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Shawn Levangie got the call he’d been dreaming of last summer when, out of the blue, retail giant Wal-Mart placed a $1-million order with his garden tool company in Nova Scotia.
Business was about to boom, but when Trail Blazer Products Inc. went looking for financing to expand, Mr. Levangie found his line of credit was being squeezed.
In a tight lending climate, he was forced to take out mortgages and borrow from his father’s company, eventually scraping together enough cash to buy the extra machinery needed so his Dartmouth company wouldn’t miss its big break.
“If we did turn the order down, you can pretty much guarantee that they wouldn’t be reordering in the future,” Mr. Levangie said. “It would just show that we were incapable of handling it.”
It’s a problem confronting many entrepreneurs. Small-business lending plunged during the economic downturn, forcing companies to slash operations and hoard cash.
In a tight lending climate, he was forced to take out mortgages and borrow from his father’s company, eventually scraping together enough cash to buy the extra machinery needed so his Dartmouth company wouldn’t miss its big break.
“If we did turn the order down, you can pretty much guarantee that they wouldn’t be reordering in the future,” Mr. Levangie said. “It would just show that we were incapable of handling it.”
It’s a problem confronting many entrepreneurs. Small-business lending plunged during the economic downturn, forcing companies to slash operations and hoard cash.
So as most companies reduce debt, a smaller number are strategically stockpiling credit.
Small businesses that do seek loans could face higher borrowing costs now that the Bank of Canada has raised interest rates for a second successive time, although to a still-low 0.75 per cent. Governor Mark Carney this week indicated that policy makers are more concerned about a rebound in global growth – which he described as “not yet self-sustaining” – and, in particular, the choppy recovery in the U.S., Canada’s main export market and a vital source of revenue for many small firms. That suggests borrowing costs are unlikely to rise quickly.
The borrowing climate in Canada is a far cry from south of the border, where Federal Reserve chairman Ben Bernanke is urging lenders of all types to extend credit to smaller enterprises, in order to kick-start the economy’s fizzling growth and try to cut into a stubbornly high unemployment rate.
Pointing to data showing that banks’ loans to small businesses in the world’s biggest economy fell to $670-billion (U.S.) from $710-billion over the past two years, Mr. Bernanke called making credit accessible to viable small businesses “crucial” to sustaining the recovery.
Economists in the U.S. are divided over whether the drop in lending is more a function of banks that are still scarred from being left holding the bag after a wave of defaults and foreclosures or a byproduct of smaller companies having less appetite to borrow because they’re worried about taking on more debt before the economy, and their sales prospects, look more stable.
In Canada, the July version of a quarterly survey of Canadian lenders by the Bank of Canada found a “modest net easing” in lending conditions for smaller companies. That marked the first time since mid-2007 that the survey found an increase in financial institutions’ willingness to lend to such firms.
The credit climate for small businesses started to stabilize in the first three-month period of the year after several quarters of tightening, according to the central bank’s surveys. Up to then, improvements in access to credit were mostly limited to larger companies that source their financing from capital markets.
Ted Mallett, chief economist at the Canadian Federation of Independent Business, said his group’s research suggests there hasn’t been a huge improvement in lending over the past year, but cautioned against reading too much into that.
“It’s open to question how much of a deterioration there was from, say, the summer of 2008 to the winter of 2009,” Mr. Mallett said. “We don’t have firm data on that, it’s mainly anecdotal, but [our view] is yes, there was both a demand and supply-induced reduction in borrowing through that period, but it didn’t seem to be as bad or problematic as what happened during the 1990-91 recession.”
That experience, and the downturn of the 1980s, has contributed to many smaller businesses relying on other sources of loans, such as family members or suppliers, he said.
Grant Robertson and Jeremy Torobin
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