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

21 Almost two-thirds of client businesses generated $600,000 or less in revenues in the last fiscal year. Only 4% of client businesses generated over $10 million in total revenues. Almost 90% of client businesses reported employing between 0 and 20 employees. Only 2% of the clients we interviewed indicated that their companies employ more than 100 employees, with the maximum reported number of employees being 200. Slightly over three-quarters of the clients reported paying $300,000 or less in wages in the last fiscal year. Only 2% of the clients indicated paying more than $5 million in wages. The majority (57%) of the clients that have received some form of higher education reported not having diplomas or degrees related to business management. 3. The clients received funds facilitated through the LI Program during different stages of their business and the funds were used to support a wide array of activities. The 271 clients who participated in the survey reported receiving 326 loans/investments that were facilitated through the LI Program totalling almost $39 million in value. On average, the clients reported receiving an average of 1.2 loans/investments totaling $145,960. Of the funds provided to the 271 clients we interviewed, 17% totalled between $1,000 and $10,000, 27% totalled between $10,001 and $25,000, and 56% totalled more than $25,000. Seven percent of the clients reported receiving over $500,000 in funding for their business. Of the businesses that received funding: 29% received the loan in their first year of operation (i.e. start-up operations); and 71% were at least in their second year of operation. The clients indicated that the funds they received were used for a variety of purposes including to: Purchase equipment (identified by 47% of the clients); Cover working capital/operating costs (31%); Purchase inventory (26%); Start up the business (18%); Cover leasehold improvements (14%); Carry out market development activities (10%); Purchase a building (7%); Purchase the business (7%); Develop and/or commercialize new products (7%); Cover other expenses (5%); and Cover research and development expenditures (2%). 4. In addition to the loan or investment, 29% of the LI Program clients reported that they received additional assistance from their respective Capital Providers in developing their business. Evaluation of the Loan and Investment Program Page 15

22 In addition to the loan(s), did you receive any other assistance from the financial institution that helped you in developing your business? No 71% Yes 29% Don't know 1% 0% 10% 20% 30% 40% 50% 60% 70% 80% Among the 29% of clients who received additional assistance, one-on-one business counselling was the most frequently cited type of assistance received, reported by a little over two-thirds of the clients, as indicated in the chart below (responses are mutually inclusive). Nearly half of the clients reported receiving assistance with the development of their business plans. Some clients also indicated having participated in training programs/seminars and mentoring programs. What types of assistance did you receive? Business counselling (one-on-one) 68% Assistance in the development of a business plan Participated in a training program or seminar Other 19% 18% 44% Participated in a mentoring program Pathfinding to identify other business resources 10% 15% Don't know/no response 1% 0% 20% 40% 60% 80% Those clients who indicated receiving other forms of assistance mostly referred to access to additional financing from their respective financial institutions (e.g. through lines of credit, corporate credit cards etc.). Evaluation of the Loan and Investment Program Page 16

23 5. Over 20% of the clients had unsuccessfully applied for funding from other sources while most others believed that it was unlikely that they could have obtained funding elsewhere. A little over one-quarter of the clients reported having already applied for a similar loan from another financial institution when they applied for WD supported loan funding, as indicated in the chart on the following page. It is important to note that many client businesses reported being referred to the WD supported funds (internally within the same Capital Provider organization or externally to another Capital Provider organization) during their initial meeting (pre-application/screening stage) with a financial institution. Some clients indicated that they decided to apply for funding from a WD supported fund after reviewing the applications for conventional funding and realizing that they would not be able to meet the eligibility criteria to secure funding from traditional sources. Had you already applied for a similar loan from another financial institution when you applied for this loan? No 71% Yes 27% Don t know 2% 0% 10% 20% 30% 40% 50% 60% 70% 80% Of those loan clients that had applied earlier for a similar loan elsewhere, most were unsuccessful as indicated in the chart below. What was the outcome of the earlier application? Denied 77% Approved 19% Don't know/no response 3% Other 1% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% Lack of collateral and lenders low risk tolerance were the top reasons cited by the clients for not receiving the loans. Additional reasons as to why previous loan applications were denied are listed below: Evaluation of the Loan and Investment Program Page 17

24 Debt-to-equity-ratio was too high at the time/had personal loans such as a mortgage; Poor credit scores or lack of credit history; Lack of financial institutions support for small businesses; Restrictive bank lending policy; Institution did not finance start-up companies/business was new/just starting up; Institution perceived the business plan as unlikely to succeed; and Loan freeze. The decision of the clients to obtain funding from the WD supported fund rather than another source was mainly due to the fact that the loan was readily available and the terms were better/more flexible than those from the other sources, as indicated in the chart on the following page. The other category in the chart refers to clients who indicated that they decided to obtain funding from the WD supported funds for specific reasons. Many clients were made aware of the WD funds through personal referrals (e.g. clients involved in self-employment programs are referred to Capital Providers associated with the WD funds upon their completion of the program). In addition, some clients indicated that the Capital Providers involved with the WD supported funds appear to be more supportive of their types of businesses in the community and more responsive to/understanding of local businesses than traditional lenders, which is why they sought funding from a WD supported fund. What was the main reason you decided to obtain the loan from the WD supported loan fund rather than another source? It was readily available 46% The terms were better or more flexible 45% Past history with the financial institution 34% Other I could not obtain the same loan amount from other sources 25% 24% Don't know/no response 12% 0% 10% 20% 30% 40% 50% When asked in what ways the terms were better or more flexible, the clients most commonly cited flexibility around repayment schedules, how the loans could be used, and the security/equity needed. Evaluation of the Loan and Investment Program Page 18

25 In what respects were the terms and conditions of the loan better or more flexible? Repayment schedule Loan purpose/how the funds could be used Security taken Equity requirements Working capital available 28% 28% 30% 36% 54% Other 13% Don't know/no response 5% 0% 10% 20% 30% 40% 50% 60% 6. The Capital Providers we interviewed confirm that they manage their LI Program loan portfolios significantly differently than their other types of business loans. The Capital Providers highlighted differences in their process for reviewing loan applications, characteristics of the target clients, approval criteria, interest rates and terms as outlined below: The processes involved in reviewing loan applications under the WD supported loan funds and managing the related loan portfolios are more demanding than those for conventional commercial loans. Most of the Capital Providers we interviewed have similar processes for loan intake, review and management of the loan portfolios for their respective loan funds established under the Program. Potential clients initiate the application process in a variety of ways: many are referred via business training, self employment and mentoring programs, some seek assistance after finding out about the Program/funds from community organizations whereas some others are referred through other lending programs within the same financial institutions. Some Capital Providers indicated that all loan applications initially undergo the regular lending process and the applications that are not approved at that stage may be directed to the loan funds made available through the LI Program. The loan intake process typically involves personal interviews, business training and business plan reviews, credit assessments (e.g. reviewing cash flows, personal net worth, existing debt levels, personal income etc.), and occasionally meeting with business stakeholders (suppliers, customers etc.) to further investigate the loan applicant. Depending on the Capital Provider, application packages and investment proposals may then be sent to Boards of Directors, credit committees and risk assessment departments for further review and approval. Loan portfolios are managed/tracked and individual loans are often subject to annual reviews. Finally, Capital Providers are subsequently involved in reporting back to WD. Though the loan approval processes for LI Program applications and conventional loan applications are similar, most Capital Providers indicated that the processes related to the LI Program are more demanding both in terms of time and resources. The application processes for both types of financing involve assessing an applicant s character (e.g. diligence, Evaluation of the Loan and Investment Program Page 19

26 perseverance etc.), the capacity of the business to service debt, and the collateral that can be used to secure the loan. However, for LI Program applicants, there tends to be much more emphasis on the applicant character component. As such, due diligence on these potential clients tends to involve more in-depth investigation and analysis. Conventional commercial loans are often approved or denied based on the results of an auto credit score review, which does not require thorough investigation and analysis. Typical clients for loans under the LI Program generally cannot be approved via such a scoring system automatically (as they generally have poor credit history, little security etc.). Instead, Capital Providers must allocate significant time and resources towards reviewing each applicant s business plans, researching supplementary data/information, and validating business forecasts. These activities call for more relationship-building between Capital Provider staff and loan clients compared to traditional business loans. Capital Providers indicated that portfolio management processes for loans under the LI Program and traditional commercial loans tend to be quite similar, though there are relatively more write-offs under the former resulting in more follow-up tasks/activities. The approval criteria for the LI Program loan funds vary significantly from the criteria used in approving conventional commercial loans. Many of the loan eligibility criteria used for conventional commercial loans are waived for loans under the WD supported loan funds. The regular business financing application process requires that potential clients demonstrate good credit history, proven financial income, strong interest coverage, provision of collateral to secure the loan etc., whereas applicants under the LI Program often have less stringent requirements (e.g. Capital Providers are willing to accept lower credit scores). Loan clients under the Program typically do not meet most approval criteria conventional lenders require and, as such, are considered high-risk. The interest rates for the loans under the LI Program tend to be higher than those for conventional commercial loans. While some Capital Providers reported that the interest rates they charge on loans supported by the LI Program do not vary significantly from conventional business loans, most Capital Providers indicated that interest rates are marginally/nominally higher for the LI Program loans. Interest rates are higher due to the higher risk associated with the loans, as well as to compensate for the more rigorous loan approval and administration processes. Capital Providers noted that the higher interest cost to loan clients is often offset by the fact that clients are generally not charged application fees under the Program and may also be waived fees for lines of credit. As a result, the overall costs are comparable to those borne by a typical commercial loan client. Some Capital Providers indicated that the interest rates charged to loan fund clients under the Program may vary depending on the characteristics of the loan client (e.g. if a client has inadequate but some collateral, the risk factor diminishes accordingly and the client is charged a lower interest rate). The terms of the loans issued under the LI Program tend to be more flexible than those for conventional commercial loans. Evaluation of the Loan and Investment Program Page 20

27 While some Capital Providers indicated that the terms of the LI Program loans do not vary at all or significantly from the terms for the conventional commercial loans they provide to businesses, the majority reported that the loans under the WD supported loan funds tend to have longer amortization periods and more flexibility around late and missed payments. Many of the loans supported by the Program have amortization periods of five years or longer; this period is typically much shorter for commercial loans, ranging from about two to three years in length. The Program is also more flexible with respect to payment scheduling, allowing for skipped payments, missed payments and blended payments. Moreover, some of the WD supported loan funds provide loan clients with the option to make smaller payments at the beginning of their loan term. 7. As a result of taking on higher levels of risk, the percent of loans written off tends to be significantly higher under this Program than for other types of business loans. Eighty percent of the Capital Providers we interviewed indicated that between 0% and 20% of the value of loans advanced under the loan funds associated with the Program are anticipated to be defaulted upon and written off, as indicated in the chart on the following page. A little over two-fifths of Capital Providers indicated this default/write-off rate is expected to be between 0% and 10%. Only 4% of Capital Providers indicated that they expect more than 40% of the value of loans advanced under their loan funds to be defaulted upon and written off. Approximately what percent of the value of loans advanced under this loan fund do you anticipate will be defaulted upon and written off? 0% to 5% 29% 6% to 10% 13% 11% to 20% 38% 21% to 40% 0% Over 40% 4% Don't know/no response 17% 0% 5% 10% 15% 20% 25% 30% 35% 40% 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 investment 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 we interviewed; this is as expected, given that the Program encourages lending to SMEs that are deemed high-risk. 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 Evaluation of the Loan and Investment Program Page 21

28 to four times higher than their conventional commercial loans. Only one Capital Provider indicated that the default/write-off rate is lower for WD supported loans than for its commercial loan portfolio; which was attributed to the additional support services that the loan clients receive. The support services provided by Capital Providers and other stakeholder organizations both before and after receiving loans can decrease the risk of business failures and the corresponding risk of loan defaults. There are various characteristics of the WD supported loans which make them riskier than other types of business loans. Applicants under the Program do not meet conventional commercial loan approval criteria; they lack business experience, have little security, have poor/no credit rating, lack management capability etc. These businesses are often start-up ventures, quite often in new or emerging sectors; thus, the applicants have no proven track record or historical performance data and as a result, loans are approved based on riskier, forward-looking projections. Furthermore, some loan clients are faced with additional personal challenges such as dealing with disabilities. While clients that receive loan funding under the Program are inherently riskier than conventional commercial loan clients, there are other factors that may impact their likelihood of default. For instance, Capital Providers who issue a large number of loans under the Program must often deal with many clients/businesses at any given time; with no resources allocated for staff support/administration. Capital Providers find it difficult to individually manage loan clients and cannot provide the training/coaching they may require in order to better ensure business success. 8. WD representatives also see the Program as having a significant impact in terms of encouraging Capital Providers to take on more risk. When asked to rate the extent to which the Program has been successful in encouraging the participating Capital Providers to take on more risk, on a scale of 1 to 5, where 1 is not at all successful, 3 is somewhat successful and 5 is very successful, nearly four-fifths of the WD staff provided a rating of either 4 or 5, as indicated in the chart below. The average rating was 4.0. The higher loan loss rates of the loan funds under the Program relative to default rates for conventional loans disbursed by the participating Capital Providers is a clear indication that the Evaluation of the Loan and Investment Program Page 22

29 Program has been able to move participating Capital Providers up the risk curve. In addition, WD staff indicated that a few Capital Providers have set up their own loan programs to cater to riskier clientele after becoming familiar with the higher-risk market segments through their participation in the Program. 9. The Program does not specifically focus on facilitating access to funding for SMEs in emerging sectors. During its inception years, the Program had a number of sector specific loan funds designed to increase/facilitate access to capital for SMEs in emerging sectors such as information technology and telecommunications, biotechnology, advanced materials and manufacturing technology, knowledgebased businesses, value-added agriculture etc. These sector specific funds had not been renewed upon expiry. Through its existing funds, the Program continues to increase/facilitate access to capital for SMEs so that high-risk ventures can form and grow, resulting in new investments and jobs in communities across Western Canada. However, such high-risk ventures can be from both emerging and traditional sectors (except primary resource sectors). 10. The current reporting structure does not track and report on the outcomes of the businesses that have received funding. Under the current reporting structure of the Program, Capital Providers periodically submit data on loan requests, approvals, status and defaults to WD. WD staff compile and analyze the data to track the performance of individual funds/agreements as well as the performance of the overall Program over time in terms of the total number of funds approved, the total value of funds disbursed, the total value of funds leveraged, the total value of loan loss contribution claimed etc. With the exception of anecdotal data, neither the Program nor the participating Capital Providers collect data on the outcomes of the businesses that have received funding. Without a performance measurement and tracking system, the full economic impact of the Program cannot be measured. Economic Impacts Because WD program staff do not collect economic data from all loan recipient companies, the following economic impacts are based on a sample of 271 companies gathered as part of this evaluation. To generalize the findings to the entire population assumes a representative sample which is questionable given the difficulties obtaining client lists from Capital Providers (please see section D: Challenges and Limitations). Therefore, the following economic impacts are factuallybased but require cautious interpretation. Also, this evaluation cannot assess what portion of the following economic impacts are attributable to the LI Program as it is one of many factors contributing to the economic impacts. Finally, the sample of 271 clients included two subgroups of companies with higher economic impacts than the other companies: 1) 11 (4%) very successful high growth companies; and 2) 17(6%) companies that received assistance prior to (revenues tend to increase over time). Combined, these 28 (10%) companies accounted for 55% of the total current revenues while receiving about 27% of the loans/venture capital investments. The following estimates are based on the entire sample of 271 companies. Vancity/Vancity Capital loan funds (36%) and Community Futures (17%) accounted for the majority of the sampled clients. Evaluation of the Loan and Investment Program Page 23

30 1. The revenues of businesses increased in the fiscal years after receiving loans facilitated through the LI Program. The businesses averaged $856,000 of revenue in the year prior to the loan. As of two fiscal years ago, average revenues had increased to $1.38 million; in the most recent fiscal year revenues averaged $1.53 million - an increase of $4.65 for every dollar in loans provided from the level prior to the loan. 2. The incremental revenues of the businesses tend to increase over time. The following diagram displays the incremental revenues by the number of years since the first loan was received from the Capital Provider. The incremental revenues were calculated by deducting from each year s revenues the revenues which were generated by the business in the year prior to receiving the first loan (which would be $0 for businesses which received the loan in their first year of operation). Incremental Revenues By Number of Years Since the First Loan/Investment Revenues ($) Thousands $14,000 $12,000 $10,000 $8,000 $6,000 $4,000 $2,000 $ Number of years since first loan/investment The regression analysis (using both the most recent and current fiscal year data where possible) suggested that on average, incremental revenues increased $250,000 per year over the four years following receipt of the loan. The majority of companies (142 of the 271) received their first loan supported by the LI Program prior to Company revenue growth is associated with increases in export sales, employment and wages paid. For every dollar in loans received, the typical company: 1) generated increased revenues of $4.65; 2) generated increased sales of $1.67; and 3) paid additional wages of $1.40. Employment increased by one person year for every $28,233 in loans provided. 4. The majority of the impacts in terms of increased investment, revenues, employment, and export sales are incremental in that they would not have occurred in the absence of the LI Program. To obtain data to be used in assessing incrementality, we asked the loan clients to estimate how likely it is that they would have been able to obtain their loans from another source (e.g. from banks or Evaluation of the Loan and Investment Program Page 24

31 other financial institutions) if the Program had not been available. To provide an alternative perspective, we also asked the Capital Providers to estimate how likely it is that the loan clients would have been able to obtain their loans elsewhere. The results indicate that: The clients were, on average, only 35% confident that they could have obtained their loans 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. 50% 40% 30% 20% 10% As indicated in the chart below, most loan clients believe that the loans and services they received have been very important to them in the establishment or further development of their business. 0% AVERAGE RATINGS ON THE LIKELIHOOD OF CLIENTS OBTAINING LOAN ELSEWHERE 35% 23% LIP Clients Capital Providers - Their Institution 28% Capital Providers - Other Institutions % of Clients 100% 80% 60% 40% 20% 0% IMPORTANCE OF THE LOANS AND SERVICES RECEIVED BY PERCENTAGE OF LOAN CLIENTS 2% 1% 5% 1 - Not at all Somewhat important 12% 81% Very important When asked to estimate what their revenues would have been in the most recent fiscal year in the absence of the services received, the loan clients reported that their current revenues would be 34% lower on an aggregated basis (i.e. current revenues would be equal to 66% of current levels). Similarly, the clients reported that the level of funding invested in their business (including debt and equity) from other sources would have declined by 40% on an aggregated basis (i.e. investment would have been equal to 60% of current levels). 5. Business survival rates decline over time. Eight percent of companies were no longer operating. This figure likely under-estimates the actual percentage of companies which are no longer in operation because it is difficult to contact representatives of these companies. Evaluation of the Loan and Investment Program Page 25

32 Another indicator of business survival rates is the percentage of loans defaulted upon before full repayment. Limited data from Capital Providers 8 showed 17% of the loans had been defaulted upon to date and that default rates increased over time from about 6% of loans (within one year of being issued) to about 20% (within five years of being issued). Again, these figures somewhat overstate survival rates to the extent that not all currently active loans will be paid in full and not all businesses which stop operating default on their loans. According to Statistics Canada s Longitudinal Employment Analysis Program (LEAP) 9 which tracked the survival rates amongst businesses established between 1994 and 2003, 72% micro-businesses (fewer than 5 employees) in Canada were still operating after the first year, 46% were operating after three years, and only 35% were operating after five years. Similarly, 70% of small businesses with 5 to 99 employees in Canada were still operating after the first year, 46% were operating after three years, and 38% after five years. However, the survival rates for the LI Program supported companies are likely higher than the small business survival rates reported by Statistics Canada. Much of the small business failure rate reported by Statistics Canada occurs in the first year of operation (30%); most of the businesses supported under the LI Program had already survived the critical first few years prior to receiving the loan from the Capital Provider. 6. The Program has had several unintended impacts on clients and Capital Providers. The Program generated mostly positive unintended impacts on clients and Capital Providers: The majority of clients served by the Program generated incremental economic activities by way of new/additional investments, revenues, jobs and taxes with the help of the funds they received through the Program. The Program has encouraged entrepreneurs and business owners to be more innovative, start secondary businesses and establish businesses in emerging sectors. Additionally, the funds have better prepared clients for future ventures by helping them build their credit rating and develop a track record, which, in turn, has increased their likelihood of securing supplementary financing in the future. The provision of support services after loan disbursements has ensured that loan clients remained engaged with Capital Providers and received support on a continuous basis, even after the loans had been repaid. Programs that provide financing to facilitate changes in ownership have allowed younger, aspiring business owners to replace long-established, retiring business owners, ensuring a smooth transition. Capital Providers stated that loan clients have been negatively impacted in some instances when they received inadequate funding under the Program. The demonstrated success of the Program and the positive outcomes associated with the loan funds encouraged Capital Providers to apply elements of the Program to other programs within their own organization (e.g. establishing own programs to cater to high-risk clientele). 8 All capital providers report on the number and value of loans defaulted upon in a given year. However, only five (42%) of the 12 capital providers collected data on the timing of the defaults and the corresponding number of years which have elapsed since the defaulted-upon loans were issued. In addition, aggregate/cumulative default rates could be calculated for some of the loan funds operating for less than 5 years (i.e. 5 of the 124 loans issued within a three year period were defaulted upon within that period). 9 Key Small Business Statistics, Industry Canada, January 2008 Evaluation of the Loan and Investment Program Page 26

33 Some Capital Providers noted that the Program has put a strain on their organizations as there are not enough resources allocated to staff administration and support. Issue #5: Demonstration of Efficiency and Economy 1. The Program is viewed as being successful in achieving its intended objectives. When asked to rate the extent to which the Program has been successful in achieving its objectives, on a scale of 1 to 5, where 1 is not at all successful, 3 is somewhat successful and 5 is very successful, the average ratings ranged from 4.4 among Capital Providers, 3.9 among WD staff and 3.7 among other stakeholders. Over 90% of the Capital Providers, about three-quarters of the WD staff and more than half of the other stakeholders we interviewed indicated that the Program had been either very successful or successful in achieving its objectives, as indicated in the chart on the following page. How successful do you think the Program is in achieving its objectives? Very successful 21% 33% 61% 4 30% 28% 50% Somewhat successful 9% 28% 29% 2 Not at all successful 11% 0% 10% 20% 30% 40% 50% 60% 70% Capital providers Other stakeholders WD staff WD staff, Capital Providers and other stakeholders attributed the success of the Program to the following: The Program has increased/facilitated access to capital for higher-risk ventures and businesses that would not get funds via conventional financing means. By doing so, the Program has been able to leverage significant amount of funds with the participating Capital Providers. As of March 2009, about 3,358 loans and investments have been approved under the various funds of the Program totaling about $261 million. The Program has allowed Capital Providers to take on incremental risk in lending and has enabled them to provide financing with flexible terms to small businesses that would have difficulty accessing capital through conventional sources. Some Capital Providers reported that the loan loss support provision available through the Program had made it easier to raise the capital needed for their respective funds from partner organizations. Evaluation of the Loan and Investment Program Page 27

34 The majority of companies generated incremental economic activities by way of new/additional investments, revenues, jobs and taxes with the help of the funds they received through the Program. The Program has facilitated the establishment and development of many small businesses, many of which have grown to become large and successful firms. Many SMEs have been able to graduate from the high-risk category over time and are currently operating as a stable or expanding company/capital Provider client. Despite the high-risk nature of the loans, the default rates associated with some of the individual loan funds are notably low, demonstrating the success of the Program. 2. The clients are generally very satisfied with the funds and other assistance that they have received from the Capital Providers under the LI Program. When asked to rate the level of satisfaction with respect to the funds and other assistance received from Capital Providers, on a scale of 1 to 5, where 1 is not at all satisfied, 3 is somewhat satisfied and 5 is very satisfied, almost eight in ten clients provided a rating of either 4 or 5, as indicated in the chart below. The average rating was 4.3. 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 especially helpful in finetuning business plans and assisting in various aspects/operations of the business. High interest rates, which are typical for higher-risk loans, and approvals of loan amounts lower than what applied for were cited as areas with room for possible improvement. Loan clients indicated that Evaluation of the Loan and Investment Program Page 28

35 larger loan amounts would allow them to more adequately meet the needs of their business. In addition, the clients suggested that efforts should be made to reduce staff turnover within Capital Provider organizations. The clients indicated that staff turnover often makes the loan follow-up process more difficult; having the same loan officer handle client files allows for good rapport and better understanding of individual businesses. Lastly, a few clients indicated that the various fees associated with the loans (e.g. set-up/administration fees) should be lower. 3. Capital Providers have been effective in managing their respective loan funds. When asked to rate the extent to which Capital Providers have been effective in managing the loan funds, on a scale of 1 to 5, where 1 is not at all effective, 3 is somewhat effective and 5 is very effective, more than 90% of the WD staff provided a rating of either 4 or 5, as indicated in the chart on the following page. The average rating was 4.2. WD staff indicated that overall, Capital Providers have been fairly effective in managing their respective funds. Since WD does not provide 100% loan loss support and Capital Providers are required to absorb any losses beyond the stipulated limit set forth in each fund agreement, there is a built-in incentive for Capital Providers to manage their funds diligently. Some Capital Providers have rigorous audit checks in place internally to ensure effective and efficient administration of the funds whereas others provide/refer to mentoring/after-care services to further assist clients in successfully running their businesses in order to minimize exposure to loss. 4. The majority of Capital Providers currently involved in the Program are likely to continue to be involved in the Program going forward. More than three-quarters of the Capital Providers we interviewed indicated that they plan to continue to be involved in the Program in the future, as indicated in the chart on the following page. The Program helps fulfill the mandate of Capital Providers regarding community building/social responsibility by enabling community businesses that cannot access funds through conventional financing means to form and grow. Furthermore, the Program complements other existing funding programs of Capital Providers. Riskier clients who cannot secure funds through these other Evaluation of the Loan and Investment Program Page 29

36 programs can be referred to the LI Program. Capital Providers can tap into a new stream of clients by participating in the Program as many riskier loan clients graduate to more stable clients once their businesses take off. Additionally, the Program draws attention to the Capital Providers involved in delivering the associated funds and consequently increases client/membership levels at these organizations. Some of the clients we surveyed indicated that the Capital Providers involved with the WD supported funds appear to be more supportive of their types of businesses in the community and more responsive to/understanding of local businesses than traditional lenders, which is why they sought funding from a WD supported fund. Is your financial institution planning to remain involved in delivering this Program in the future? Planning to remain involved 79% No longer involved/not planning to be involved again 17% Uncertain 4% 0% 20% 40% 60% 80% 100% While the funds facilitated through the Program are riskier, they also command higher interest rates to compensate for the higher risks, ensuring that the funds operate at least at break-even. The Program also enables Capital Providers to leverage/pool capital in an effort to minimize risks while lending to high-risk clients. Almost one-fifth of the Capital Providers we interviewed indicated that they are no longer involved with the Program or are not planning to be involved with the Program in the future. Those Capital Providers cited restrictive criteria (e.g. too narrowly focused in terms of geography) or not having capable staff as reasons for not renewing/not intending to renew their respective funds. It is difficult to source and retain qualified staff who can effectively administer high-risk loans, which are typically smaller than conventional business loans. Staff who have the required knowledge, skills and experience vis-à-vis high-risk SMEs generally leave for better opportunities to manage larger and more standard loan portfolios that generate better returns relative to the time and efforts required to manage high-risk loan portfolios. Some Capital Providers that are no longer involved in the Program found the Program s objectives to be incongruent with their profit-driven, risk-averse culture that does not encourage loss/default under any circumstances. 5. The design of the LI Program is inherently very cost-effective. 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 Evaluation of the Loan and Investment Program Page 30

37 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. 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 as outlined in the table below. ESTIMATE OF WD RETURN/LEVERAGE ON THE ASSISTANCE PROVIDED TO LI PROGRAM CLIENTS FROM TO Indicator Total Population of Loan Clients to Average per $1 of Funding Provided by WD Total WD Costs over a Five-Year Period $10.6 million Value of Loans Received $90.1 million $9 Simultaneous Investment $198 million $19 As indicated in the above table, 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). 6. Key success factors behind the accomplishments of the Program to date include the presence of strong relationships between the partners, the commitment of Capital Providers and WD to the Program, autonomy, flexibility and availability of other assistance. Factors key to the success of the LI Program include: Strong relationships between WD, Capital Providers and clients. The Program is highly relationship-oriented. The success of each loan/venture capital fund/agreement as well as each loan/venture capital disbursement is partly due to effective and close communications and interactions between WD and Capital Provider as well as between Capital Provider and loan/venture capital client on an ongoing basis (e.g. developing a clear and shared Evaluation of the Loan and Investment Program Page 31

38 understanding of the target high-risk ventures in order to be able to draft an appropriate and effective loan/venture capital fund agreement, building and maintaining rapport with loan/venture capital clients to ensure provision of advice/support in addition to loan etc.). Commitment of Capital Providers. The Program has benefited from the participation of dedicated and qualified Capital Providers characterized by senior management buy-in to fund high-risk ventures as well as capable staff who can understand and manage such high-risk portfolios. Commitment of WD. The commitment of WD to the Program as well as the relationships between WD staff and Capital Providers, have also contributed to the success of the Program. There exists a good working partnership between the two groups and a high level of communication. Additionally, continual funding from WD has been integral to the success of the Program. Autonomy. The Program has benefitted from the participation of dedicated financial institutions and the expertise of the Capital Providers in facilitating higher-risk financing. The autonomy granted to Capital Providers in making lending/investment decisions has augmented delivery of the Program by enabling a customized approach suitable to each Capital Provider. Flexibility. The flexibility that Capital Providers can offer to loan clients under the Program has been a major contributor to the Program s success. The Program is flexible in terms of the financial assistance it provides as such assistance is not restricted to a specific use; the Program accommodates start-ups, expansion plans, lines of credit etc., all of which can be useful to clients depending on their need at a given point of time. The terms of the funding are also more accommodating relative to traditional loans, which is beneficial to high-risk loan clients. Availability of other assistance. For the most part, the right assistance is getting to the appropriate businesses at the right time under the Program. The Capital Providers we interviewed credited the highly-relationship orientated nature of the Program as well as the support services provided to clients for the success of the Program. The relationships that Capital Providers have with various partnering organizations and programs attract ideal candidates to the Program via referrals; potential clients receive business training/coaching from partnering organizations and are subsequently referred to the Capital Providers. Loan clients that originate from referral programs such as self-employment programs are more likely to succeed and pose less risk of loan default. Similarly, the business advisory support loan clients receive from Capital Providers after receiving their loans also increases the likelihood of business success. 7. Some of the challenges faced by the LI Program include budget constraint, staff turnover, time and efforts requirements, lack of availability of support services, lack of awareness of the Program and restrictions on debt consolidation. Some of the factors that have constrained the LI Program from having an even greater impact to date include: Budget constraint. The Program operates within budgetary constraints which limit opportunities to expand the number or size of funds (e.g. loan loss support limits could not be raised without additional funding). The Capital Providers indicated that the Program is Evaluation of the Loan and Investment Program Page 32

39 constrained by the loan loss support percentage limit as well as the limit on the maximum size of individual loan/investment amount. In order for the Program to operate outside of these limits, additional funding would be necessary. Staff turnover. Capital Provider staff turnover can affect the performance of a loan/venture capital fund negatively (e.g. changes in senior management may bring a more risk-averse or conservative culture within a Capital Provider organization, replacement of frontline staff may change a Capital Provider s relationship with existing loan/venture capital clients etc.). Time and efforts requirements. Cultivating relationships with and providing guidance to each loan client, which is important for ensuring low loan default rates, can be a costly exercise for Capital Providers in terms of time and efforts, particularly because loan amounts are typically small, loan clients tend to have less business acumen and expertise than typical conventional loan client, and WD does not provide funding to cover staff/administrative costs. Lack of access to support and after-care services. Key informants and clients identified a need to expand support and after-care services (e.g. marketing advice, cash flow management support etc.) for the clients under the Program. Capital Providers indicated that it can take up to three years for a start-up firm to become stable; thus, developing and maintaining relationships with clients and providing ongoing support are important for decreasing the likelihood of loan default. Lack of awareness of the Program. Some Capital Providers noted that the funding allocated towards promotion of the Program and the associated loan funds is limited and more funding should be provided for promotion in an effort to further disseminate information about the Program to targeted communities and potential applicants. Promotion is necessary to educate potential clients on the characteristics and benefits of the funding provided by the Program; this will help ensure that the right types of target candidates are applying to the Program as it can be time consuming to sort through the high volume of applications (e.g. poor referrals, applicants with undeveloped business plans etc.). Restrictions on debt consolidation. The fact that the Program does not allow for debt consolidation can hinder the financial stability of the loan clients who subscribe to the Program (e.g. loan clients who have personal debt as a result of financing the launch of their business via personal credit cards cannot consolidate their credit card debts). A debt consolidation loan option could help loan clients manage their credit better and pay off more expensive debts sooner. 8. Some gaps exist in the programming designed to increase access to capital for SMEs in Western Canada. The financing gaps identified by WD staff, Capital Providers, similar programs representatives, other stakeholders, and clients are listed below. As most micro loan funds cannot approve loans greater than $35,000 and most larger loan funds do not approve loans under $100,000, there is a lack of financing in the above $35,000 and under $100,000 range. In the provinces that mostly have micro loan funds, there is a gap for financing over $35,000 There is a major gap for those who have been approved for financing under the Program but still do not qualify for follow-up/secondary financing outside of the Program. Evaluation of the Loan and Investment Program Page 33

40 The Program should make more funds available to early-stage companies. Address the financing gap that still exists for knowledge-based/high technology firms; prelaunch activities (e.g. research and development) are covered by the Program but pre-seed financing is not covered. The Program should provide funds to facilitate corporate restructuring deals/transactions. There is a need for more line of credit loans for high-risk SMEs to cover ongoing expenses. Securing a term loan to start operations is often not enough. Programs targeting select groups such as new immigrants, low income earners, First Nations, people with mental health disabilities etc. are needed in facilitating access to funding as well as providing assistance in the development and execution of business plans. There is a lack of venture capital firms and funds in Western Canada; this type of equity financing is vital for certain types of businesses (e.g. knowledge-based firms) as well as certain stages of business development (e.g. pre-seed and seed). More financing programs targeting firms that are between the start-up and growth phases of the business life cycle are needed. There should be more programs providing or facilitating subordinated financing/quasi-equity debt to complement asset-backed lending. More funding is needed to support socially responsible ventures, which are often from new/emerging sectors (e.g. alternative energy). 9. WD staff, Capital Providers, similar programs representatives, other stakeholders, and clients provided a number of recommendations and suggestions to further improve the LI Program. The major recommendations and suggestions to further improve the LI Program are grouped into similar themes and summarized below. Program Structure/Design Having a clear definition of the phrase high-risk may help ensure exactly what types of SMEs are eligible for financing under the Program. The definition should be flexible enough to reflect the differences across regions, sectors, and Capital Provider mandates (e.g. debt versus equity capital) while specific enough to further minimize duplication/overlapping with the mandates of other programs facilitating access to capital for SMEs. In planning the future of the Program, it should be reviewed whether or not the Program can be delivered more appropriately through another Federal Government agency such as BDC, whose mandate maybe more directly tied to the goals of the Program. The Program should identify the emerging sectors in the four Western Canadian provinces and set up sector specific funds to nurture and support those sectors during the inception stage. Start-ups in emerging sectors are often considered high-risk because it is difficult for lenders to assess their potential due to the lack of background information. Evaluation of the Loan and Investment Program Page 34

41 Incorporate specific performance metrics into loan/venture capital fund agreements for Capital Providers in terms of number of loan/venture capital applications screened, number of loan/venture capital applications approved, marketing efforts etc. over the duration of the agreement in order to ensure that Capital Providers will follow through with the agreement. Instead of the regular financing programs/divisions, consider approaching the programs/divisions within large banks that specialize in high-risk lending (e.g. subordinated debt or mezzanine financing program/division) to participate in the Program. As most micro loan funds under the Program operate on a break-even basis, any additional funding from WD would be helpful. If no operating funding is available, funding can be provided to cover onetime expenses such as advertising and promotion costs. Program Delivery More emphasis should be placed on the business coaching and training needs of clients in order to increase their likelihood of success and decrease the risk of loan defaults/increase emphasis on after-care services for all loan recipients as in addition to capital, business skills and training are critical to ensuring the growth of a business. If Capital Providers that do not provide loan aftercare/business advisory services refer their loan clients to other Capital Providers or third-party organizations that have dedicated staff for such support/services, such practice may hinder their efforts to build relationships/rapport with individual loan clients. Cultivating relationships/building rapport is critical as loan clients who are experiencing difficulties in running their operations should be able to turn to their respective Capital Providers for additional support. Ideally, loan clients should receive loan aftercare/business advisory services from the same Capital Provider. Capital Providers can engage volunteers such as retired business professionals or business students or successful past loan recipients under the Program to provide loan aftercare/business advisory services on their own if they do not have dedicated staff for such support/services. There should be more representation of WD staff at the key internal meetings of Capital Providers in order to better promote the merits of the Program. Assign more responsibility to staff based in each province who may be in a better position to cultivate relationships with existing and prospective Capital Providers. Awareness/Promotion/Outreach More education/outreach on the Program is required (e.g. provision of information such as how many clients have been assisted etc.) as many community organizations are not fully aware of/clear on the role of the Program and the various participating Capital Providers. Produce more promotional/information literature on the Program that highlights the eligibility criteria of the Program, benefits of the Program, funding levels, and overall results and success stories. Non-renewal of a fund under the Program can put a Capital Provider in a difficult situation as it needs to secure enough capital to provide any follow-up funds to the original funds disbursed under the expired fund in order to ensure that their clients can continue to operate without Evaluation of the Loan and Investment Program Page 35

42 encountering financial difficulties. Notifying Capital Providers of possible fund non-renewal as early as possible will help them to prepare better. 10. Delivery of the LI Program could be improved by adopting some of the best practices and effective strategies utilized by similar programs. The strength of the programs that work to facilitate/increase access to capital lies in the expertise and ongoing commitment of the staff involved with the various programs. Furthermore, the communityfocused nature of these programs ensures a heightened awareness and understanding of the needs of the local businesses, while facilitating networking and cooperation opportunities with other organizations and programs within the community that have a similar mandate. The similar programs representatives we interviewed provided some insights as to how these factors contribute to the effectiveness of their respective programs. In addition, they shared some of the important lessons learned and identified the factors that are critical to successful delivery of this type of program. Their comments are summarized below. Building awareness of the programs and the services they provide in the target communities is especially important for unique and non-traditional form of financing in order to ensure that they are being utilized to the maximum extent possible. While promotion of the programs is essential for creating awareness, it is important that the message is clear as to what the benefits of the programs are and who the target applicants are in order to ensure that the right types of potential applicants are reached. Establishing partnerships and aligning goals with various community organizations as well as other financial institutions are important in attracting target clients to the program, providing after-care support services to these clients, and equipping them with the necessary skills so that they can secure subsequent financing. Professional and knowledgeable individuals delivering the programs who are willing to take appropriate levels of risk while simultaneously making wise loan/investment decisions are important for effective delivery of this type of program. Ensuring availability and provision of sustainable program funding including ongoing operating funding is critical for the success of this type of program. This requires building and maintaining good relationships between the organizations delivering the programs and the government/funders to ensure that the interests of all the parties are aligned. Cultivating relationships with clients/entrepreneurs and providing them with ongoing support (e.g. mentoring, business advisory services etc.) help to ensure that solid business concepts are put forward and executed in a sound manner, and failure/default rates are low. The support services provided to clients are equally important to the funding they receive as clients may struggle with the operations of their business after receiving financing (e.g. they require assistance in marketing their products effectively). Thus, adequate resources should be dedicated to providing supplementary support. Flexible financing terms and conditions ensure that a program can address the needs of all clients equally and quickly adapt to changing market environments. The table below provides examples of some comparable programs that operate under different delivery models than that of the LI Program. The following table summarizes their strategies to create awareness, incorporate flexibility in loans terms and conditions, effectively carry out application Evaluation of the Loan and Investment Program Page 36

43 processes and provide ongoing support for the clients. Similar Programs Examples of Best Practices and Strategies The application process is done with due diligence which includes applicants preparing a business plan that is considered in the report submitted to the Board who ultimately makes the lending decision Entrepreneurs Loan Program - First Peoples Economic Growth Fund Loans terms and conditions are more flexible under the program compared to their regular commercial loans - the loans have longer amortization period, equity requirements are lower and support services are stronger The program is advertised through newspapers, via attendance at key/strategic community meetings/events, by setting up booths at conferences, through word-of-mouth communication, and via referrals Entrepreneurs with Disabilities Program - Community Futures BC The most notable advantage of this program is the flexible design of the loan terms and conditions which involves loans that are repayable at competitive rates and specifically tailored to address each individual entrepreneur s needs. Loans terms and conditions are different at the various Community Futures offices, depending on the local environment and the client The program is well-promoted through various marketing activities such as local marketing initiatives at the Community Futures level (e.g. website). Other avenues used to reach potential clients include networking with select organizations such as disability services providers (e.g. MS Society, Arthritis Society etc.), the Ministry of Housing and Social Development (the Employment Program for Persons with Disabilities), and self-employment programs for people with disabilities The program provides loans at competitive interest rates, flexible repayment schedules and no pre-payment penalty Community Futures British Columbia Loan Programs Alberta Women Entrepreneurs (AWE) Loan Fund Program - Women s Enterprise Initiative (WEI) The effectiveness of the application process lies in their efforts to not only provide pre-lending support including assistance with research and development of the business plan but also continue providing support and advice on an ongoing basis after the loan has been approved. Prior to approving the loan, credit officers investigate applicants creditworthiness, character and security values. In addition, credit officers review applications and make recommendations to a community-based committee which ensures community input on loan approvals In order to access the AWE Loan Program, clients must first work with a Business Advisor who assesses business needs, identify AWE loan requirements and determine whether or not applicant requests meet the program s lending criteria. Two rounds of Business Advisor assessments are done, after which the application is sent to a loan committee for third review and approval Particular strengths of this application process is that loan managers monitor payments after loans have been disbursed and Business Evaluation of the Loan and Investment Program Page 37

44 Similar Programs Subordinate Financing - Business Development Bank of Canada Examples of Best Practices and Strategies Advisors continue to provide loan after-care including maintaining regular contact, reviewing financials, sending letters for missed payments etc. The program is particularly focused on conducting due diligence during the application process as it does not have any real collateral coverage. The program obtains detailed information on the business seeking funding by directly contacting its customers, suppliers etc. The promotion of the program is done through other banks and accounting firms that refer clients on to BDC for subordinate financing. Direct marketing to increase awareness of the program is carried out by contacting past and prospective clients via mail/ and through seminars Commercial Loan Program and Specific Loan Guarantee Program - Agriculture Financial Services Corporation (AFSC) The competitive feature of this program is that it provides support to clients who are involved in riskier projects than clients of conventional banks along with higher ratio of financing against security, longer amortization period, and less restrictive funding criteria The program offers grants that can cover marketing studies, research initiatives, and development of business plans to assist in securing a larger commercial loan Northern Development Fund - Saskatchewan First Nations and Métis Relations Commercializing Emerging Technologies Program (COMET) - Department of Innovation, Industry, Science and Research, Australia Services for Aboriginal Entrepreneurs and Businesses - Aboriginal Business Canada The application process is simple and involves proof of government permits and if the business is starting up, applicants must prove they have been working beforehand. Grant applications involve a onepage formal application requiring basic information including a proposal, business goals, proposed budget etc. The program is welladvertised in the target communities through media and local business magazines The program encourages applicants to get informed and complete the online customer pre-application checklist before applying. Application forms are filled out with the assistance of a Business Adviser who then provides an assessment of the application to the National Manager, Board delegate and program delegate The application process is very competitive but it allows the program to select the best applicants. Business Advisers actively look for potential clients and are rewarded if they can facilitate investment capital to customers Assessment is conducted on the basis of individual project s viability and merits. A number of factors are considered including funds received from other government departments or agencies. A successful application requires a balanced financial package, involving debt financing from other sources and a minimum level of applicant s own equity. If applicant is starting a new business, ABC contracts out to an organization that helps applicants in working on their business plan, statement of cash flows etc. Evaluation of the Loan and Investment Program Page 38

45 Similar Programs Small Business Investment Company Program - Small Business Administration, US Examples of Best Practices and Strategies The program invests long-term capital in privately owned and managed investment firms, which, in turn, make funds available to small businesses Networking with trade associations/community organizations and word-of-mouth communication help promote the program Requests for loans are evaluated on the basis of the business ability to create jobs and add services to communities Small Business Loans Association Program - Enterprise Saskatchewan The program places high emphasis on partnerships and networking. To borrow from the program, potential loan clients must first contact the local program staff for information and application forms The program is promoted through regular campaigns (e.g. small business week) and by networking with the community partners Evaluation of the Loan and Investment Program Page 39

46 RECOMMENDATIONS III. RECOMMENDATIONS The recommendations arising from our review are as follows: 1. The Department should coordinate opportunities for participating Capital Providers to discuss and share best practices related to fund administration. Assuming the Program continues to enter into agreements with capital providers allowing them to lend/invest for at least five years from the date of entering into the agreement, it could be beneficial to schedule meetings of capital providers. As a number of Capital Providers from across the four Western Canadian provinces participate in the Program and some have developed expertise in certain areas of Program delivery over the years such as screening applications, assessing risk, providing supplementary services/support, managing client expectations and building relationships etc., there is value in periodically bringing together the Capital Providers to exchange and share information and ideas. Some Capital Providers process a high volume of loans under the Program but do not provide loan aftercare/business advisory services whereas some other Capital Providers approve relatively fewer loans and provide comprehensive loan aftercare/business advisory support/services, which leaves room for greater coordination and cooperation among the Capital Providers. Those Capital Providers who do not have adequate staff to provide loan aftercare/business advisory services can refer their loan clients to the Capital Providers within the same province that have dedicated staff for such support/services (e.g. BDC administers a loan fund under the LI Program in Manitoba and potentially has dedicated staff who can provide aftercare/business advisory services to the clients who receive funding from the other Capital Providers in Manitoba under the LI Program). This will ensure that the different funds active in each province complement one another to the fullest extent possible. As part of this process, the Program should collect and summarize any data currently collected by Capital Providers related to fund administration (e.g. number of loans/investments facilitated per Capital Provider staff, number of defaults on term loans versus line of credit loans etc.) for dissemination to the participating Capital Providers so that Capital Providers can determine how effectively and efficiently they are administering their respective funds and how they can make improvements. It is likely that the majority of Capital Providers already collect fund administration data relevant to their own funds/agreements for internal use. The provision of comparative data from the other Capital Providers will enable them to better interpret their own fund administration data without requiring significantly more time/effort. An additional benefit of sharing best practices among the participating Capital Providers is that it will reinforce their commitment to continue with the Program because of their exposure to the related work of their counterparts in other provinces in facilitating access to capital for high-risk SMEs. 2. The Department should formulate a performance measurement and tracking strategy for the Program. As part of the performance measurement and tracking strategy, develop and incorporate performance measures (e.g. number of loan/venture capital applications screened every year, number of loan/venture capital applications approved every quarter, minimum level of marketing efforts etc.) for any new funds going forward. Performance benchmarks for a new fund can be developed based on the aggregate/average performance of similar funds in the past. For funds involving new regions or products, performance benchmarks can be developed at the end of the first year once both WD and the Capital Provider have a better understanding of fund demand/intake. Evaluation of the Loan and Investment Program Page 40

47 RECOMMENDATIONS In addition, the Program should collect outcome data from Capital Providers on a regular basis regarding the SMEs that have received financing. Such data can provide valuable insight and input into future program decisions in terms of what types of SMEs are the most likely to utilize the Program, as well as at what point and what proportion of such high-risk SMEs complete their transition into successful ventures and what types of impacts the successful SMEs generate in their respective communities in terms of revenues and jobs. 3. The Department should give Capital Providers more flexibility over the funds they disburse as well as introducing new loan instruments. Some of the options include: Instead of setting maximum loan amounts, allow Capital Providers to provide funding based on the need of each applicant/sme. Instead of the regular financing programs/divisions, consider approaching the programs/divisions within large banks that specialize in high-risk lending (e.g. subordinated debt or mezzanine financing program/division) to participate in the Program. Explore the feasibility of expanding the Program eligibility criteria/clarify existing Program eligibility criteria to include cooperatives. Evaluation of the Loan and Investment Program Page 41