on prices etc.) whereas demand for capital has increased as businesses with decreasing sales/revenues try to secure funds to stay afloat and laid-off workers set up new businesses in pursuit of self-employment. In addition, personal wealth has diminished due to the current economic Evaluation of the Loan and Investment Program Page 6

13 situation and there are less personal funds available to invest into businesses. 3. Extant literature highlights the barriers that SMEs face in accessing capital. Some of the major findings of our literature review include: Securing bank financing in establishing their business is the most commonly reported barrier by SME owners. As indicated in the table below, 61% of the SMEs surveyed in a study commissioned by the Canadian Federation of Independent Business 1 reported that securing credit from banks was the major problem for their business whereas an additional 41% and 28% reported collateral/security requirements and the high costs associated with financing as barriers, respectively. MAJOR BARRIERS TO ESTABLISHING A BUSINESS FOR SMEs Major Barriers Percent Securing term financing or loan from bank 61% Providing collateral 41% Cost of financing too high 28% Other 8% Security equity financing from investors 4% Access to financing is one of the most critical issues facing SMEs during the current economic downtown. The Research conducted by Question Pro 2 among SMEs in developed countries including Canada 3 revealed the major problems that SMEs are facing due to the current economic crisis, as outlined in the table below. As indicated, 60% of the SMEs reported that it had become harder to access financing. EFFECTS OF THE CURRENT ECONOMIC CRISIS ON SMEs Major Barriers Percent Customers delaying payments 66% Pressure on prices 65% Access to financing 60% Hitting Sales Target 60% No salary increases 51% Supply chain uncertainty 36% 1 Bruce D., Banking Matters: Survey Results of Small Business Owners on Banking Issues, Canadian Federation of Independent Business, Ran One, Press Release: SMEs prepared to take risks to stay afloat according to new research, The regions included North America, Western Europe and Australia Evaluation of the Loan and Investment Program Page 7

14 A recent study by BDC4 conducted among 231 SMEs demonstrated similar results. The entrepreneurs surveyed identified tightening credit (70%) as one of the major challenges they currently face. Two in five surveyed SMEs (39%) are experiencing direct effect of tightening of credit and approximately half of the SMEs (46%) currently seeking financing. Over the last 20 years, lending to large businesses has increased in Canada, while lending to SMEs has declined slightly. The Bank of Canada s 5 banking and financial statistics demonstrate a dramatic increase in the value of larger bank loans (higher than $200,000) issued in Canada between 1989 and 2007 while a slight decrease in the value of smaller loans (less than $200,000), even though the number of SMEs has increased during that time period. As indicated in the chart below, the value of smaller loans issued by chartered banks every year has been around $10 billion since 1989, while value of large loans has almost doubled (from $60 billion to $112 billion) within the same time period. CHARTERED BANK LENDING TO BUSINESSES BY AUTHORIZED LOAN SIZE In line with banks reluctance to disburse smaller loans, there has been a decrease in the number of SMEs applying for debt financing. As indicated in the chart on the following page, the share of SMEs applying for bank financing has steadily been declining since There has been some uptick in activities between 2003 and 2006, though the level is significantly lower than in 1987, when there were fewer SMEs. 4 BDC. View Points online panel: Opinion of the Canadian Entrepreneurs on the Current Economic Situation, May Bruce D., Banking Matters: Survey Results of Small Business Owners on Banking Issues. Canadian Federation of Independent Business, Canadian Federation of Independent Business Banking Survey, Evaluation of the Loan and Investment Program Page 8

15 SHARE OF SMES THAT APPLIED FOR BANK FINANCING SMEs in Western Canada are more likely to apply for loans than SMEs in most other parts of Canada. The table below presents the results of Statistics Canada s Survey on Financing of Small and Medium Enterprises with respect to loan request and approval rates. As indicated, while loan approval rates in Western Canada are similar to the overall rate for Canada, loan request rates in Western Canada are higher than the Canadian average, implying a greater reliance on debt financing on the part of Western Canadian SMEs. DEBT REQUEST AND APPROVAL RATES BY REGION (2004) Region Request Rate (%) Approval Rate (%) Atlantic 20% 82% Quebec 18% 88% Ontario 15% 77% Prairies 23% 82% British Columbia 20% 82% Northwest Territories, Yukon, Nunavut 15% 78% Canada 19% 81% 4. The strong demand for funding under the Program is another important indicator of the need for the Program. The high level of demand for the funds offered by the Program, as demonstrated by the number of applicants and clients, is an indication of the great need for the LI Program. The Program is attractive to potential clients not only because it provides access to capital that they would otherwise be unable to secure, but also because it allows business owners to circumvent the requirements of having a prohibitive level of personal investment into their business or coming up with security/collateral. 7 SME Financing Data Initiative, Statistics Canada, Survey on Financing of Small and Medium Enterprises, 2004 Evaluation of the Loan and Investment Program Page 9

16 As indicated in the chart below, the majority of the WD staff and Capital Providers we interviewed indicated that demand for capital either exceeds or is balanced with the funds available through the Program. Representatives of similar programs were asked the same question with respect to their respective programs and the majority of them also indicated that demand for capital either exceeds or is balanced with the funds available through their respective programs, suggesting that even at an aggregate level; supply of capital is still not adequate. The other category in the chart refers to respondents that indicated that the demand-supply equilibrium varies across regions and fund/agreement types. Supply of capital may exceed, meet only part of, or be in line with demand depending on the region or fund/agreement in question. At this point, would you say that the supply of funding under your program/fund exceeds the demand, is well balanced with the capital available, or meets only part of the demand for capital? Demand exceeds supply 38% 33% 71% Supply and demand are balanced 21% 25% 58% Other 4% 7% 13% Supply exceeds demand 4% 25% 0% 10% 20% 30% 40% 50% 60% 70% 80% WD representatives Representatives of Similar Programs Capital Providers WD staff indicated that the Program is limited in its current capacity to better balance demand and supply and additional capital would be required to establish more funds or raise the maximum allowable Loss Support Contribution percentage whereas Capital Providers stated that more funding is needed to permit higher maximum loan/venture capital amount. Those Capital Providers who indicated that the capital available for lending is adequate suggested that more operating funding is needed to address various bottlenecks that exist with respect to delivery of the Program (e.g. the loan application process is time-consuming and warrants more resources). For the similar programs where supply of funding exceeds demand, similar program representatives indicated that increased promotion of their programs is needed to help balance demand and supply, as many target clients are unaware of their programs and, as such, financing opportunities are being missed. Some similar program representatives indicated that there is an excess supply of capital due Evaluation of the Loan and Investment Program Page 10

17 to the fact that potential clients still have difficulty in accessing the financing provided under their programs; for example, potential clients often require more than the maximum funding available under a program and consequently look for financing elsewhere. 5. The activities of the LI Program serve to complement the activities of many different organizations/programs which provide funding and services to help facilitate the establishment and development of SMEs in Western Canada. WD staff, Capital Providers, similar programs representatives and other stakeholders identified a number of Federal and Provincial Government, private sector and non-profit programs in each of the four Western Canadian provinces that facilitate access to capital for SMEs. However, they indicated that most of these programs either cater to very specific niches based on a diverse range of criteria such as type of venture, type of activity/product, location, applicant characteristics, risk level, time frame, financing stage etc. or operate differently (e.g. funding SMEs directly, providing business advisory/counselling services in addition to funding etc.). Consequently, they do not overlap with the Program. Furthermore, these programs often have more stringent requirements for securing financing (e.g. asset/investment requirements, historical/detailed financial statements, co-signing of loans etc.). Thus, the LI Program complements these programs not only by adding to the overall supply of capital available for businesses, but also by making it easier to obtain financing. In addition, the Program complements other funding programs and organizations by: Allowing them to take on more risks in lending capital (e.g. Program agreements/funds with the Business Development Bank of Canada); Allowing them to leverage capital or make bigger loans (e.g. Program agreements/funds with Community Futures Development Corporations); Providing funds to meet the needs of clients that other programs cannot accommodate (e.g. WD supported loan funds can accommodate both loans and lines of credit for working capital, bridging receivables etc.); and Providing funds to assist clients in transitioning to other programs/organizations for further financing. For example, some programs require that clients put in some of their own investment in order to be eligible for financing; the LI Program can help clients in this type of situation as it provides them with initial financing which can then be used to secure subsequent financing. 6. Various formal and informal efforts and mechanisms are in place to build coordination and cooperation among the different organizations/programs. Prior to establishing new loan/venture capital funds in a given region, WD engages in discussions with Capital Providers serving the region in order to ensure that the fund will not compete with existing sources of capital. In addition, WD staff and Capital Providers occasionally partake in formal funding coordination/cooperation mechanisms such as participation in a funders table. Informal referrals between the LI Program and various programs and organizations are common to help facilitate coordinated transactions. The LI Program occupies a place in the continuum of financing; clients can apply to multiple programs and use different program offerings to meet various financing needs over the life of a business venture. Individuals and businesses that have received funds through the LI Program are often referred to other programs or organizations for supplementary/next-stage financing services. These second-stage financiers have increased Evaluation of the Loan and Investment Program Page 11

18 confidence due to mitigated risk factors when investing in businesses that have already received funding under the LI Program. Networking among Program staff and staff of other organizations/programs also helps facilitate referrals (e.g. refer a business that received loan from a fund established under the Program to another program for business advisory/mentoring services or vice versa). ISSUE #2: ALIGNMENT WITH GOVERNMENT PRIORITIES 1. The mandate, objectives and focus of the Program are consistent with the priorities of WD and the Federal Government. All 14 WD staff we interviewed reported that the Program s mandate is consistent with certain departmental priorities as well as certain priorities of the Government of Canada. WD staff identified that within the WD Program Activity Architecture, the Program is consistent with the activity Business Development and Entrepreneurship as well as sub-activities Access to Capital, Improve Business Productivity and Technology Adoption & Commercialization. All of these activities contribute towards building a competitive and diversified economy in Western Canada and a strengthened Western Canadian innovation system, the strategic outcome under Entrepreneurship and Innovation. In addition, the Program is consistent with the Government of Canada s current priorities of Stimulating the Economy and Strengthening our Financial System. Canada s Economic Action Plan includes initiatives aimed at strengthening the financial system and improving access to credit. As noted earlier, SMEs are finding it increasingly more difficult to access capital from conventional/traditional sources in the current economic climate as lending guidelines have become more restrictive among banks and credit unions, resulting in a shortage of capital. ISSUE #3: ALIGNMENT WITH FEDERAL ROLES AND RESPONSIBILITIES 1. WD staff, Capital Providers and other stakeholders believe that supporting this type of programming is a necessary and legitimate role for the Federal Government. All14 WD staff, 100% of the Capital Providers and 95% of the other stakeholders we interviewed reported that the Program is aligned with an appropriate and necessary role for the Federal Government. WD staff members and the other stakeholders noted that the funds facilitated through the Program help companies form and grow, resulting in new investments and jobs in communities across Western Canada. Thus, the Program lends itself to fulfill a Federal Government mandate - generate and sustain economic growth. Capital Providers mentioned that the funds facilitated through the Program assist SMEs in accessing capital. Since these types of businesses are the major drivers of the economy, the Federal Government should support the activities that assist SMEs in their growth and development. It is very challenging for riskier SMEs to access funds through conventional financing means without any government support. Furthermore, since the Program leverages money with Capital Providers, it is less costly for the Federal Government than providing direct funding. Furthermore, because the Program facilitates financing through participating Capital Providers as opposed to providing direct funding, there is a low likelihood that the disbursement of loans/investments would be subject to Evaluation of the Loan and Investment Program Page 12

19 political interference/pressure or seen as business subsidy/handout. 2. The Capital Providers and other stakeholders understand the mandate and objectives of the Program. The primary objectives of the Program, as identified by Capital Providers and other stakeholders include: To leverage funding with Capital Providers and encourage them to move up the risk curve in order to increase/facilitate access to capital for SMEs in the high-risk category so that such SMEs can incorporate and grow and support the development and diversification of the Western Canadian economy; To support entrepreneurship/small business growth and development; To help businesses become independent, economically sustainable, and more engaged in the community; To increase the number of new businesses and improve the state of existing businesses in Western Canada; To encourage investment dollars directed towards the innovation sector/early-stage start-ups in Western Canada; and To develop communities/improve community welfare by providing capital for disadvantaged groups which enables them to contribute to the local economies. The Performance Measurement Framework of the LI Program highlights the objectives of/rationale for the Program as leveraging private/public funds and utilizing the expertise of recognized Capital Providers, to support SMEs and strategic growth industries where financial gaps exist in Western Canada; which are consistent with the objectives mentioned by Capital Providers and other stakeholders. 3. The mandate and focus of the LI Program are still relevant as evidenced by the strong support for continued involvement of WD in this type of programming. All 14 WD staff and 96% of the Capital Providers we interviewed recommended that the LI Program continue to operate. The WD staff noted that the Program costs relatively little since WD does not directly provide funding to businesses. Instead, the Program utilizes the resources, expertise and network of participating Capital Providers to stimulate the flow of capital to businesses that generally find it challenging to access funds. Program administration costs are low since Capital Providers handle bulk of the work associated with loan screening, processing, monitoring and reporting. Consequently, the Program provides an excellent return on investment for WD. According to Capital Providers, without the Program, many SMEs would not have access to funds, preventing them from contributing to economic growth in Western Canada. In addition, the Program promotes a culture of entrepreneurship by assisting businesses with new products/services/concepts to establish and grow. The Program also assists members from disadvantaged/marginal groups who strive to become productive members of society and otherwise would not have the opportunity to be Evaluation of the Loan and Investment Program Page 13

20 self-reliant. ISSUE #4: ACHIEVEMENT OF EXPECTED OUTCOMES Characteristics of the Clients, Loans and Businesses 1. The characteristics of the target clients for the loan funds under the LI Program vary from those of typical business loan clients. Given that the Program is intended to facilitate access to capital for those who typically do not qualify for conventional financing, LI Program loan fund clients tend to lack business experience and management capability, lack adequate security/collateral, have low net worth, and have poor credit history relative to typical commercial loan clients. Loan fund clients are often early-stage/start-up companies that are deemed high-risk and, as a result, find it challenging to access capital. The majority of the loans disbursed under the Program are typically smaller than conventional business loans. The types of businesses that receive loans can vary dramatically, ranging from small home-based businesses to green/sustainable technology firms. In addition, Capital Providers may have target requirements for eligibility; for example, they may focus on the size of the firm (e.g. applicant company must have less than 10 employees) or consider only specific marginal groups for eligibility of loans under their respective loan funds (e.g. low-income groups, business owners with disabilities, people receiving employment assistance etc.). 2. The profile of the clients we surveyed is largely consistent with the characteristics of the target clients for the Program. The key relevant characteristics of the clients we surveyed are highlighted below: Three-fifths of the clients we surveyed reported receiving funds totalling $50,000 or less. Only 7% of the clients we interviewed indicated receiving over $500,000 in funding for their business, representing the non-micro loan funds. The majority of the clients we surveyed are small businesses, with almost two-thirds reporting total capital investments (including equity and debt capital as well as the funding obtained through the WD supported funds) in their business to date of $300,000 or less. Roughly another one-third of the clients indicated having invested over $300,000 in their business to date, of which only 2% have invested over $10 million. A little over three-fifths of the clients that had new funds from sources other than the LI Program invested into their business at the time they secured financing through the LI Program indicated that they invested less than $50,000 in new funding (excluding the WD supported funds). While the amount of new funding from sources other than the WD supported funds is relatively small for many businesses, they were adequate when leveraged with the loans from the WD supported funds. More than half of client businesses generated revenues of $50,000 or less in the year prior to receiving WD supported funding. A small percentage (1%) of client businesses reported incurring losses or breaking even in the year prior to receiving WD supported funding. Only 1% of the clients indicated that their business generated over $10 million in the year prior to receiving WD supported funding. Evaluation of the Loan and Investment Program Page 14