Fiscal COVID: Scaling Up Is Hard To Do: Financing Canadian Small Firms

Canada’s small and medium-sized enterprises (SMEs) play an out-sized role in generating jobs and promoting economic prosperity. But Canadian growth-oriented SMEs lag those of other advanced countries and face financing hurdles, whether in raising debt or attracting equity investments. Despite Canada’s healthy supply of debt financing, access to financing appears to be of particular concern among certain types of firms including those that are young, growth-oriented, and exporters. Plus, Canadian SMEs in general face relatively high borrowing costs compared to those in other OECD countries. As for equity capital – such as angel financing and venture capital (VC) – there appear to be shortages in financing for companies that seek investments of less than $5 million. Of particular importance, the scale of angel financing in the US dwarfs that which is evident in Canada. The authors recommend a number of policy actions. For young and high growth firms, the federal government should consider re-structuring the fee payment schedule on Canada Small Business Financing (CSBF) loans such that fees can accumulate over the loan’s life and are repaid by a balloon payment at maturity. This would reduce the annual borrowing costs for the most vulnerable borrowers. For high growth firms, the CSBF program could also be amended to allow it to cover the portion of requested loan amounts that exceed that which financial institutions are willing to provide. For exporters, Export Development Canada (EDC) could help reduce exchange rate volatility through its foreign exchange facility guarantee program. To address the gap in the supply of angel and seed/early stage VC financing in Canada, the authors recommend a national co-investment fund that would invest alongside angels to leverage their investment and expertise. One approach might be through expansion of existing programs such as the National Research Council of Canada’s Industrial Research Assistance, the Venture Capital Action Plan and the Venture Capital Catalyst Initiative programs. The authors also point out the need for policy research on the impacts of foreign funds on the Canadian VC industry.