BDC Fact #5

If you thought for a second that there wasn’t enough material to get through an entire week (see post “Next week is ‘BDC Facts & Figures’ Week“, December 2-07), you were wrong.

Although you might think that The Business Development Bank of Canada exists to serve the needs of Canadian small business, there appears to be a definite desire on their part to serve large companies as well. You might be surprised to know that BDC’s lending group chases multi-million dollar plain vanilla term loans at firms with ~$150 million of revenue and 1,000 employees. That’s a small and medium business (“SME”) in their books; or maybe its just a convenient way to hit the 7% net loan growth targets they set for themselves in 2006.

I don’t know about you, but I don’t think firms with $150 million of revenue or more than 500 employees count as SMEs.

The European Union’s (“EU”) definition of a SME, which is used for EU statistical comparisons, “defines a small enterprise as one with less than 50 employees, and a medium enterprise as one with at least 50 but less than 250 employees. Large enterprises have 250 or more employees.”

According to the Canadian Bankers Association (“CBA”), a SME customer is one with less than $1 million of authorized credit.

And it isn’t just the term loan group. The BDC regularly books sub debt deals larger than $5 million, according to industry sources and publicly available data. One sub debt deal in March was authorized at $14 million. A $10 million deal was announced in December, two $7.7 million transactions in January and August, etc.

All told, 7 of the 20 largest sub debt deals announced in Canada (for Canadian-based borrowers) so far this year were led by BDC, one of which was syndicated with Investissement Quebec.

Unfortunately, this notion of what “a SME looks like” is inconsistent with even Statistics Canada and Industry Canada definitions. According to a 2004 survey of Small and Medium Exterprises conducted by the Small Business and Special Survey Division of Statistics Canada, for the purposes of government data collection a SME has fewer than 500 employees. By the Industry Canada definition, a SME has 499 or fewer employees.

Even the 2006 BDC Annual Report says that a “Medium” business has between 100-499 employees.

I think the CBA is right. A true SME borrows less than $1 million. Once the loan gets higher than than, definitions get murky. But even if Stats Can and Industry Canada have it right, and a firm with 499 employees is a SME, the BDC lending group is operating outside its mandate when it lends to well-banked firms with well north of 500 employees.

If it wasn’t to hit the loan growth targets outlined in their own annual report, why would they bother? Is staff morale hindered when the average loan size is $285,000? Is it to preserve and honour long-standing client relationships? Is it to tap into compensation plans that pay for authorized, not drawn, loans? Is it that no one on the outside was paying attention?

MRM