In his Financial Post article “Stifled Growth” from earlier this week, John Greenwood describes how banks are showing less and less faith in Canadian businesses and are therefore making their lending policies increasingly tight.
Greenwood writes that “a study by the Canadian Federation of Independent Business shows across Canada small and mid-sized businesses are a driving force in the economy, creating jobs and driving activity, yet the banks are often reluctant to extend the credit they need to flourish.”
The CFIB notes that an “alarmingly high” number of requests for lines of credit or loans from independent businesses are being turned down. In fact, the twenty-year period between 1989 and 2009 saw banks such as CIBC lose nearly half of its market share. This is a drop so big that according to the director of research at CFIB, Doug Bruce, “it raises serious questions about whether they’re doing it intentionally or because of competition.”
Bruce believes that the big banks are making it increasingly difficult for small business owners to develop relationships with their bank managers. This is often a key in getting loans approved. Says Bruce: “We advise our members to develop a relationship with the account manager and to keep an eye on the services the banks are providing and the fees they’re charging.”
As Greenwood explains, however, this relationship is not necessarily such an important key to have anymore. The centralization of decision making at financial institutions make it so that the funding request is often reviewed by someone who may never have even met the person applying for the loan.
One of the most startling revelations to come from the CFIB study is the fact that the highest rate of loan rejection is suffered by “micro-businesses” that employ up to four employees. About a quarter of applications from these businesses are turned down. Meanwhile, companies with five to 49 employees see a 16% rejection rate.
Overwhelming evidence shows that banks are simply saying “no” to business owners. Clearly, financial institutions such as CIBC and Scotiabank feel that lending to small to mid-sized businesses in Canada is too great a risk.
The time for Canadian owners of such businesses to look into the possibility of securing a merchant cash advance has never been so appropriate. Without the extra working capital needed to fund renovations, expansion, advertising and the purchase of new equipment and inventory, small and medium-sized businesses will not be able to assist the Canadian economy the way they have been known to in the past.
Says the CFIB study: “To lead Canada on a path to a healthy economic recovery in 2010 and future years, Canada’s small and medium-sized enterprises must not be hindered in their ability to focus on jobs and growth.”