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Credit unions in Newfoundland and Labrador have looked at their Nova Scotia peers for years with a touch of jealousy because of that province’s Credit Union Small Business Loan Guarantee Program. Now, N.L.’s eight credit unions have finally convinced the Government of Newfoundland and Labrador to pilot a similar program.
Announced this week, the new Newfoundland and Labrador’s Small Business Loan Guarantee Pilot Program should result in more businesses seeing greater access to the capital they need for growth. For the pilot, the Province will provide loan guarantees for commercial loans up to $250,000, or the principal amount of an eligible loan, whichever is smaller. The collective guarantee for all loans combined will max out at $5 million.
“These are businesses who are giving us every indication they are going to be successful but they just don’t have the collateral behind them at this point,” explained Newfoundland and Labrador Credit Union director of credit Kent Farrell, speaking with ABM. He was excited for what the new program has the potential to achieve.
Developing financial relationships
Lack of collateral is not an uncommon story in a long list of situations, including younger entrepreneurs, new Canadians, or the startup community in the knowledge-based sector, where there may not be as much invested early on in physical assets.
Farrell said when people don’t land loans, they might have some success through an Atlantic Canada Opportunities Agency (ACOA) program or a provincial Industry, Energy and Technology (IET) program that may serve at least part of their needs. But that’s not ideal in every case. And when finished, there isn’t the same relationship established with institutional lenders, he said.
On the other hand, if a small business connects to a credit union through this pilot program and is successful with an early loan, they then have a proven track record with the institution.
“The more success the local business community has, the more we can help members achieve their financial dreams.”
—Kent Farrell
Farrell said other provinces have explored similar loan guarantee programs. Nova Scotia’s has born fruit for years now. From 2003 to 2016, the program had supported almost 2,000 businesses, with more than a $100 million total in loans. Only about five per cent of those loans defaulted. Since then, the Government of Nova Scotia has continued the work with credit unions, and the program has seen increases in both the percentage of the loan principle eligible to be guaranteed as well as the total amount of guarantees.
“They have a program where they approved $208 million since the program started,” Farrell said. As he understands it, the program just across the Strait has now covered loans to just shy of 4,000 businesses and is estimated to have helped business owners create and retain over 20,000 jobs in Nova Scotia.
“So we’re hoping to have similar success here in Newfoundland,” he said.
It all starts with the pilot. While the Government of Newfoundland and Labrador is covering $5 million for now and IET is tracking the results through quarterly reports from the credit unions over two years, Farrell expects the pilot could allow for credit union loans to 50 businesses that might not have been issued otherwise (not all of the loan requests will be at the guarantee cap of $250,000).
A rising tide…
“Local businesses are the primary employer in most of our communities in the province,” Farrell said, noting the bonus benefit to credit unions as growing businesses support people in local communities—people who will contribute to the local economy, who will go looking for mortgages and car loans and other personal financial staples.
“The more success the local business community has, the more we can help members achieve their financial dreams,” he said.
To be clear, it’s not the the provincial government that will grant loans. The credit unions remain responsible for the review and approval of a loan and then request the guarantee from the province. The province’s guarantee doesn’t cover any costs related to any lost interest, or collection costs.
Responding to questions, government officials said guarantees can be issued for up to two years from the start of the program. The maximum term of the loan guarantees will be 10 years following the date of the particular loan guarantee agreement.
“In the event that a loan issued by the credit unions is determined to be uncollectible, the provincial government will assess and process claims by the credit unions up to the outstanding principal portion of the loan,” stated officials, in an email.
The credit union system in Newfoundland and Labrador includes eight member-owned financial co-operatives, with total assets of more than $1.4 billion.
Anyone with questions on the new program is encouraged to contact a local credit union. Participating are: Atlantic Edge Credit Union, Community Credit Union, Eastern Edge Credit Union, Hamilton Sound Credit Union, Public Service Credit Union, Reddy Kilowatt Credit Union, Venture Credit Union and the Newfoundland and Labrador Credit Union.
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