COVID-19 could permanently alter how Canadian SMEs (small and medium-sized enterprises) get financing.

RBC CEO David McKay stated in an interview with BNN Bloomberg,

“It [future COVID-19 business loans] would have to come in a forgivable form, the way it came in did in the [Canada Emergency Business Account], for [businesses] to be interested.”

McKay went on to explain,

“What customers, small business and commercial customers have clearly told us, across the country, is they don’t have the capacity, the cash flow, the ability to absorb more debt,” McKay said.

Canadian small businesses have certainly taken on a lot of debt over the past decade. According to Statistics Canada, the request rate for debt financing for Canadian small businesses rose from a low of 14% in 2009 to a peak of 30% in 2013. As of 2018, the request rate for debt financing sat at 27%. With Canada’s real gross domestic product falling 7.2% in March as a result of COVID-19, the number of SMEs seeking debt financing will likely increase – even if they might not be able to service it.

None of this is to say that small business loans are bad. In fact, they play a vital role in the growth of Canadian SMEs. An economic impact analysis of the Canadian Small Business Financing Program (CSBFP) found that,

“. . .a CSBFP loan significantly increased firms’ growth in revenues, profits and employment by 6, 7 and 3 percentage points, respectively, from 2014 to 2016. CSBFP loans also significantly increased the probability of survival to 2016 by 3 percentage points.”

However, problems could arise if businesses begin to depend on government support to reach cashflow.

Benjamin Tal, Deputy Chief Economist at CIBC, recently commented in an interview with BNN Bloomberg,

“. . .Of course it’s not a V-shaped recovery, but it can be a very long period of up and down where you cannot stop all those programs, especially the C$2000 per month. Can you actually stop it at any point in time over the next year when the economy is not back to normal? So on the fly, without even noticing, we are establishing the pipelines, basically the plumbing of our infrastructure for the social assistance system of the future, without even knowing we are doing it.”

And therein lies the problem: how do you stop social assistance programs once they start? While these programs have their time and place (especially during a global pandemic), questions remain over how they will be paid for in the long run. Mr. Tal himself states in the aforementioned interview that interest rates aren’t going anywhere for the foreseeable future.

COVID-19’s Effect on Canadian SME Financing

Many Canadian SMEs are already at their limits when it comes to debt, and may require further relief in the form of forgivable loans to stay afloat. This, combined with prolonged social assistance programs, could have long-term economic implications for the Canadian economy. Although Canada is still one of the best places in the world to start a business, COVID-19 and continual government spending threatens to change that.