When I started my business I went to the bank and I got an unsecured line of credit. That was in 2001—and those days are long gone. In Battle of the Banks, the Canadian Federation of Independent Business reported that between 2000 and 2012 overall loan rejection rates have almost doubled. “The banks have no interest in financing small business unless they are 100% secured on company assets, personal insurance and guarantees,” said a Bank of Montreal client based in Saint-Laurent, Quebec. “If we are going to borrow on those terms, I might as well be the secured lender myself.”
And, if you’re a new Canadian, a woman, a younger person, or aboriginal, your chances of getting a loan to start a small business are even less likely. According to Industry Canada, only 12% of SME owners are younger than 40, only 22% were born outside of Canada, and only 16% are majority female-owned. In addition to the difficulty that many potential business owners face in accessing capital, aboriginal people have unique challenges to securing financing including legislation prohibiting the use of on-reserve assets as collateral, lack of local financial institutions to work with, and lack of access to angel investment or venture capital.
Despite the fact that Canada’s biggest banks have been on a remarkable earnings run since mid-2013 profits in the future aren’t expected to be nearly as spectacular. In response, maximizing value through cost-cutting and lower risk tolerance will be the priority and even fewer entrepreneurs will be able to access capital. Perversely, in optimizing their profitability, banks are limiting the potential of entrepreneurs (who represent 97% of all Canadian businesses, employ 56% of all workers and play a key role in shaping local communities) to contribute to Canadian society and its economy.
Nowhere is the lack of access to capital more conspicuous than with aboriginal people in Alberta. The province outperforms the rest of the country in GDP performance—largely due to double-digit annual revenue growth from the oil and gas sector— but most aboriginal people have been left out of Alberta’s prosperity because they can’t access the capital they need to become entrepreneurs.
“Trust me, I really had a hard time when I first started.” says Connie Saliwonczyk, president and founder of Connie’s Oilfield Lease Maintenance Ltd., based in Frog Lake, Alberta. “I was in business for nine years prior to getting financing. Back then I was cutting grass and pumping water, providing well-site maintenance. I started out very small on my own. I worked with child welfare and I saved my money and started buying my own equipment.”
However, there is reason to be hopeful. Social Finance: Unlocking the Potential for Developmental Lending, a new research report conducted my firm Impakt, reveals that the Indian Business Corporation, a company owned by the three treaty areas of Alberta, has pioneered an approach called “developmental lending” that is providing aboriginal entrepreneurs such as Ms. Saliwonczyk with capital to create new businesses, or maintain or expand existing ones.
Developmental lending as practiced by IBC involves providing financial services (primarily loans) to aboriginal people who, for a variety of cultural and/or financial reasons, are alienated by mainstream lending institutions; approving loan applications on the basis of typical financial considerations while taking into account the potential for positive social or community outcomes; and evaluating social outcomes resulting from the loan portfolio over the long term.
Impakt’s report illustrates the potential of developmental lending to help aboriginal people to become successful entrepreneurs, transform the lives of families and communities, and support the needs of industry. However, despite evidence of the business and social value of developmental lending, industry has not yet invested in this approach, the pool of available loan capital in Alberta remains inadequate, and the economic and social benefits remain largely unrealized.
As accessing capital becomes increasing difficult for Canadian entrepreneurs—especially those who are considered particularly risky by Canada’s big banks—other approaches, such as developmental lending, ought to be taken more seriously. “If Canadian resource companies really want to do something valuable for aboriginal people while securing their social licence to operate, they should provide capital for developmental loans,” said Brian Cardinal, President, Indian Business Corporation.
For my own part, thirteen years after starting my business, I went to our bank to request an increase to our line of credit—and was rejected.