Why Canada's SMEs need a new federal insurer and lender

Opinion piece calls for a new lending agency focused on small businesses and intangible assets

Why Canada's SMEs need a new federal insurer and lender

Canada is in dire need of a dedicated federal government insurer and lender for small and medium-sized enterprises (SMEs), according to experts Patricia Meredith and Robert McGarvey.

Meredith, former chair of the federal payments system review task force, and McGarrvey, founding director of Rethinking Capital, argued that Canada’s reliance on traditional banks for SME loans is outdated and stifling the digital economy.

“Small and medium-sized businesses are the foundation of our economy, after all,” the two said. They are currently co-authoring the book “Canada’s Time to Lead” on the digital revolution.

Meredith and McGarrvey added that while private banks were intended to support economic development by lending to SMEs, these businesses have continually complained about the lack of available credit, especially for modern digital companies lacking physical assets as collateral.

“Commercial loans as a percentage of bank assets have steadily declined, especially since the 1970s, when banks were permitted to make residential mortgage loans,” the authors wrote in an opinion piece for The Globe and Mail. “The problem has become particularly acute for modern digital companies that do not hold physical assets, as banks are only comfortable lending to companies with real estate, or other hard assets, for security. This is very unfortunate.”

As of 2021, SMEs employed over 8.2 million Canadians and contributed around 67.7% of the GDP generated by the private sector. Medium-sized businesses employed 2.5 million or 20.4%, according to the piece.

A federal SME lender

Their proposed solution is “a dedicated federal government insurer/lender” modelled after the Canada Mortgage and Housing Corp. (CMHC), specifically for SME loans.

“While this country does have the Business Development Bank of Canada (BDC), the large corporation has been a major contributor to the old economy, not the new, digital economy – just as commercial banks have,” Meredith and McGarrvey wrote.

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The authors detailed a two-pronged approach for this hypothetical ‘SME Loan Corp’.

First, they said to focus on immediate solutions by modifying standards to recognize intangible assets and developing new underwriting guidelines for such lending. Second, they propose a long-term project to modernize Canada’s payment systems, allowing data collection for real-time insights into business performance.

Potential benefits

The authors believe this ‘SME Loan Corp’ would:

  • Provide essential funding for digital-focused SMEs, the backbone of the new economy.
  • Formally recognize and value intangible assets, critical in the digital age.
  • Transform Canada’s payment systems for real-time data essential for economic growth and sound lending practices.

“The end result would be the transition of Canada’s economy from the industrial age to the digital age,” they said. “Digitalization of the global economy is proceeding at a breakneck pace. If Canada is to remain prosperous, the institutions of finance have no choice but to keep up.

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