Resurrecting a strategy from the 2008 financial crisis, the two Crown corporations that lend to Canadian businesses will boost their loans by $10-billion, part of Ottawa’s strategy to inject additional liquidity into the economy.
Together, Export Development Canada and Business Development Bank of Canada will increase their loans, typically issued on commercial terms, by $10-billion, but there are few details beyond that.
The government has yet to detail how the program will work, including whether it is directly providing funds to the $10-billion credit facility or whether the two lending agencies will use their existing financial capacity instead. Ottawa has not said how the $10-billion in new loans will be split between the two agencies, which operate at arms-length from the federal government.
But Finance Minister Bill Morneau did say that small and medium businesses are to receive most of those funds. Smaller companies are facing the prospect of severe hits to cash flow as social distancing hurts the retail and hospitality sectors, in particular. Loans from EDC and BDC could provide a financial bridge during the fight against the new coronavirus.
Economists said providing extra capital to small and medium-sized businesses from federal agencies such as the EDC and BDC is an approach that proved its merit during the global financial crisis in 2008.
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Glen Hodgson, a fellow at the C.D. Howe Institute, said lending from the EDC and BDC is a cost-effective way for the government to support businesses without driving up Ottawa’s spending.
Mark Chandler, head of Canadian rate strategy at RBC Dominion Securities Inc., said that while it is difficult to gauge the impact of any one government initiative in an economic crisis, making up to $11-billion of additional capital available from the EDC and BDC back in 2008 is seen as a program that worked.
“This is the first step I thought the Finance Minister would take when he talked this week about government support, because we know these programs help get money quickly to small businesses with cash-flow problems,” he said.
Dan Kelly, president and chief executive officer of the Canadian Federation of Independent Business, welcomed the loan announcement as a “reasonable second step,” coming after a loosening of Employment Insurance eligibility rules earlier in the week.
“After keeping people healthy, the biggest challenge for small businesses in coming months will be cash flow. It’s really important for financial institutions to help businesses through the valley,” said Craig Alexander, chief economist at Deloitte Canada. He said small to medium-sized businesses will struggle with problems in supply chains, maintaining inventory and swings in customer demand.
Mr. Alexander said: “Agencies such as BDC not only supply capital directly to businesses, they partner with other lenders. That is absolutely the right thing to do right now.”
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Patrick Brethour
Andrew Willis