Small Businesses Prove to Be Resilient Despite Difficult Market Conditions

(Business Development Bank of Canada)

Drawing on data from its loan portfolio and its experience with its 27,000 entrepreneur clients, the Business Development Bank of Canada (BDC) has found that to date small business is generally managing to cope with the effects of a strong Canadian dollar and turbulence in the financial markets. This is one of the conclusions BDC reaches in the first issue of its new Entrepreneurial Insight newsletter.

"Small businesses and especially manufacturers make up much of BDC's loan portfolio. Thus the state of our portfolio could be a good barometer of the health of SMEs and the Canadian economy," says Jérôme Nycz, Vice President, Strategy & Planning. "Our loan portfolio is relatively stable and solid. The number of clients having temporary or permanent difficulties in repaying their loans remains low and has changed very little in the past three years. Although 2008 is far from over and we are continuing to monitor the situation closely, so far we have seen that entrepreneurs are very resilient and most can adjust to market conditions."

However, BDC has also found that market conditions are having more impact on manufacturers. Nearly half of the BDC loans that have deteriorated (i.e. are unlikely to be repaid) were granted to manufacturers. Manufacturing exporters, particularly those whose exports to the United States make up 40% or more of their sales, are the most vulnerable.

“SMEs that moved into export markets in recent years were betting on the proximity and ease of trading with the United States,” Mr. Nycz explained. “Because of their generally lower productivity, the rapid increase in the value of the Canadian dollar and fierce global competition, SME manufacturing exporters who relied too heavily on the U.S. market are suffering the consequences today.”

Although they account for only 4.2% of Canadian SMEs, manufacturers make up 26% of BDC’s clients. To help them adjust to market conditions, BDC recently offered its eligible clients the option of postponing principal payments on their loans for six months.

”We know that manufacturers who navigate through these difficult waters successfully are those that have developed clear business strategies so that they are ready to seize opportunities on national and international markets. By offering them this financial respite, we wanted to give our entrepreneur clients the leeway they need to review their business plans and export strategies and look at ways to improve productivity,” Mr. Nycz explained.