Access to capital for high-risk businesses.

Small and medium-sized businesses lacking the collateral required to secure a bank loan are being handed a break by the federal government.

Under, a new loan-loss reserve agreement between FedNor and Northern Ontario credit unions, high-risk businesses in the North will be given access to the capital and consulting services they need to either get a new business off the ground or to expand an existing enterprise.

The funding program, still in its initial stages, is expected to generate up to $15 million in new commercial financing for small businesses in Northern Ontario. FedNor has committed $8 million to the loan-loss reserve fund and will assume a share of the risk associated with the enhanced financing. Marie Desmarais-Santi, a policy and planning officer with FedNor, says the loan loss reserve agreement is FedNor's latest initiative aimed at generating new business in Northern Ontario, and that a similar arrangement has been made with Caisse Populaire, another Northern Ontario banking group.

"Also, FedNor supports 22 not-for-profit organizations across the North called Community Futures Development Corporations," Desmarais-Santi says. "They also have a component which is an investment fund, so they invest in small business. I guess the whole logic behind that is that access to capital is harder for small business in the North than it is (elsewhere). Often banks will decide that a venture is considered too risky because it's in the North, whereas the same venture somewhere else wouldn't be a concern."

By assuming a portion of the risk, FedNor, through the loan-loss reserve, will enable credit unions to provide increased access to higher-risk term loans, capital and equity financing for SMEs (small- and medium-sized enterprise) to finance projects emphasizing business and market expansion and diversification.

SMEs have greater access to loans

The fund will be overseen by two administrators: Northern Lights Credit Union Ltd. in the northwest, in Dryden, and Northridge Savings and Credit Union Ltd. in the northeast, in Sudbury.

"Any other credit union that wants to participate in the program will be required to sign an undertaking which says that they are willing to abide by the agreement that FedNor has signed with the two administrators."

Desmarais-Santi says. "Then they (the credit unions) participate through the administrators."

There are 29 independent credit unions operating 78 branches throughout all regions of Northern Ontario, and Desmarais-Santi says many are expected to participate in the program.

"This is all commercially based, repayable loans," she says. "But (the program is meant to) try to encourage the providers of capital to provide the capital that they would not otherwise provide."

Under the terms of the loan-loss agreement, any individual, firm, company, corporation, joint venture or trust is eligible for funding provided: the business has less than 250 employees and annual total sales of less than $20 million; the business agrees to participate in mentoring and counselling support if determined necessary by the participating credit union, and agrees to pay for those services; and the business is, or is about to be; a business located in Northern Ontario.

The financing can be used for any number of projects, ranging from business expansion and enhanced competitiveness, to strategic planning, market development and management support.

Projects that involve refinancing, or do not result in new or increased economic activity, are not eligible for the program.

"These loans would be (for businesses) that don't meet the criteria specifically of our own loan policies," Northern Lights Credit Union Ltd. chief executive officer Doug Robinson says. "They are, in most cases, probably shy of security, which is where the loan-loss reserve fund comes into play. It just shores up the security portion that's missing. (Applicants) still have to put together a business plan to outline what it is they're trying to do and how they think they're going to do it and what kind of financial projections they feel are reasonable."

Robinson says the funding program will give his credit union, and other Northern Ontario credit unions, more flexibility with the services they offer to SMEs, and an initiative that complements existing investment activities at the Dryden credit union.

"We are fairly involved in small-business lending already," Robinson says. "So we were given the opportunity of offering some input into how the program was going to be structured."

FedNor's $3-million reserve fund will act as a safety net in the event an approved, high-risk business loan cannot be repaid, Desmarais-Santi says.

"FedNor flows funding to the credit unions, but the funding is used only when a loss has been incurred," she says. "Before they tap into the reserve, they must go Through all the normal procedures of trying to recover funds. So it's sort of a last resort."

The loan-loss reserve fund will cover 20 per cent of the loss once all avenues of financial recovery have been exhausted, she adds.