This is the second post in a three-part series covering the three credit programs that the Canadian Federal government has established for businesses that have been affected by COVID-19. In Part 1, we wrote about the Canada Emergency Business Account. Below, we review the second option available to Canadian businesses: the Export Development Canada Loan Guarantee.
The Program
Export Development Canada (EDC) is a self-financed Canadian Crown corporation. While EDC collaborates with the Government of Canada, it operates at arm’s length. EDC operates similar to a commercial institution in that it does not rely on governmental annual appropriations for funding. Rather, it collects interest on loans and charges premiums on insurance products. EDC also has a treasury department that sells bonds and raises money in global capital markets.
Despite the name, the program is not limited to loans. It does provide loans (cash flow term loans, to be precise), but it also provides credit, to micro-, small- and medium-sized businesses. The maximum amount is $6.25 million, with EDC covering up to 80% of the value of the amount, and the remaining 20% to be covered by the borrower’s financial institution and/or private credit insurer. The program is available to both exporting and non-exporting companies. The funds are to be used for operational expenses only. This means that it cannot be used for dividend payouts, shareholder loans, bonuses, stock buyback, option issuance, increases to executive compensation or repayment/refinancing of other debt.
Commentary
Unfortunately, qualifying for the program is not entirely clear. The Government of Canada states that: “Canadian businesses in all sectors that were otherwise financially viable and revenue generating prior to the COVID-19 outbreak are eligible to apply.” However, actual details on qualifying appear to be left to the discretion of financial institutions/credit insurers.
For example, while EDC states that the program is intended to assist micro- and small-sized businesses, and the Government of Canada states that the program is intended to assist small- and medium-sized businesses, the Royal Bank of Canada states that the program will assist “mid-sized and large” RBC business clients. This means that qualification for the program may be based on a threshold level of annual payroll or gross revenue. Unfortunately, this will limit the ability of smaller businesses to access funding.
We would like to see the Government of Canada put more pressure on financial institutions / credit insurers to loosen the qualifications for this program. At minimum, the discretion financial institutions / credit insurers have to set qualifications for this program should be limited.
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