BANC - Standing Committee

Banking, Commerce and the Economy

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40-2 40th Parliament, 2nd Session (January 26, 2009 - December 30, 2009)
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Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce

Issue 2 - Evidence, March 11, 2009

OTTAWA, Wednesday, March 11, 2009

The Standing Senate Committee on Banking, Trade and Commerce met this day at 4:05 p.m. to examine the present state of the domestic and international financial system.

TOPIC: Access to credit for businesses

Senator Michael A. Meighen (Chair) in the chair.

[English]

The Chair: This is our first public meeting, and I want to welcome everyone here.

[Translation]

The Standing Senate Committee on Banking, Trade and Commerce is studying today the present state of the domestic and international financial system and more particularly access to credit for businesses.

[English]

I believe that the access-to-credit problem is an important issue. I know this view is shared by all members of the committee. It must be examined in the context of the economic downturn that Canada, like many nations worldwide, is experiencing. While actions have been taken by the federal government and by the Bank of Canada, concerns continue to exist about business access to credit.

In particular, notwithstanding policy efforts, survey and anecdotal evidence all indicate that at least some businesses are finding it increasingly difficult to access credit. Our witnesses here today from the Canadian Federation of Independent Business, CFIB, will tell us in detail about this situation. Before introducing them, however, it might be appropriate to introduce to you the members of the committee who are present here today. On my far left, Senator Oliver, from Nova Scotia; Senator Paul Massicotte, from Quebec, via Manitoba; the very distinguished deputy chair of the committee, Senator Yoine Goldstein, from Quebec; on my left, Senator Harb, from Ontario; and Senator Wilfred Moore, from Nova Scotia. We have now been joined by Senator Stephen Greene, from Nova Scotia. Nova Scotia, as you can see, is dominating once again.

From the Canadian Federation of Independent Business, we have with us today Ms. Corinne Pohlmann, Vice- President of National Affairs; Mr. Daniel Kelly, Senior Vice-President, Legislative Affairs; and Mr. Ted Mallett, Chief Economist and Vice-President, Research.

My name is Michael Meighen. I chair the committee, and I am from Ontario, via Quebec. That being said, we should get right into the matter at hand. I understand you have a presentation, which, hopefully, all members have received. Perhaps you would like to make a statement, after which there will be questions for you.

Corinne Pohlmann, Vice-President of National Affairs, Canadian Federation of Independent Business: Thank you for the opportunity to be here today. You should all have a copy of our presentation in front of you, as well as a couple of documents to which I will be referring in a few minutes as I walk you through the presentation. With me today are Mr. Kelly and Mr. Mallett, who will be here to answer questions at the conclusion of the statements.

I want to start with a bit of context about who we are at CFIB. The CFIB is a non-partisan, not-for-profit organization that represents the interests of 105,000 small and medium-sized companies across Canada. These are all independently owned and operated companies. That means they are not publicly traded companies. We have members represented in all parts of Canada, and they come from all sectors of the economy. If you name a sector or a type of business, we probably have them as a member.

We are 100 per cent funded by our members. We take no money from banks or government. Everything we do comes from our membership. We deal with issues at all levels of government — municipal, federal and provincial —- but we also deal with issues related to large institutions. We have been involved in financing and banking for a long time, starting back in the 1980s.

The banking industry has a huge impact on the small and medium-sized sector. Since the early 1980s, we have been doing surveys on our membership every three to four years as to how they interact with the banks and how the banks are treating them. We got very involved in 1998 as part of the bank merger fight. We fought strongly and effectively against the merger of four or five banks. We are proud of being part of that campaign. We believe strongly that the strength of our banking sector today has much to do with the fact that the merger did not go through in 1998. That is the reason Canada is seen as a model in the banking sector.

I want to mention two things that make CFIB unique as a business organization compared to others. First, we have a field force. Our field force is about 200 individuals whose job is to visit small and medium-sized companies every day. We estimate that 4,000 small businesses are visited by a representative of CFIB weekly. This allows us to gather information from them and to deliver information to them effectively. It is a grass roots type of organization from that perspective.

Second, we have our survey process. We are a very democratically driven organization. We do not take a policy position on an issue until we get feedback from our membership through our survey process. Mr. Mallett oversees that area. We have become very sophisticated at it. We do all of our own survey and analysis in-house. That allows us to bring forward the information that, hopefully, we will be able to bring forward to you here today.

Moving to the next page, I want to give some quick context before we jump into our data. It is important that we remember the size and scope of small and medium-sized businesses in Canada. About 98 per cent of all business in Canada have fewer than 50 employees. That is the threshold for what we consider to be a small business. Small and medium-sized companies employ 60 per cent of all Canadians and represent almost half of Canada's GDP today. It is important to understand that, while we often focus on larger businesses or those that are publicly traded because they get the headlines in the newspapers, Canada's economy and jobs are just as dependent, if not more dependent, on the small business sector in this country. It is important to understand the dynamics happening there.

Moving to the next page, I want to talk about the economy and what we are hearing from our membership as to what is happening in the economy. Before I explain this chart called the ``Business Barometer,'' I want to provide some background. We were doing this survey called the ``Business Barometer'' annually up until 9/11. At that point, there was chaos in the system where we did not know what was happening. We wanted to survey our members on a weekly basis to understand what they were feeling in the economy. Goodness knows, the stock markets were going crazy at the time.

We did the survey over a 10-week period, surveying 10,000 members over those 10 weeks. By the end of the 10-week period, we realized that our members were doing quite well. We told Finance Minister Paul Martin this information at that time. We said, ``This is not the time to start spending our way out of this. We believe that our members are doing well.'' We were also able to calculate that 250,000 jobs were open at that time. This was at the beginning of 2002. We told him to keep calm and to let things emerge. Sure enough, by the end of 2002, we were proven to be right. In 2002, we created 500,000 jobs in the economy. We realized that this business barometer that we created was very important. We were asked by the Bank of Canada and others to do this on a more regular basis. Consequently, Mr. Mallett and his team started doing it on a quarterly basis. It is now used as an economic indicator of the Canadian economy by the Bank of Canada. Mr. Bloomberg uses it and spreads it around the world. It is indicative of what the non-stock market economy is thinking in Canada.

In front of you is the business barometer for the most recent quarter, which was December 2008. This is based on a questionnaire that asks a series of questions about members' businesses. We do not ask our members about their opinion on the economy. We ask, ``What is happening with your business? Will it be stronger or weaker?'' No one knows their business better than they do. Based on that question of where they think their business will be a year from now, we have built the index in front of you. The thicker lines are the perceptions of our members. That index has been coming down. It is ranked against the thinner, blue line, which is Canada's GDP. As you can see, our members' perspectives are a good reflection of where the GDP is going. In fact, we should have put the number in after the 1.3 in that the GDP has since fallen quite a bit more and is reflective of our members' perspectives. While this indicates our members are feeling less optimistic — which is true; there is definite caution and worry among our membership — we believe there is underlying stability there.

I now ask you to turn to the next slide to give you some ideas of why that might be.

I will get to the first part on ``Access to Bank Credit'' in a second. The ``Full-Time Employment Plan'' is what is important. This is where the real economy comes in. Our members have told us that, as recently as December, more than 80 per cent plan on hiring or maintaining their current levels of staffing. They are holding on to their people and continuing to hire. That, we believe, is an underlying stability that exists among the small and medium-sized business sector.

You should have with you our last quarterly business barometer, QBB. Contained in it is considerably more information and depth of detail about the economy. It talks about the business barometer by region and sector. There are variations on both. That might be information for you to look at. I will leave that with you to look at on your own. Our next business barometer will be released March 28, so we will have to see whether the numbers go down, stabilize or go up. That will be interesting for us to watch.

I want to get to the subject of today's hearing, namely, access to bank credit. Also on this chart, there is something there that we pull from our quarterly business barometer as part of the conditions that small businesses face. We have been asking this question about their access to bank credit for a long time. As you can see, in December of 2007, 13 per cent said that access to bank credit had worsened in the last three months. By the time we got to September 2008, it started increasing to 18 per cent. In September, everything started coming down around us. By mid-September, we started doing a weekly survey again, and we saw that number almost double to 28 per cent. While the number has increased, it has been stable since September. From September to December, 27 or 28 per cent of our members were saying that access to credit was stable, but it had not changed in that three-month period. We will be watching closely in the next QBB to see if that number has changed.

Based on this, we knew we had to get more information and dig deeper. Starting in January, Mr. Mallett and his team began a monthly survey. We have yet to release the results of that survey. We have only done it for January and February so far. It will look at what is happening in the economy; however, we have added more questions to delve into the access-to-credit issue. In that survey, which we will be sharing with you today, we will be sharing the preliminary results based on the 900 responses that we received in January and February on the issue.

If you move to the next slide, this is new information for us.

Senator Greene: With respect to access to bank credit, is that in relation to whether it is possible to qualify for credit, or is it an interest rate issue?

Ms. Pohlmann: It would be both. We are not specifying in that particular question which of those. It is just a general access to bank credit.

In this next set of questions, we get into more detail to bring out those nuances.

Page 6 breaks down who is borrowing and who is not borrowing by size of firm. We are sharing this with you because often there is a perception that smaller businesses are more likely to need financing. We are trying to break that myth. Smaller firms are no more likely to get financing than larger firms. That is what we are trying to show in this slide. It is interesting that firms are becoming less dependent on borrowing money from banks. In 1990, on average, about 75 per cent of small and medium-sized companies were borrowing from banks. That number has come down to 60 per cent since 1990. We believe they have learned their lessons in previous downturns with how the banks reacted during those particular periods of recession or downturns in the economy. They have become more cautious when seeking money from the banking system.

Stability among smaller companies may seem to be good. We think it is great at this moment in time, which is important. However, it also indicates that they are not necessarily putting as much investment into growth. When you go into debt, obviously you are trying to leverage money to move toward an expansion or a new investment. That could be something that is not necessarily happening to the degree that it should be, and it is something that we need to watch closely.

The next page shows how easy it is for them to access financing. It explores more of the nuances, such as if they are looking for credit, are they able to find all of it, most of it, some of it or none of it? Here, we looked at it based on the type of financial institution from whom they are getting the credit. If they are a non-borrower, not surprisingly, they have access to all the credit they need because it is not important to them. However, if they are using specialty asset financing, basically leasing companies, they are not able to access credit as easily as using other types of financing. There is little difference between credit unions, foreign-owned and domestic banks in terms of our members who are using those. They feel that they can access credit to some degree. Our problem with this particular survey at this point is that we have never asked these questions before. We do not know if this is getting worse or better. This is a benchmark for us that we will start monitoring as we move forward to see if there are changes in this particular breakout that we have in front of us.

On page 8 is a pie chart. It asks about whether their loan balance amount is higher or lower than three or four months ago. That is, do they have to pull out more money. It is quite split here. About one third said that they have a higher loan balance amount; one quarter said that they had a lower loan balance amount.

The Chair: Is that a first-time question as well?

Ms. Pohlmann: Yes.

The Chair: Perhaps you can let us know which ones are first-time questions.

Ms. Pohlmann: All of these are first-time questions. They are based on only two months of data.

Page 9 takes those people that say that they have a higher loan balance amount than three or four months ago and asks them why. The majority said that they have unexpected lower revenues or higher expenses. We believe this is directly related to cash flow issues. Smaller businesses are struggling more with cash flow right now. Bills are not getting paid and business may be down, so cash flow is becoming more of an issue. They cannot necessarily pay down the line of credit as they would like to, so this is resulting in their expenses being higher or their revenues lower. This is a good reflection of the current economic situation.

Interestingly, 17 per cent, one in six, are actually expanding. They are looking to do new investments. There is still a dynamic in the economy today that is growing and investing. It is important to keep our eyes on that as well.

The next chart shows the reasons members have a lower loan amount balance than three or four months ago. The majority here, 73 per cent, say that it is because they are making efforts to pay down their loans. Again, it shows you that small businesses are very responsible when it comes to financing and loan paying. They are making efforts to also get rid of their own debts.

We found it very interesting that only 1 per cent told us that the lender had initiated a credit cutback. In other words, a bank came in and said, ``We are cutting your credit line or loan amounts.'' Only 1 per cent told us that has been an issue for them. We have a system within CFIB where members can call us to help them with their issues, and we get literally hundreds of calls per week. We learned, through that process, anecdotally that it is not people who have an established relationship with a bank that are having a problem. It is when people are trying to get a new loan or trying to renegotiate the terms of a loan that they start to run into roadblocks. It is not that they will not get the loan, but they may have extra paperwork and need to do more to get that loan. That is where the roadblocks are coming in. We are learning this anecdotally and would like to explore further.

The next chart looks at the cost of the loan, at what percentage they are paying on the largest loan that they currently have outstanding. It starts from prime rate or less, and then it goes up to prime rate, prime rate plus and so forth. The average loan interest rate that our members are paying is at about prime plus 2.75 per cent. This is a first- time chart, so we do not know what is changing right now. However, it is interesting that one of the highest percentages is those who are carrying prime plus 6 or more per cent. That is a huge amount to pay for a loan. When we delved into that more deeply, we discovered a higher percentage than normal of retail firms, manufacturing firms and firms getting their loans either through a special asset financing loan, a leasing company, through the Business Development Bank of Canada, BDC, or through credit unions. Those tended to be more highly represented in that group that had the higher rates of interest on their loans.

We also discovered a slight increase in the cost of loans from January to February. There is a bit of an uptick between January and February. However, it is only one or two months of data, so we are hesitant to say that it is a trend. It could be a blip. We are watching that because, anecdotally, that is what we are hearing more than anything else.

That brings me to my last page. Overall, from the data that we have been collecting and from the anecdotal information we received from our members, they are able to access credit, but the cost of it is going up. It is getting much more expensive to get credit, and we are finding that those negotiating new loans or renegotiating the terms of a loan are encountering roadblocks. I have a quote from a member that gave us a comment that I feel is fairly typical. They said, ``Our biggest problem is cash flow and collecting receivables. Our bank has reduced our line of credit by 20 per cent. We applied to the BDC in December of 2008, received verbal confirmation in January of 2009 and still have not received anything in writing as of today,'' which was March 4. ``We keep getting a positive response, but there always seems to be one more hoop to jump through. We have a serious cash flow problem that is restricting our production, which in turn affects our sales, which in turn affects our cash flow and so on.'' I think that is fairly typical of what is happening to many businesses out there today.

Ultimately, we need more data to understand what is happening out there. That is why we decided to take on this monthly surveying process that we started to share with you here today. We will continue to collect that information and monitor it closely. We have been through this before, and I believe both Mr. Mallett and Mr. Kelly can give you some illustrations of experiences of recession in the past with respect to the banks.

In addition to this survey, we are also doing a one-time business financing survey of which you should have a copy. That survey is currently in front of our membership right across the country. We expect we will have over 10,000 responses to the survey, with results coming in late April, early May. That will provide more in-depth information for us to understand the impacts on our membership. With that response, we can analyze it by region and sector and so on. We will have much more information to share.

Senator Goldstein: Is this the one you are talking about?

Ms. Pohlmann: Yes, it is.

Senator Goldstein: We have it in our kit.

The Chair: Will you be able to share the results as it comes in?

Ms. Pohlmann: I will turn that over to Mr. Mallett. We are open to any questions you have.

The Chair: That was concise and clear and helpful to us now. Perhaps I should introduce the other members of the committee. You can see the interest that your presence here has generated. We have Senator Hervieux-Payette, from Quebec; Senator Johnson, from Manitoba; Senator Eyton, from Ontario; and Senator Ringuette, from New Brunswick.

I should draw all members' attention to the fact that we have a full turnout today. We have 33 or 34 minutes for questions, so the chair will have to be strict in terms of time allowed for each questioner. Before I turn to our developing list of questioners, do either Mr. Mallett or Mr. Kelly have anything to add?

Ted Mallett, Chief Economist and Vice-President, Research, Canadian Federation of Independent Business: In answer to your first question before the introductions, we will be producing a report on this banking survey, probably sometime in the summer.

The Chair: Is that coming out of the survey that you were referring to in May? Can you give us anything at the end of May?

Mr. Mallett: Yes, we will probably be able to release additional information on our monthly tracking of financing conditions before that. The one-page, two-sided survey will not be available until the summer. It goes into certain details. Its purpose is to start comparing individual institutions on banking relationships and so on. It has some financing information. The purpose of the monthly survey is to track business financing performance and conditions on a time series basis to see if things are getting better or worse.

The Chair: Do you make a distinction between incorporated business or sole proprietorships, et cetera?

Mr. Mallett: We can. It is in the database, and we are able to distinguish between those. If we were asked to find the difference between the two, we could do that. We certainly do it by size of business as well, which is also a good indication of incorporated and not incorporated.

Senator Oliver: Thank you for your presentation. I found it surprisingly positive given all the things we have read because your conclusion is that small business is not having difficulty getting access to credit. The way you put it, they are still able to get access to credit, albeit some are paying prime plus six, but the majority are not.

The federal government, in its budget, has decided that one of the things it can do to loosen up more credit is to give billions of dollars to BDC and Export Development Canada, EDC. From your work and surveys, do you think this will be effective, and what are you hearing about it?

Mr. Mallett: Ms. Pohlmann commented about BDC having difficulty getting back in time to certain businesses. Are they really able to work on a fast basis?

Senator Oliver: Is that a consistent complaint?

Mr. Mallett: We tend to hear this.

BDC is not a primary lender to our membership. Only about 3 per cent of our members receive loans from BDC.

Senator Oliver: Under the budget proposal, BDC and EDC will become a greater source of financing.

Mr. Mallett: It is a new channel that many of our members have not had to travel before, and that will become an education for them. It is still unknown whether BDC and EDC will be able to respond quickly to requests.

Ms. Pohlmann: We welcomed that announcement only because we feel that more opportunities to access credit in the marketplace can only be good for the market. We will be talking about the fact they can access credit, but we are concerned about those businesses that are perhaps new and having more trouble, and that is where organizations such as BDC and EDC become important. We did support that particular initiative for that very reason because it is definitely tightening up. So far, it is not as bad as we have seen in previous downturns in the economy, and we are trying to gauge that.

Daniel Kelly, Senior Vice-President, Legislative Affairs, Canadian Federation of Independent Business: The other welcome change the government made in its budget was changes to the Canada Small Business Financing Act. They did increase the loan limit, but that was not something we had been pushing. We welcomed the other piece of reducing the paperwork and restrictions of that process. We also want our lending institutions, the main delivery vehicle for that, to ensure that businesses know when they receive a loan guaranteed by the federal government.

Senator Oliver: Are the three of you surprised with the positive results you have received on the monthly survey that you are doing?

Mr. Mallett: I am not terribly surprised, but I see this data all the time.

Senator Oliver: We are in a massive recession.

Mr. Mallett: We had data from the previous recession. December numbers on our barometer were not record lows. We saw worse numbers in August of 1990, albeit by a very small margin, which suggests that we are in familiar territory. There has been speculation that we have never seen this kind of economic performance before. We would say, at least in the small business sector, they have had this kind of pain.

Mr. Kelly: We have not seen at this stage, which we have in the past, banks getting out of full sectors of the economy or freezing lending to types of business, such as not lending to restaurants or to agricultural operations. We have seen that happen in the past. At this point, that does not seem to be the case. I am not sure that I would agree fully that this is extremely positive information in that there are two concerns: access to credit and cost of credit. We hear much on the cost of credit side.

Senator Harb: You mentioned the previous recessions. Interest rates back in the 1990s were in the double digits at the time. You did a survey, looked at figures from the 1990s and compared them to what you have now. Do you think we are better or worse off now in terms of small businesses in the 1990s?

Mr. Kelly: As some of the data shows, small businesses have reduced their dependence on financing, to which there are good and bad implications. We have often reflected that businesses have had to become more self-reliant because of some of the poor lending practices in the past. As a result, small firms have become a bit more insulated from some of these pressures in the past, and right now that is turning out to be a good thing.

The flip side of that is that many businesses perhaps will say that they are taking a pass on growth opportunities because they feel if they went to the bank they would not be received terribly positively.

We do get questions whenever the Bank of Canada lowers its interest rates and small businesses see their lines of credit go up in terms of cost. That has been a bit of a disconnect. We understand there are many reasons behind that, but from our member's perspective, that raises some questions.

Senator Harb: I was interested in your chart showing the GDP and the business index. It seemed to validate, to a large extent, your surveys. I will still ask my question despite this graph.

When you send out your surveys to those who normally respond to you, in terms of leasing companies, do you classify them differently with respect to who returns the completed surveys? Often in politics, as well as in business, you have repeat offenders. It is the same people who continuously reply because they can and because they want to, and that could skew the results to a large extent. The good news with what you have done is that you have the facts to prove it; it is legit. Have you done any analysis to find out who is responding to your surveys?

Mr. Mallett: Thank you very much for that question. I love to answer those kinds of questions because it shows we pay a great deal of attention ensuring our survey is correct and representative.

Roughly between 10 and 20 per cent of our members respond to any one particular survey. Our statistics show that roughly 50 per cent of our members answer at least one survey per year, and we process about a quarter million survey returns every year from our membership. We are a pretty large and sophisticated survey house.

We are also very careful. We subscribe to the International Organization for Standardization, ISO 20252 standard on market research. We belong to the Marketing Research and Intelligence Association. We subscribe to their code of conduct on all their survey methodologies. We are at the same level as Ipsos Reid in terms of how we process. Our surveys are not anonymous; members cannot vote more than once; and we clean out any kind of repeat votes on that basis.

Our membership is highly diverse. We have members with a couple of thousand employees, and we have members who are unincorporated businesses. The response profile is extremely consistent amongst those who are responding versus those who are not responding. They do not respond for many reasons: They are busy people; they average 60- hour work weeks. We encourage them to do this on a range of issues, but they seem to like to give their perspectives, and we do compare our numbers with whatever is available outside of CFIB in terms of comparable surveys to ensure our numbers are coming back consistently.

The work that Statistics Canada and Industry Canada do on small business financing is a good validation of the surveys that we do because we come up with the identical results. I believe there was an 86 per cent approval rating on financing applications, according to the latest Industry Canada data, which was only 0.4 per cent different from our measurements released two years ago. It is very clearly consistent.

Does that answer your question in terms of representation?

Senator Harb: Yes, thank you.

Mr. Mallett: Thank you for asking.

Senator Massicotte: Thank you very much for being with us today. I am trying to understand what is happening. Your survey seems to suggest that confidence is down, but the amount of loans have increased.

On February 20, the Bank of Canada issued their latest weekly financial statistics. You probably see this more frequently than I do. It summarizes all types of credit: consumer credit as well as all types of business credit. There is the securitization, business loans, but under the total amount of credit outstanding, this is in trillions of dollars, there is approximately an 8 per cent increase of business credit compared to a year ago. It is the same thing with consumer credit.

Even without the non-commercial real estate sector, there is a significant increase of total loans outstanding to businesses, yet, when I see your survey, and the Bank of Canada survey that comes out every quarter on business sentiments and many relations to that, it talks to us about lack of credit. We can talk about pricing, but the significant complaint is about the amount of credit.

How do you explain that? This is at the end of December. In absolute sum, we are seeing a significant increase of credit, typical of the times, a higher rate of increase than the rate of economic growth, yet we hear many complaints about poor credit. Where is the disconnect? Is it because human beings start to believe what we read? When we read a lot of negative stuff, we start losing confidence, and that is how recessions occur. It is all psychological. Some people say it is all BS, but it is all psychological.

How do you explain reality versus what we hear?

Ms. Pohlmann: There is some truth to the psychological aspect of it.

I do not think we said that access to credit is down. In fact, our data tells us that they can access credit. We do not disagree with what the Bank of Canada says. The issue is the cost of credit and the hoops people must go through to get it. More paperwork is required and many more roadblocks are in the way. The real issue is the cost involved in getting the loan.

As Mr. Kelly mentioned, the fact that the Bank of Canada rate is going down while those rates are going up adds to the psychological view that access to credit is more difficult. We know there are reasons that the cost of accessing credit is increasing, but we think you need to question the banks more on that scenario, given that the Bank of Canada rate is going down.

I know that the cost of lending around the world going up is causing that, but there are too many factors: access to banking, the credit card sector, increased service fees. The banks seem to be increasing the cost of lending in many ways.

Senator Massicotte: In this same report you deal with interest rates. You can see that the spread has gone up significantly because of the credit markets, but the actual rate that they pay is not going up. The basis cost has gone down and spreads have gone up, but the amount of money people spend on interest costs has not gone up. While they may be displeased that they have not achieved the savings they thought they would, they are not paying more.

How do you separate reality from these sentimental feelings that they are getting shafted? They may be getting shafted, but they are not paying more. The interest rate cost has not gone up.

Ms. Pohlmann: However, the cost of doing business has gone up.

Senator Massicotte: The spread has gone up. Look at the percentage of interest rates companies pay of total revenue. It has not gone up.

Ms. Pohlmann: The issue is that, with the economy down, their bills are not getting paid the way they were before. Rather than waiting 30 days, they are waiting 45 or 60 days because everyone is trying to hold on to as much cash as possible. The issue is cash flow for small and medium-sized companies. It is not so much getting loans as it is being able to have the cash flow when they need it. Their bills are not being paid, but they still need to pay their employees. That is where the tightening is happening in the small business area. Cash flow is king for small and medium-sized companies. That is how they operate from day to day, and when that becomes difficult, it can put a dent into how a business operates.

Senator Massicotte: I appreciate that; I am trying to get at the liquidity issue. I am trying to understand the problem. I hear what it is. All the surveys indicate that there is a problem, including the survey of the Bank of Canada. Is it similar to the consumer index where, because you talk about a problem, eventually there will be a problem? Will we see credit going down dramatically in six months because we have convinced ourselves it is bad?

Mr. Mallett: Demand is down. The historic lows of interest rates were expected to help businesses through many of these types of problems. They are seeing their spread go up. They are happy that they have the money, if they are keeping their line of credit and their mortgage is still applied. Our numbers do corroborate this. Thirty-two per cent of our members say that their loan balance is higher than it was three months ago versus 26 per cent who say that it is lower. It is the cash flow issue that is the problem.

We are at historically low interest rates and possibly historically high premiums on those interest rates. We do not know yet, because our data is only two months old. When stimulus packages and fiscal policies start to kick in, if additional monetary policy stimuli kick in, interest rates will have to go up in a hurry to combat future inflation. How long will it take for those spreads to come back down again?

In the future, businesses may have to face much higher interest rates just when the economy is trying to recover. This is a problem that we may see in the next couple of months or years.

Senator Massicotte: I just wonder if we feel sick because people tell us we should feel sick.

Senator Moore: I want to clarify something, Senator Massicotte. Are you saying that the cost of borrowing is not higher, that they are not paying more interest?

Senator Massicotte: Bonds have gone down dramatically, so the rates they are paying are the same, but the spread has gone up.

Senator Moore: The spread between what?

Senator Massicotte: Between the costs of funds of those banks, or the interbank lending rate. It is similar to the London rate. The spread has gone up substantially because they deem it to be more risky times. However, the absolute sum that businesses or mortgage companies are paying is, for example, 5 per cent. In the mortgage market, the spread is 350 basis points above the Government of Canada rate. It used to be 115. However, the absolute interest rate the borrower is paying is the same, which is 5 to 5.5 per cent.

Mr. Kelly: How is that helping the economy? It takes out any stimulating effect of lower interest rates.

Senator Moore: I was interested in your comments in regard to those businesses that are paying prime plus 6 per cent. You mentioned manufacturing, retail, asset financiers and credit unions; a number are paying prime plus 5, prime plus 4 and prime plus 3.

Mr. Kelly, you mentioned hearing stories about the types of businesses that are having to pay more. Are the lending institutions saying that the resource sector will have to pay more than the manufacturing or tourism sector? Do you have that type of a break down? Is 13 per cent only for manufacturing and retail? Which sectors are within the higher groupings?

Mr. Mallett: That is the entire survey sample. Of the people who answered that question, 13 per cent say that they are paying 6 per cent or more.

Senator Moore: Who are they?

Mr. Mallett: It could be any sector, and we see people in every sector.

Senator Moore: Is there a preponderance of sectors?

Mr. Mallett: As Ms. Pohlmann said, manufacturers and retailers are over-represented in that group, so the suggestion is that they are feeling it more than traditionally.

That makes sense because they are typically in either asset or inventory financing. Service businesses do not tend to borrow as much. When we are talking about problems associated with lending, it has to do with inventories of products.

Senator Moore: Are there other industries or sectors besides those two that are experiencing higher increases in the cost of loans?

Mr. Kelly: We have been hearing anecdotally from many sectors about that. I am based in Calgary, and the resource sector is definitely feeling that effect right now.

[Translation]

Senator Hervieux-Payette: Following the question asked by Senator Moore, I would like to know, on a regional level, if Atlantic Provinces, Quebec, Ontario or Western provinces are those where this problem is the most severe? Has it a regional basis?

Considering that several programs or incentives that are part of the stimulus program will mostly benefit construction projects, in which jobs are mostly occupied by males, I wish to know if your statistics take into account female entrepreneurs because this sector is their major employer in Canada? In the past, women asking for credit had already been victims of discrimination by all financial institutions. Do you see a difference in the present environment? Have you considered that aspect?

[English]

Ms. Pohlmann: We do track female owners versus shared owners versus male owners. We can break it out to see if there is a difference between female-owned businesses versus male-owned businesses. I do not think we have looked at that. Have we looked at male- versus female-owned businesses on this data?

Mr. Mallett: Yes, on the banking data.

Ms. Pohlmann: I do not believe we have looked at it yet, but we can. In the past, we have looked at the issue of whether female-owned businesses have a more difficult time obtaining credit. We have discovered, however, over the course of the 1990s and into the 2000s that they were having an easier time obtaining credit. It has flipped.

At one time, data showed women were having a harder time getting credit. Due to work on our part, as well as other organizations, we put a spotlight on that, and it became less of an issue. We discovered women were more likely to get loans because they are often considered more risk averse than men.

We have not looked at that issue because it became a non-issue for us after a while. However, it is something we can explore.

[Translation]

Mme Pohlmann: Your first question was about regional data.

[English]

Have we looked at this by region?

[Translation]

Senator Hervieux-Payette: Is it the same thing?

[English]

Mr. Mallett: Yes, we have. We will be able to break it out in more detail. With only 900 responses, we cannot be clear in terms of the regional disparities.

On the economic information, with what the business barometer shows, we expect it to correspond to what we have been finding. Quebec, Ontario, Alberta and British Columbia are the provinces having the greatest difficulty with the economy. That is where most of the industrial activity takes place.

Traditionally, with respect to what we found over the past year or so, it is the Atlantic region and the Prairie provinces that seem to be performing above average.

[Translation]

Senator Hervieux-Payette: I come back to Senator Massicotte's question about the spread between prime and prime plus 6 per cent. Can we anticipate the answers?

Would it be because their security market operations are less profitable that banks are trying to catch up by increasing their interest rates or is it simply to cover themselves from possible exposure to higher risks in a situation that your members do not consider desperate?

Your members are still confident and ready to operate their businesses. However, banks do not seem to trust them. The lack of confidence does not come from business people but from bankers who are not trusting them.

How could that 6 per cent spread be justified? I can understand the frustration of businesses when we know that the Bank of Canada has lowered its rate to 0.5 per cent while loan rates keep increasing.

I do not understand that situation anymore than Senator Ringuette understands the increase in credit card rates. As parliamentarians, we must understand the reason for that dichotomy because there does not seem to be a serious explanation in this regard.

Do you have information that would allow us to explore those reasons? You have looked at credit unions, foreign banks and Canadian banks. The fact that everybody does the same thing will not convince me that it is justifiable.

[English]

Ms. Pohlmann: It is partly because they think they are riskier businesses. That is one of the reasons they provide.

We have found, through our banking surveys over the years, that banks have become less interconnected with local businesses. There used to be an account manager, and you used to have a relationship with your banker, but that has lessened over the years. There is basically a formula: As a business, you go into a bank, they do a formula and you are either in or out. No longer do we have understanding of the business or the business owner. That has happened over the years to create a disconnect between the banks and business owners.

I cannot tell you what the bank's perception is, if their perception is also that small businesses are riskier. I do not know if my colleagues have any comments on that. I think that is the reason they are giving them a high rate, that they are risky. The BDC only provides high-risk type loans, and that is why they charge more.

Mr. Mallett: Let us compare with what we heard in 1990-92. Businesses were saying that the bank had eliminated their financing; the banks thought they were too risky for the market. They would have loved to pay prime plus 3 per cent or prime plus 4 per cent for their loans. Their businesses would survive at those kinds of rates, but the banks said that they would not be lending to them any longer.

We are seeing for the first time a little bit of banking price for perceived risk. The entrepreneurs' definition of risk is different from a banker's definition. That is always a difficulty.

The banks have been listening to CFIB and small businesses in general. It does not make sense for them to be pushing businesses and their customers out of business. The small business sector is traditionally the most profitable portion of their markets over the business cycle. I think they have started to believe us that there is no point in eliminating a big part of their marketplace.

Are they conducting themselves perfectly? Probably not. Prime plus 6 per cent may be high. The chartered banks are less likely to be at prime plus 6 per cent compared to other institutions. We will give them credit for doing things right, and when they do things wrong, we will not give them credit. In fact, the opposite will be true.

Mr. Kelly: Speaking of doing things wrong, we wanted to offer our congratulations to Senator Ringuette and the entire committee on shining a light on credit card fees in the weeks ahead. We are honoured that your committee has agreed to examine this area. This is a huge concern for small businesses, and some of us will be before you soon to talk more about that issue.

Senator Ringuette: I am pleased that when the members of this committee received the motion referred from the Senate, there was no delay in response. The agenda is moving along very well. I am pleased with that.

I agree with you that access to credit has not changed much. I have had frequent talks in the last four months with small and medium-sized businesses, and there is not much complaint about accessing credit. The big complaint is the cost of that credit and the red tape they have to go through in order to get to that credit.

I am also in the other committee room right now, at the Finance Committee, looking at the budget. When I first read that there was to be more flexibility from the Business Development Bank of Canada in regard to more money becoming available and an easier assessment in regard to small and medium-sized businesses, although their interest rate is higher, I thought that was a good move. That is okay with me.

However, as I read on, I saw that Export Development Canada, EDC, was intending to play a similar role in Canada for export between the provinces. Right now, that organization should really be focusing on helping and increasing our export credit, getting our products out there as quickly, conveniently and efficiently as possible.

I am looking at these two aspects and, from my perspective, you are the experts when it comes to the small- and medium-sized business community in Canada. I think you are probably like me, happy that there is an increase of flexibility from BDC in dealing with small and medium-sized businesses, although there has been an increase in rates with each passing week, with the cost of a line of credit from a chartered bank increasing steadily. Every week we hear that one is increasing by 1 per cent, sometimes 2 per cent.

That being said, how do you view this new mission of Export Development Canada into the interprovincial exports? Does it make any sense?

Ms. Pohlmann: We have been trying to get information on what that would look like. We have not received anything; I think they are still trying to figure it out themselves.

As I responded to Senator Oliver earlier, we supported this money into BDC and EDC because it is providing more access to credit in the marketplace in Canada. We have been trying to get more information to understand EDC's role. It has not been clear to us, either. I cannot honestly answer the question until we understand how it will work, how it will be delivered and how it might be different from BDC, or whether it will merely be another avenue in which to provide funding into the marketplace.

Senator Ringuette: If it is a means of duplicating the current credit access route of BDC, we should increase the number of BDC officials and offices throughout the country to create that facilitating service. Many of your small and medium-sized businesses would be in the export market.

Ms. Pohlmann: It is about 25 per cent.

Senator Ringuette: I am afraid that if the EDC starts to compete with BDC, they will no longer focus on their main mission of supplying credit at a reasonable rate for export purposes. I still feel that Canada is one unit, and Quebec is not exporting to Ontario. It is selling to Ontario. It is exporting to the U.S., though.

Senator Eyton: We are talking about SMEs, and, as far as I know, everyone loves SMEs. In that context, I want to know more about your organization. It has a wonderful name: Canadian Federation of Independent Business. However, what does ``independent'' mean here? Somewhere in the material it says that you have 105,000 members, and you are owner-operator.

I want to test your bona fides. In terms of the ownership, would a general manager operating a plant with a 5 per cent ownership in the company be owner-operated? Does that qualify? How broad do you cast your net? Does it have to be an individual operating a particular business?

Mr. Kelly: It has to be a closely held corporation or business, but none of our members are publicly traded, and none of them are companies that have tiny interests.

Senator Eyton: The public company category probably covers 4,000 or 5,000 companies in Canada, and many others are medium-sized and small. Are you saying it has to be closely held? That is your membership?

Mr. Kelly: That is right. We have a large number of sole proprietors, members that are in partnership with each other and corporations. We are a completely voluntary association supported exclusively — not one dime of government money — so the only ones that will belong to us will be ones that have a fairly significant interest in the actual business operation.

Senator Eyton: I thought maybe 5 per cent was significant, but you do not think so?

Mr. Kelly: I would be surprised if we had anyone in that category.

Senator Eyton: How about size? Are there large ones in your 105,000? Who is your largest member?

Ms. Pohlmann: I do not think we even know that ourselves. We would have members with 1,000 or 1,500 employees. The only criterion is that you have to be privately owned and operated. However, the average size is of our members is maybe 12 to 14 employees. The vast majority of our members are like the business population. They are under 50 employees.

Senator Eyton: I was thinking of, generally, assets or maybe enterprise value or something similar — very large companies.

Mr. Kelly: We collect all of that data, and if any of that would be of help to you, we would be happy to pass it on.

We do break out our data by size of firm frequently, and we do have a sliver of our members that are of reasonably large size. As Ms. Pohlmann has pointed out, the vast majority of our members are very small. We tend to be a little under-represented in businesses with under 5 employees, so the micro-sized businesses are perhaps not the type to be as motivated to join our organization.

Of the very large businesses that are still privately held, we probably do not have more than a few handfuls of those. Our members would be the larger small businesses that would be perhaps between 5 and 50 employees. That would be the preponderance of our membership in a significant way.

Senator Eyton: I take it there is not much overlap between you and the Chamber of Commerce. It has many members as well.

Ms. Pohlmann: We would have a great deal of overlap, especially at the local level. We differ from them in that we do not have banks, governments or big companies as members. Banks and associations cannot be our members.

Senator Eyton: I was looking at the surveys, and you indicated that it is generally in January and February. I guess that meant you sent them out and got them back in that period.

How do you take into account lag time? If you are in the middle of January or the beginning of February when you complete that kind of survey, it may not indicate, as of the day they complete the survey, the actual fact for them. You tend to look back over the last three or six months. You are reflecting a general impression that you have collected over a little while. If your banker turned you down that day it might be immediate. In general, it would be attitudinal and shaped over a few months. There seems to be built-in lag time in that.

The second lag time I can think of is that the first source of financing for any small business is increasing the payables. Rather than paying in 30 days, they pay 60 or 90 days. That has implications for the guy on the other side as well. That is all in the context of a quick recession or turbulent time. The first thing you do is slow down on your payables. It is only after you have done that that your suppliers or other people are upset with you that you then go to the bank. Your next line of defence is going to the bank to try to get money.

I am suggesting that, given the rapid deterioration in the economy, the banks as well as other financial institutions are about to be tested. In that sense, again, there is a lag in the attitude as you try to measure it.

Can you take into account lag time in filling out your kind of survey?

Mr. Mallett: That is a good question. The first time we sent the survey out was February 2; the second time was March. Our plan is to release information within a couple of weeks. The financing is important but is supplemental to general business conditions. We followed the basic OECD-style — Organisation for Economic Co-operation and Development — business indicators. We like to get a leading indicator on the economy out of this. We will be tracking, which we will release when we have enough information, such things as whether untold inventories are above or below normal or at normal; whether receivables are above normal, below normal or worse than normal; and whether staff overtime is above normal, normal or worse than normal. Those indicators are here and now. Members will know then and there whether these things are happening in their business. We plan to release that information to the public as soon as we procedurally can. Hopefully, that will answer your question about minimizing lag time. We only just learned what the December GDP was early last week. We will not find out how things are happening right now until the end of May, if we are lucky. As much as possible, CFIB information, using other lessons from around the world, is trying to come up with a good indicator of what is happening — at least in the small and mid-size business market.

Mr. Kelly: We are hearing a lot from small businesses on the receiving end of a slowdown in paying their payables. That affects many of our members and, it has a spill over effect onto the people from whom they purchase.

Senator Eyton: It bounces around. Then, there are inventories.

Mr. Kelly: This is why we said at the outset that this information is important. We need to continue to collect it. We are hoping that you will be asking, on a regular basis, banks and financial institutions for similar data down the road.

Senator Eyton: Also remember that if you have a lag time, when situations are deteriorating, they tend to be positive. When situations are improving, it tends to be pessimistic or more negative. That is the way it is.

Ms. Pohlmann: I do not think anyone will get information into your hands as quickly as we will; within two weeks. I do not think Statistics Canada or the Bank of Canada or any other organization will get you information as quickly as we can from the point that we get the questions answered to the point that we make it public.

Senator Eyton: The bottom line to my suggestion is that these surveys are probably more positive that than we expect, partly for the reason I am talking about.

Ms. Pohlmann: Yes. That is why we do them.

Senator Eyton: The next question is sectoral, more anecdotal. I happened to be involved in the real estate business in the early 1990s. I am sure what happened then is happening here, either in real estate or in other industries or businesses. I do not want to make the banks the bad guys, but they decided to clean up their balance sheets. It had almost nothing to do with either the business or the borrower. They wanted to get a bit of money. They went in saying, ``I am sorry. I have instructions from head office. We do not want real estate on our balance sheet.'' Everyone was running. That was after the Resolution Trust Corporation, and so on, in the U.S. It did not matter how good you were. It did not matter that you had equity. They did not want you because you were in that business. Do you encounter much of that?

Mr. Kelly: You hit the nail on the head. That has been our experience in the past, namely, ``We have enough farmers on our balance sheet, we do not want anymore. It does not matter that you have never missed a payment on anything ever, you are out the window.''

We have not had those types of calls from members to this point in this downturn. We have had calls, but we have not had huge numbers of members in a particular sector calling us to tell us that the bank has been shutting the door to them, as we have had had in the past. Again, these are early days.

Senator Eyton: Wait a bit.

Senator Massicotte: Senator Eyton's question was relative to a type of industry. Do you see a difference between types of provinces? In other words, do some provinces have tougher lending conditions with respect to credit than others? Some reports say that.

Mr. Mallett: It is still preliminary. It is small in Manitoba and Saskatchewan, for example, but they tend to be better off. The perception is better in those provinces compared to Ontario, Quebec, British Columbia and Alberta.

Senator Goldstein: In another life, I practiced bankruptcy and insolvency. My experience — and, Senator Eyton alluded to it — was that the first source of credit when credit becomes difficult is starting to lean and extend on your payables. That, to me, has always been the first sign of credit problems in the economy as a whole and in specific sectors in particular.

Do you keep any records on that? Do you ask your people about an average aging of payables or do you have any other metric that will allow you to have a handle on the extent to which the time for the payment of payables is being extended?

Mr. Mallett: The way we are doing that is asking the other side. We believe we will get a better answer from the receivable side. I do not think anyone will volunteer that they are slowing down their payments.

Senator Goldstein: Do you have any such answer on your receivables or are you just starting that?

Mr. Mallett: We are just starting that. Those are new questions that we will be releasing.

Senator Goldstein: How do you publicize the data that you receive? Do you issue press releases or reports?

Mr. Mallett: We create a report. It is released on a fixed schedule. It is always the last Wednesday of a fixed quarter. We release it whether good or bad.

Senator Goldstein: You release them quarterly?

Mr. Mallett: Yes.

Mr. Kelly: The quarterly data that Mr. Mallett mentioned is with respect to the economic forecast for the country as a whole, and it contains some of these banking questions. With the honour of your request to come before you today, this is the first group to whom we are presenting the new data.

Senator Goldstein: We appreciate that. Thank you for coming to help us.

You were talking earlier, Ms. Pohlmann, about the accessibility to new credit being more difficult as opposed to accessibility for ongoing credit. How do you measure that, if you do measure that difficulty? What empirical evidence do you have that accessibility to credit for new enterprises is more difficult than the norm?

Ms. Pohlmann: There are two reasons. If you look at page 7, that side is about access to financing for small- and medium-sized enterprises. It asks whether they have access to all credit, most of it, some of it or do not have access. It gives you some sense there, by institution, where they may be struggling. For example, for specialty asset financing, 29 per cent are saying that they can only get some of that credit. That is where some of that information is coming from. That is then layered on to the anecdotal information that we are receiving more frequently.

The hoops encountered seem to be through trying to renegotiate loans or trying to access new loans. Again, we are not saying that they are not getting them. However, there tends to be more paperwork involved, and they have to go through more hoops to get those loans. We had some say that they thought they had everything approved and, suddenly, the bank came back to ask for a whole new slew of paperwork to go through a new phase. They feel they are getting strung along. They never get a ``no.'' It is always positive, but they seem to be stretching out the final ``yes'' at the end of the day. That is what we are hearing more about.

Senator Goldstein: I want to get a handle on those who you represent. You have told us that you have 105,000 members and that the number of establishments is in the area of 2.4 million. How many employees are there in the aggregate of those who are members of yours?

Mr. Mallett: I have that number somewhere in my head. Our members employ about 1.2 million employees and represent about $75 billion in GDP. It is in one of our brochures. I did not bring it.

Senator Goldstein: You said 75 per cent of the GDP?

Mr. Mallett: No, $75 billion in GDP.

Senator Goldstein: What per cent of the GDP do you represent of that $75 billion?

Mr. Mallett: I can get that for you.

Senator Goldstein: Thank you very much.

The Chair: It seems odd to me that there is a 400-basis-point gap between many people getting loans at prime plus 2 per cent and many people getting loans at prime plus 6 per cent or greater. What happened in between here?

Mr. Kelly: Part of the line on the 6 per cent or greater is that it is greater. They would be the sum of everyone above that. If we continued to plot that out, with each per cent above prime, the line would probably be reasonably flat. Because it is aggregated, then it looks like a big jump at that tail end.

Senator Massicotte: It must be certain type of loans, for example, a lease back or car leasing loans.

The Chair: Many people are getting prime plus 1 per cent and prime plus 2 per cent, and then there is a drop until you get to prime plus 6 per cent.

Mr. Kelly: Ms. Pohlmann mentioned in her presentation that it depends on the timing of your financing. Those that, perhaps, are in some form of relationship or have some sort of fixed rate are better protected than those renegotiating right now. Many of us who have a line of credit are receiving letters right now about the interest rate spread going up. Business owners are seeing the same thing. It is a bit of a timing issue as we have discussed in the past.

The Chair: I was interested in your allusion to pricing to risk. Some members of the committee may recall that we had evidence a while ago that banks were not interested in doing that at all, or very little. Small and medium-sized businesses were saying, ``We are prepared to pay more; just give us a loan.'' The banks said, ``No, no, we do not want to do that.'' I got the impression that some banks were afraid of bad publicity that they were flirting with being usurious. Now it sounds from your evidence that there is more of this pricing to risk.

I thank all three of you very much. You have been very kind and very helpful. We are sorry we kept you over time. If we could continue to count on your assistance, please send us what you have when you get it.

[Translation]

The second part of this afternoon's meeting also concerns access to credit for businesses, but this time, it will be from the perspective of manufacturers and exporters.

[English]

The manufacture and export sectors have been hard hit by the economic downturn. In January alone, employment in Canada's manufacturing sector fell by 101,000, the largest monthly decline in the industry on record. A month earlier, in December, Canada recorded its first trade deficit since 1976.

Within that rather unpleasant and frightening context, we are pleased to have before us the Canadian Manufacturers & Exporters, represented by Mr. Schaadt, Director of National Programs. Thank you for coming on such short notice. We appreciate it. The floor is yours.

Geoff Schaadt, Director of National Programs, Canadian Manufacturers & Exporters: Thank you for inviting us. Unfortunately, you caught us during peak vacation season, so I am alone. However, I will try to answer your questions to the best of my ability.

I am here primarily to represent the findings of the Canadian Manufacturers & Exporters, CME, business conditions survey. We began this survey very recently, in December of 2008. It was done historically by Statistics Canada, just taking a general measure of the business environment within the Canadian community. I could not honestly speak to why Statistics Canada ceased delivery of that resource.

The problem we see, particularly in this brave new world we are in right now, is that current data sources are typically two to three months out of date when they are presented publicly, as was discussed previously. Our efforts were to create a document that would speak to the immediate situation as best we could in order to provide both the business community as well as policy-makers such as yourselves with timely information to see where we are and particularly what lies ahead, and to try to be more forward looking with some of the data we are collecting on both employment and current financing issues, which I will speak to in a minute. These results are being submitted on a monthly basis to the Department of Finance Canada, to Foreign Affairs and International Trade Canada and to Industry Canada. I will anticipate a question and say that we will be happy to deliver these results to the Senate on a monthly basis, at your request.

I will speak to the findings of our most recent release for the February 2009 survey. We had 620 companies respond, 90 per cent of which were in the SME category. They represented all sectors of manufacturing and exporting, as well as all provinces. I will hit some of the highlights, as I am assuming we will want to visit more specifics down the road, but these are aspects that stand out in terms of the survey.

We have seen a dramatic downturn in orders since October. The metric we like to look at is current orders, and we ask our respondents to view that three months post as well as three months forward looking and to provide those results. We have seen a dramatic downturn in orders since October. This is centred particularly in the automotive and supply sectors, although we are beginning to see it spread across all sectors and all provinces. Sixty-eight per cent of the companies are reporting that orders have fallen in value since November, 24 per cent report that orders are relatively unchanged since November and only 8 per cent report that orders have increased over the last three months.

Nearly 70 per cent of respondents indicated a decline in current orders over the last three-month period. Of that nearly 70 per cent, a full 19 per cent, or almost a fifth of companies, report that orders have fallen more than 30 per cent since November. The majority of manufacturers and exporters also expect the value of new orders to fall, looking forward over the next three months. Fifty-six per cent report that orders are likely to decrease between February and May of 2009, 27 per cent anticipate that orders will stay about the same and 18 per cent expect to see an increase. While we do have some positive there in an 18 per cent increase looking forward, we still have over half of the respondents indicating that a decline is in the future from what they are seeing in the current environment.

In addition to that, 45 per cent of our respondent companies report that employment levels within their firm are likely to fall over the next three-month period. Again, nearly half are reporting a decline in employment. These numbers do not speak specifically to the finance issues, and we will come to that.

These numbers are important for credit because the risk profiles of these businesses will change in light of the numbers being reported. The growing concern is that this will translate into greater difficulties in accessing credit as it already has for many companies.

The next three to six months will be critical for many businesses as those orders fall off, and they will burn through a great deal of the cash they are sitting on now and will eat up the lines of credit that have not yet been severely impacted.

What we see now is not where we anticipate a real significant problem in terms of credit. Our real concern is when we have a rebound in orders, when the economy turns around and we start to see the new orders increasing. We will need access to financing at that time because companies will be operating without significant receivables to fall back on. They will need operating funds to fulfill the new orders when we do have an increase in economic activity.

To speak to the issue of access to financing, in our most recent survey 60 per cent of manufacturers and exporters report they are experiencing difficulties accessing adequate levels of financing. How do we define ``difficulty''? We are asking them for varying levels of information, including whether they were unable to obtain financing, experiencing significant difficulties in obtaining financing or did have difficulties, which included higher financing costs.

For companies looking for financing, the greatest difficulties fall into two groups. One group is those who need loans for working capital or their operating line of credit, the other group being those looking for capital investments, investments in new technology and new product development. Again, that is a particular concern because it goes hand and hand with retraction across the market.

Twenty per cent of the respondents have asked their financial institutions to increase their operating line of credit over the past three months. We do not see a large number of firms asking for an increase right now in their lines of credit, but of that 20 per cent asking for an increased line of credit, 41 per cent requested an increase to cover their current expenses in the face of their lower sales, slightly less than 40 per cent were looking to finance business growth and, among those requesting an increase, 22 per cent were declined with 35 per cent still waiting for an answer.

Companies who requested an increase in their operating line of credit and were refused report a variety of reasons. The most common report given, roughly 40 per cent, was that the banking sector thinks the industry they are in is too risky to take on additional funding at this time. The second most common reason for refusal was that the assets presented as security did not meet the bank's requirements.

The closing remarks from the perspective of the Canadian Manufacturers & Exporters, speak to the reaction of the banking sector to the changing economic picture. I might couch these comments in stating that not much of this is quantitative. It comes from conversations with our members. It is difficult to draw comments such as this directly from the survey. This is the sense of what we have developed in interaction with our members in the manufacturing sector.

Generalizations across the banking sector are not appropriate. Institutional reactions have been quite varied. We see some banks standing by their clients strongly while other banks are retracting and making situations more difficult and not really reacting in a positive light for us.

It appears that many banks are not changing their risk assessment criteria to reflect the changing marketplace. We have clients with a dramatically changing risk profile in a rapid manner, but we have not seen the kind of granular risk assessment from the banking industry that would be helpful.

The Chair: Mr. Schaadt, some of our members are trying to follow you in your presentation.

Mr. Schaadt: I am on the last page of my speaking notes. My apologies; I should have been clearer. I am speaking from the notes. I believe you were all given a copy. I have not gone into the actual survey report itself as yet.

It does not appear that the banks are changing their risk profiles as yet.

Another area of concern, probably not apparent yet in survey data, is the fact that we have many areas of the market where financing is drying up, particularly venture capital. I am sure we have all heard the stories that venture capital is almost impossible to acquire. In addition, we have asset-backed lending, commercial paper, leasing and issues such as this. These markets are drying up and the banks are being asked to provide some financing into markets in these areas where typically they have not gone before. This is where they are being asked to fill gaps that they have not dealt with before.

Another concern that the Canadian Manufacturers & Exporters has is it is not clear that the banks will be encouraged to loan on anything less than a 100 per cent government guarantee, which is a clear concern for us as we move forward.

In our perspective, the role of the government as we attempt to hasten the recovery process is to pass the budget bill quickly. We need action to occur quickly and to begin moving forward. We recognize that the federal budget has several valuable components to it; however, the financing provisions of that budget are critical, and we do not feel that other measures will be terribly effective if we do not have appropriate financing in place.

Relative to concerns about EDC and BDC, EDC and BDC have been strong partners of the Canadian business community for a long time, and we are sure they will continue to be so. We are concerned about the new changes coming in these financing mechanisms that will take them beyond their traditional comfort zone and the role they filled in the past. Our concern is the ability to get programs up and running effectively in the very quick time frame necessary to meet the needs of the business community.

My final comment is that the real issue is financial institutions need to repair their balance sheets at this time. The problem is that they need something more than just short-term liquidity assistance. Time will help them through this process as well. Unfortunately, time is the enemy of many of the businesses we are representing now, so this is where we need some assistance from government, in reducing the risk profile many of these businesses are facing so that the banks are more willing to work with the business community moving forward.

That concludes my initial remarks. Any questions that I can answer, I am happy to oblige.

The Chair: Thank you very much, Mr. Schaadt. That was very helpful. The first on my list is Senator Eyton.

Senator Eyton: We just listened to the Canadian Federation of Independent Business. Were you in the room when they were speaking?

Mr. Schaadt: Yes, I was.

Senator Eyton: They spoke of SMEs, but you indicated in your remarks that 90 per cent of your members are SMEs. Was that a number I got from you?

Mr. Schaadt: Ninety per cent of the respondents to the survey were SMEs, which also maps on the membership of the CME. Our membership maps almost perfectly, if you overlay it on top of the actual business base, within the manufacturing and export sector of Canada.

Senator Eyton: It is almost the same community.

Mr. Schaadt: We do represent some of the largest and most well-known firms in the country.

Senator Eyton: Canadians are used to our big, and, it turns out, well-run banks. However, financing comes from a variety of sources for your members as it does for all of us. Do the banks dominate financing for your members, or is 20 or 30 per cent coming from other institutions such as insurance companies or credit unions?

Mr. Schaadt: I do not have data to answer that with certainty. However, I do know from anecdotal conversations that it is representative of the finance community at large. Our members, because they are both large and small, will access a variety of financial mechanisms from commercial paper to personal finance and savings.

Senator Eyton: I am sure that the banks are still predominant in size.

Mr. Schaadt: They are well represented.

Senator Eyton: On the other hand, a significant percentage is from other financial devices of one kind or another.

Mr. Schaadt: Yes.

Senator Eyton: You referred to your survey, and you spoke about three months and compared that to November. All of your detailed material talks about three months. Can you do that seasonally? I would have thought January to January would be important as opposed to January to December. There must be a tremendous seasonal impact in that, and what would that do to your numbers?

Mr. Schaadt: Although it is probably not reflected here, the survey question says specifically ``correcting for seasonality.'' We find that most respondents can do this.

Senator Eyton: They can do that?

Mr. Schaadt: Part of participating in the manufacturing sector is developing the ability to predict what they will need moving forward; what sorts of raw material inventories need to be in place to react to forward-looking projections of the marketplace.

For example, I recently had a conversation with a manufacturer of outdoor patio furniture. That is a highly seasonal business, but because they have been in business for some time, they can anticipate how this year compares to last year, the year before and so on. Because the question asks them to take seasonality into account, they are able to respond.

Senator Eyton: My last question relates to the EDC and let us say the BDC, for the moment. I think the rules are being fashioned as we speak. We are all somewhat uncertain about how the stimulus money that will be made available to BDC will be distributed.

Is there not a temptation for the other financial institutions when someone comes in the door asking for credit, to say, ``Why don't we both go to the BDC and form a package? In that way, the financial institution would have a 100 per cent guarantee rather than an 80 per cent guarantee. Is that possible?

Mr. Schaadt: I suspect that a fair amount of that will be done. I suspect that there will be a fair amount of partnering involved in the issuing of financing going forward. This is based on nothing concrete, only my personal suspicion.

Senator Eyton: I guess you would support that type of model.

Mr. Schaadt: I probably ought to not comment officially at this point because my boss is not at the table.

Senator Eyton: Thank you.

Senator Massicotte: If I were to summarize your report, it says that economic activity is down; inventories are going down or trying to go down; and unemployment is going up — in other words, the number of employees is going down. However, when I get to the lending part, I have a sense that it is not bad. Only 20 per cent of your members are looking for credit. In fact, two thirds of those have received favourable responses to their credit applications. Something is wrong with this picture.

Mr. Schaadt: Thus far, we have not seen a tremendous change in the profile. We must put an asterisk next to that comment because the first data we collected was in December. We started collecting this data in response to the changing economic environment and the fact that we felt as though there were no adequate providers of near real-time data in this environment.

Having said that, I would agree that we have not seen great change. However, we do see other indicators, particularly with current orders looking forward. There is a fairly pessimistic view across the board from our membership in the manufacturing and exporting sector that the need for financing opportunities will increase at the same time as the risk profiles of many of these businesses will worsen from where they are now or where they have been over the last couple of months.

Senator Massicotte: The two key ones are that 20 per cent of your members are asking for increased lines of credit and two thirds of those got approvals. How does that compare to a year ago? What percentage of your members were looking for increased lines of credit a year ago and what percentage were getting approvals?

Mr. Schaadt: We do not have that data. Again, this is a new survey that we have not previously conducted.

Senator Moore: Thank you for being here. I want to follow up on something Senator Massicotte was asking about. I am looking at the last couple of pages of your survey which indicate, ``reason to increase lines of credit to cover business expenses and to grow business: 38 per cent.''

Therefore, these companies are not standing still. Is that not a positive thing? I believe that 38 per cent is not bad for people looking to expand or enhance their companies.

Forty-three per cent said, yes, in response to the question, ``Has your financial institution agreed to increase your operating line of credit?'' Thirty-five per cent did not know — I do not know why they would not know; perhaps they did not receive a response, or maybe they did not apply. Twenty-two per cent said, no. Thirty-five per cent seems to be a large unknown in any survey.

Can you tell us a bit about that?

Mr. Schaadt: It is difficult now to draw any broad-based conclusions because we have no historical data to match it against. You say that that 22 per cent negative is not too bad. I would say that the glass is half empty, that 22 per cent is quite a lot of rejections for requests to increase operating lines of credit.

Senator Moore: That may be. I do not know what it is compared to. How do you explain the 35 per cent who do not know? That is a large number. Do you mean that they have applied and have not heard back?

Mr. Schaadt: Yes.

Senator Moore: Or is it that they just ticked off ``don't know'' in the survey?

Mr. Schaadt: They have applications outstanding and have not received responses. That is part of running the survey every four weeks. Our survey cycle is quite quick compared to the response time for some of these issues.

I would like to draw attention to something that I do not think we have yet discussed adequately: We do have particular sectors that are being identified clearly as high risk in which banks do not want to participate. To no surprise, the automotive sector is leading the way there.

We have good quality companies that participate in the automotive sector that are being told flatly that they cannot access any new credit and are having credit facilities reduced simply because they are in that sector.

I would offer the example of a company in Guelph, Ontario called ABS Friction. They are a leading company in their sector. They make after-market brake pads, which should be an excellent market right now as people are not buying new vehicles but are repairing their old ones. In fact, this company is seeing good sales. They are exporting 85 per cent of their sales to markets throughout the world, not only to the United States. They are 90 per cent receivables insured by EDC, and they are being declined for financing in more than one place.

I would like to point to the automotive sector as well as the forestry sector as seeing many issues. It is not surprising, but it is critical to point out.

Senator Moore: In terms of industries that are suffering, they were automotive and forestry. What other industries are suffering?

Mr. Schaadt: If you will forgive me, I do not work with this data every day, so I do not have it memorized.

Senator Massicotte: Health care products; am I reading this right?

Senator Moore: What page are you on?

Senator Massicotte: It appears on the last two pages, refusal rates for transportation equipment and health care product sectors. For primary metals, 100 per cent of those who applied were refused. Fifty per cent of the health care products applied for were refused. What is the reason for that?

Mr. Schaadt: I would strongly recommend you ask the banking institutions that question, as to their reasons for the refusals in those sectors, other than risk profiles that they are unwilling to accept at this time.

Senator Massicotte: Automotive is only 22 per cent, and wood is 33 per cent.

Mr. Schaadt: It is not health care. It is health care products and veterinary products.

Senator Harb: I glanced through your survey and, frankly, I find it quite stressful reading through some of these numbers when we talk about 86 per cent of the firms are exporters and 40 per cent of the exports account for more than 50 per cent of their revenues. I went down your list of the manufacturing sectors, and it looked as though close to 50 per cent were in the primary metals, fabricated metal products or machineries.

If one were to look at the international market in those areas and couple it with automotive products, which brings the figure over 50 per cent, the picture looks bleak. Would you agree with that?

Mr. Schaadt: Based on this data as well as some other data that we have collected over the last few months, we are anticipating significant and continued decline in business activity in the export and manufacturing sectors.

Senator Harb: It becomes even more stressful when looking at current orders, data that you obtained upon consulting with your members. It shows, and I am quoting here from data appearing under current orders, that at the national level, 12 per cent of the orders are 5 to 10 per cent lower; 16 per cent of the orders are 10 to 20 per cent lower; 13 per cent of the orders are 20 to 30 per cent lower; and almost 20 per cent of your members have told you that their orders are lower than 30 per cent.

When you went back and asked your members how they see the picture over the next three months, they told you it will be even worse. Is that correct?

Mr. Schaadt: That is correct. However, you have a much smaller number at the top of the scale. At the greater-than- 30-per-cent reduction, we only had a 6 per cent response there.

Nonetheless, if you tally these negative numbers up, it is 68 per cent lower overall. In the next three months with current orders, it is 55 per cent lower. Therefore, forward-looking is not quite as bad as rear-looking, but it is still significantly poor overall.

Senator Harb: My final question deals with bankruptcies. I do not think you have really addressed that topic in your survey.

Do you have any information that could bring to light the situation now as compared to, for example, the 1990s or the 1980s when we were also in recessions? Can you look at the cycles and give us some sort of background information in order to compare how we are faring now as compared to then?

Mr. Schaadt: We do not have that data. I do not believe we tracked it previously, and I do not think we are tracking it currently in terms of actual bankruptcies. We would be a poor source there.

Senator Harb: What about your return mail, if you sent out a survey and it came back ``no one home''? Do you track that at all?

Mr. Schaadt: No, we do not.

Senator Goldstein: Thank you, Mr. Schaadt, for appearing on such short notice and presenting a comprehensive survey.

I am having trouble dealing with the very last part, but to some extent the other parts as well. The very last part deals with your members' assessments as to why operating lines of credit could not be increased.

I am wondering whether these reasons are a factor of this particular economy, or whether these are generally reasons that would be given in ``normal'' economies. ``Normal'' is obviously in quotes in this context.

Do you have anything anecdotal or otherwise to give us some indication as to whether these reasons, or the percentage of reasons, that are given for operating lines of credit not being increased would be consistent with the past, or whether they are informed or motivated or determined by the current state of the economy?

Mr. Schaadt: To be clear, I believe we are talking about the very last page, ``reasons for.''

Certainly, standard items will always pop up historically; in particular, debt level is too high or assets provided do not meet the bank's requirements. Those are fairly standard reasons. However, the question becomes whether the bar is set for the height of the debt. Is the debt too high? Is the bar changing relative to what companies have experienced historically? We are hearing that it is, particularly when you reflect it against what industry and sector they are participating in. This is not something we have heard traditionally with a lot of real virulent sector risk that we are hearing now.

Senator Oliver: I wanted to ask some questions about government and the role of government. I heard you mention it in your presentation in three contexts that I wanted to explore.

First, you said that, in terms of what you need from the government, you need to have the budget bill passed right away for reasons you explained.

Then you went on to say that venture capital is drying up and all other forms of credit seemed to be drying up and that government needs to help change the risk profile the banks are using. You are saying they have not changed that.

As public policy-makers, what do you recommend we do and ask the government to do in order to have the banks change the way they do risk profiling?

Second, you said that there is no real problem now in terms of credit. However the problems will arise on the rebound when conditions start to improve and companies have no inventories to pledge against that line of credit. In terms of public policy-makers, what recommendations can you give us so that we, as a committee, can assist companies that want to fill orders for which they have no inventory or other assets to give credit to banks?

Mr. Schaadt: My apologies; could you repeat the very first question? I got lost.

Senator Oliver: You were saying that the first thing you needed was to have the budget bill passed, and you gave reasons for that.

Then on two occasions you stressed that one of the big problems is that the risk profile has not changed. I am asking you, how do you expect government to force banks to change the way that they do their risk profiling?

Mr. Schaadt: We feel it is important that the budget bill be passed relatively quickly, on a number of different fronts. We can spend quite some time talking about that.

However, as it is germane to this discussion, EDC and BDC will be critical components of back-stopping much of the financing activity that takes place. While they have done good things with their mandate in the past, this is a new mandate for them. We have concerns that the capacity that exists there will take them a certain amount of time to implement programs and get the human capital in place that will be required to function effectively and rapidly when the time comes that these measures will be put in place.

Senator Oliver: However, we still have our regular chartered banks to do the job. This is just additional.

Mr. Schaadt: Yes. The concern is, again, as you reflected, two things will happen, in our view.

We have not seen the big upswing in companies seeking new financing avenues because they have not eaten through their existing cash and operating lines of credit. We believe that in light of the data we have seen indicating out over the next three months that orders will continue to decline, we do not anticipate companies will stop or slow down chewing through those cash reserves and those operating lines of credit. We think we will see in three to six months time an upswing in demand for finance.

With respect to your point about getting banks to change their risk profiles, I do not know that government can cause banks to change their risk profiles.

Senator Oliver: You said that you were calling on government to do so. I am asking, what do you expect government to do?

Mr. Schaadt: I misspoke if I was calling on government to do that. My intent was to make you aware of the situation that banks do not seem to be changing the risk profile in step with the change in the risk environment and the business environment. My apologies if I misspoke there.

Senator Oliver: What, if anything, can be done about that?

Mr. Schaadt: Going back to the discussion with EDC and BDC and their anticipated increase in involvement in this area, I think these Crown corporations will likely be working in some close proximity with the traditional banking systems, and they will be able to work with the community in order to influence the approach that is taken in putting together these new financing vehicles, whatever they might be.

Senator Oliver: When the rebound comes and big orders start happening, how will they be financed with no inventory?

Mr. Schaadt: That is the question. We are having meetings right now talking about the access-to-financing problem and if there is a problem. Some would say, yes; some would say, no. There is certainly enough grey area for us to sit around and debate for some time.

However, we feel that when the time comes that we have weathered through much of this storm and we see an upswing in current orders and so forth, that is when we will see a real credit crunch, an issue with companies' ability to access the funding they need to fulfill the new orders and to come out of the doldrums they are in.

Senator Oliver: The study occurring right now is about access to credit. When rebounds happen, what types of recommendations do you suggest a committee such as this put on paper?

Mr. Schaadt: I do not know that I am competent to make those recommendations.

Senator Oliver: I will not push. That is fine.

Senator Goldstein: If I may try to push it a little bit, I understand that you cannot be a prophet. Three times in the course of your very excellent presentation, you said that the crunch would come at a time that orders started rising. Logic would dictate that that would be a good thing. People could come to their bankers with an order book and say, `` I have X or Y increase of orders; I need more money to be able to fill those orders; I will turn that inventory into accounts receivable in very quick time and you will have your coverage ratios available to you.'' Surely banks would want to react positively to that.

If I am wrong about that, can you help me try to understand how, in our report, this committee could encourage banks to react positively to that very positive change in the economy? Otherwise, we will go through the same situation all over again.

Mr. Schaadt: With respect to that situation, we are currently seeing that we have firms that are unable to access lines of credit at the levels they were getting previously, despite EDC government insurance of their foreign receivables.

Historically, typically a company, if they had 90 per cent insured receivables through EDC, could finance 90 per cent of those receivables. That is not the case now, particularly when you take into light what sector they are operating in.

That is happening right now. What expectation do we have that that will change in six, nine or twelve months, when we see a rebound in upswing? If they are not accepting insured receivables as an asset now, do we anticipate that will change? I think that is one place where we could perhaps have some influence.

Senator Goldstein: The budget proposes an increase in the small business loan ceiling of a significant amount. It used to be, if my memory serves me, $250,000, and it will now be $350,000 of credit that would enjoy government support.

Would that be a motivator for banks, given the fact that the repayment of the bulk of such a loan is virtually assured?

Mr. Schaadt: I should certainly hope so, yes.

Senator Goldstein: Would you recommend a still higher ceiling above $350,000, such as $450,000 or $500,000?

Mr. Schaadt: This is a point where I would put my personal opinions aside and leave it to those wiser in these matters than myself.

The Chair: Are there any other questions? We have a moment or two. If not, Mr. Schaadt, thank you very much indeed. We appreciate, as the deputy chair said, your coming on short notice and the helpful nature of your presentation.

Honourable senators, tomorrow morning, to refresh your memory, our witnesses at 10:30 will be the Business Development Bank of Canada and Export Development Canada, and then at 11:30 the Canadian Bankers Association. I hope you will all be with us tomorrow. I am sure it will be an equally interesting and stimulating exchange of views. I thank you for keeping your questions and your answers succinct and to the point.

(The committee adjourned.)