Industry Canada is proposing major changes to the CSBFA that would take effect April 1, 2013. The proposal is currently under a 30 day consultation period that began last Saturday.
The main changes to the current program are:
- The maximum interest rate would increase by 0.75% to prime + 3.75% or the residential mortgage rate + 3.75%
- Banks would be able to charge higher loan administration fees. These fees are capped under the current program.
- The personal guarantee provided by the shareholders of a corporation could be 100% of the loan amount. Personal guarantees are limited to 25% of the total loan amount under the current program.
Industry Canada wants to make these changes because the number of loans granted under this program have dropped from 18,000 in 1999–2000 to 7,466 in 2010–2011. Banks complain that the program is difficult to administer and that they don’t make enough money on the loans. These changes are supposed to help change that and get more of these government guaranteed loans in the hands of small business owners.
The increase in the interest rate and fees will cost businesses more when they borrow under this program but that isn’t my main concern. The proposed 100% guarantee will expose the shareholders of a company to full personal liability for the loan amount. I believe that this rule change will reduce the number of entrepreneurs willing to take a chance on starting a business.
The current 25% guarantee ensures that the shareholders have “skin in the game” but that that their losses will be manageable if the business fails. The 100% guarantee would make the losses far less manageable for many people.
I’ve seen many situations where a group of small investors pool their funds and take out a CSBFA loan to start the business. One shareholder runs the business day to day and the others help out when they can because they typically work at regular jobs. Entrepreneurs like this can justify their participation if they can limit their losses to their cash investment in the company and 25% of the loan amount. Increasing this to 100% will prevent many people from starting a business in a scenario like this.