A group of leading fintechs is in discussions with Ottawa on a proposal to provide $2 billion in emergency loans to up to 100,000 Canadian small businesses, The Logic has learned.
Representatives from Kilgour Williams Capital and the Canadian Lenders Association (CLA) have met with Finance Canada multiple times over the past month to fine-tune the proposal.
The fintechs’ proposal would get money to small businesses that don’t qualify for existing government assistance programs because their key workers are contractors rather than employees; because staff are paid via dividends instead of payroll; or because their payroll is below $50,000 or in excess of $1 million.
Their proposal lays out a vision for how fintechs can lend money to small businesses that don’t qualify for existing government assistance programs because their key workers are contractors rather than employees; because staff are paid via dividends instead of payroll; or because their payroll is below $50,000 or in excess of $1 million.
“We believe that the fintech lending sector is well suited to fill some of these gaps. We were tooled to do this in an expeditious manner before the crisis,” said Gary Schwartz, president of the CLA.
The details of the potential program are still being negotiated, but the basic structure would mirror the already-announced Canada Emergency Business Account program, whereby the government guarantees loans of up to $40,000, but individual firms apply for the money through banks.
The CLA’s proposal would see the Business Development Bank of Canada (BDC) provide $2 billion, which fintechs would loan out in exchange for a small fee for managing the money.
Potential products would include low-interest or interest-free loans of up to $250,000, as well as the potential for debt forgiveness if businesses use the loans for expenses like rent and utilities.
The CLA is making the case that members are experienced with this kind of thing; its 76 member firms have loaned out $2 billion in recent years with average loan sizes ranging from $25,000 to $250,000. They have existing relationships with tens of thousands of businesses nationwide, and have online lending platforms that can process applications within hours.
“Over the past month, we’ve had a number of conversations with government and have felt that they were listening, that they spent the time with us, that they understood the issues and that they thought that our solution was a good one,” said David Gens, CEO of Merchant Growth, an alternative financier with offices in Toronto and Vancouver, adding that while all signs were positive, the federal government hasn’t committed to the proposal.
The federal government is currently working on a number of potential new programs to help businesses. On Wednesday, Prime Minister Justin Trudeau said Ottawa would soon have more to say for firms “worried about commercial rent.” An announcement could come as soon as Thursday morning, according to Michael Smith, co-founder of Save Small Business, a lobby group launched amid the COVID-19 crisis.
The CLA’s talks have been focused with Finance Canada. Finance Minister Bill Morneau’s office directed questions about whether he supported the proposal to the office of Small Business Minister Mary Ng. “The Business Development Bank of Canada (BDC) has indeed received and is reviewing the proposal from Kilgour Williams and the Canadian Lenders Association,” said Ryan Nearing, press secretary for Ng. “BDC is working on a number of ways to help fintech platforms, given their innovative ways to adjudicate risk and to quickly disburse funds.”
Government conversations with fintech leaders have been going on for some time. On March 19, Ng said she had encouraged the BDC to expand its delivery system for the $10-billion Business Credit Availability Program (BCAP). “I just got confirmation today, they’re going to work with fintech platforms … [to] have a faster, easier way of pushing [money] out to those clients,” she said. At the time, BDC spokesperson Jean Philippe Nadeau told The Logic that “fintech is one of the scenarios we are exploring” as part of the BCAP, but that it was “too early to provide details.” BDC did not respond to a request for comment by deadline.
Toronto-based Kilgour Williams Capital, which was founded in response to the 2008 recession and advised both businesses and securities regulators throughout that financial crisis, would administer the $2 billion as part of a special purpose funding vehicle.
It would oversee loan applications to ensure there’s no double-dipping from one firm applying for identical loans from multiple lenders, and ensure custody of cash and loan assets.
“The first ones could be in a couple of weeks. Beyond that, it would take some scaling. The idea is to really make this thing fully roll out within 90 to 120 days,” said Colin Kilgour, founding partner of Kilgour Williams Capital. “That’s the window that we have available before we start to see wide-scale insolvencies.”
Kilgour said the proposal was put together after a phone call with Finance Canada, where officials asked his firm and the CLA to formalize a proposal on how fintechs could help the government disburse funds. He’s been in regular contact with the government to discuss it for about a month now, and is hoping a green light from government will come soon.
“I do know that every day counts. Bills pile up for businesses, bills pile up for individuals.
We are approaching this with a level of urgency. I assume the government has a similar sense of urgency. And hopefully we can move it forward,” said Kilgour.
Rolling out the program wouldn’t require significant, if any, regulatory changes, and the fintechs say they could get the first loans out within two weeks if the government greenlights the program.
“Canada is significantly behind other jurisdictions when it comes to leveraging technology to deploy this capital. If you look at the U.S., U.K., Australia, New Zealand, pretty much anywhere else, they’re all using financial technology platforms to make sure that these types of businesses get capital quickly,” said Cato Pastoll, CEO of Lending Loop. “We’re lending to Main Street, your local coffee shop, your local convenience store, your local yoga studio, we do accountants, we do doctors.”
In the U.K., Australia and the U.S., governments have granted fintechs licences to distribute funds. OnDeck, which is already distributing funds under the U.S. program, is urging Canada to follow suit.
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“I have relationships with thousands of small businesses, as do my colleagues in the small-business lending world, and it’s unfortunate that they’re coming to us through this, and I can’t help them,” said OnDeck Canada CEO Neil Wechsler. His firm is offering support where it can, via payment holidays and interest relief, but can’t lend new money to companies that have no revenue without some kind of government-backed program.
Under the U.S. program, fintech lenders are getting between one and five per cent as a service adjudication fee, depending on the size of the loan, according to Wechsler, who is also chair of the CLA. He’s looking for a similar structure here in Canada.
“We’ve built out the capabilities and infrastructure from an automated decisioning and servicing standpoint, that we can do this, we can do this well and fast.”