Canadian Tech and Business Groups Support Competition Bureau Study

Canadian tech and business groups are preparing to engage in a new consultation initiated by the Competition Bureau of Canada. This initiative focuses on the competitive landscape of debt financing options available to small and medium-sized enterprises (SMEs), including startups. The Bureau launched these consultations to gather insights for a comprehensive 12-month study aimed at improving the lending environment dominated by major banks.

The consultations began this week and will remain open until October 3, 2023. The Bureau intends to explore how Canada can enhance the lending landscape for SMEs, with a particular emphasis on term loans rather than equity or venture capital. This focus comes in response to widespread concerns regarding access to financing, including the stronghold of big banks and the unfavorable conditions that often accompany loans for SMEs.

Industry Response to the Consultation

Industry groups representing Canadian businesses and the tech sector have expressed their support for the Competition Bureau’s study. The Council of Canadian Innovators (CCI), which advocates for tech scale-ups, welcomed the research as a “good topic” and plans to take part in the consultations after discussions with its members. According to Laurent Carbonneau, CCI’s director of policy and research, “Improving access to capital and opening up markets is always a good thing.”

The consultation is anticipated to shed light on the challenges faced by startups in securing early-stage financing, particularly as data from the Canadian Venture Capital Association (CVCA) indicates a decline in seed-stage funding. The current capital-raising environment has proven particularly challenging for early-stage Canadian tech startups, prompting many to explore alternative debt financing options, including those offered by government entities like the Business Development Bank of Canada (BDC).

Barriers in the Debt Financing Landscape

Statistics Canada reports that approximately 25% of SMEs actively seek debt financing. Yet, acquiring such capital has become increasingly burdensome and costly. Many businesses resort to credit cards to maintain operations, facing higher interest rates than their counterparts in other OECD countries. Additionally, the requirement for personal guarantees poses a significant risk, as noted by Corinne Pohlmann, vice-president of advocacy at the Canadian Federation of Independent Business (CFIB). She emphasized that “often, businesses would prefer to use collateral rather than having to do a personal guarantee, which could potentially bankrupt them personally.”

The lack of competitive options in Canada has resulted in less favorable deal terms compared to markets like the United States. Entrepreneurs often find that lending conditions, including secured debt, hinder their ability to launch new ventures after a previous startup fails. Research from the founder support platform Chapter indicates that the average personal cost of startup bankruptcy in Canada is nearly $350,000.

Some programs designed to encourage entrepreneurship, including the BDC’s Business Loan Accelerator Program, still require personal guarantees, which can deter potential founders.

Potential Impact of FinTech and Legislative Changes

Non-traditional lenders, particularly FinTech companies, have welcomed the Competition Bureau’s initiative. Fintechs Canada argues that advancing legislative projects on open banking and real-time rail will enhance competition in the lending sector. An open banking framework would empower consumers to manage their financial data more effectively, facilitating easier transitions between banking and loan providers.

While the current study will not explicitly cover these legislative initiatives, the Bureau acknowledged their potential to promote competition. Adriana Vega of Fintechs Canada stated that advancing these policies would significantly expand access to capital for SMEs. She added that giving financial regulators a mandate to enhance competition would lead to reduced borrowing costs and a more effective market.

Pohlmann also indicated that open banking could simplify the process for SMEs looking to switch loan providers, provided that FinTech firms are not acquired by larger banks. She noted, “That’s the only thing to watch. But open banking could definitely help in that regard.”

As the consultation progresses, stakeholders are optimistic that the insights gathered will lead to meaningful changes in the debt financing landscape for small businesses across Canada. The anticipated study is expected to be published in the fall of 2026, marking a significant step toward fostering a more competitive and accessible lending environment for SMEs.