Proposal to Develop, Implement and Administer a Small Business Emergency Funding Program
Canadian Lenders Association (“CLA”), in conjuection with Kilgour Williams Capital (“KWC”), is pleased to submit this proposal to develop, implement and administer an emergency funding program (the “Program”) to assist Canadian small businesses affected by the COVID-19 pandemic, and that may not be well served, by the Business Credit Availability Program (“BCAP”) being administered through traditional financial institutions.
KWC is a regulated investment manager exclusively dedicated to managing portfolios of loans originated and serviced by the financial technology (“FinTech”) lending community. We have an existing infrastructure in place to implement, administer, and assess and manage risk in this space, making us uniquely qualified to develop and manage the Program. We were also key advisors to Canadian investors during the Global Financial Crisis.
Canada’s FinTech lenders, as represented by the CLA, have existing online systems and capabilities which allow them to efficiently originate, underwrite, and deploy small business loans. FinTech lenders can provide significant operational support and leverage to BDC and traditional lenders in deploying capital through their network of small business clients and will extend the reach of the existing BCAP program. By reaching businesses who fail to qualify for BCAP or whose needs exceed what is available through the Canada Emergency Business Account (“CEBA”) initiative, the Program will fill gaps inherent in previously announced programs.
The objective of the Program is to extend up to $ billion of emergency loans within 90-120 days to 60,000 – 100,000 Canadian small businesses that are not well served under BCAP. The Program will provide essential capital to enable these small businesses to weather the current crisis and will be critical in supporting small businesses looking to restart, rebuild and grow after the pandemic is over.
The Program has been reviewed and endorsed by the Canadian Lenders Association. It is consistent with international precedents. And it can be established and commence lending within two weeks of the acceptance of this proposal. We are available at your convenience to discuss this proposal and begin this important work immediately.
An Urgent Need to Address the Gaps
The recently launched BCAP, including the CEBA, will provide immediate and much needed assistance to many Canadian small businesses affected by the COVID-19 pandemic. However, some Canadian small businesses will not be well served by BCAP. Specifically, there are many businesses that:
- Have legitimate credit needs in excess of the $40,000 limit of the CEBA program;
- Will not qualify for CEBA if their payroll is either below $20,000 or in excess of $1.5 million;
- Will not qualify because workers/owners are paid through dividends rather than payroll;
- Will not qualify because key workers are contractors rather than employees on payroll; or,
- Do not have existing relationships with traditional financial institutions who are overseeing the CEBA program.
These businesses face the same challenges as other businesses in Canada. They have seen up to a 100% drop in their revenues which will continue for several months or more and face the prospect of a protracted economic recovery. While their long-term business prospects may remain sound, they need to survive through the short term. Absent timely financial support, many viable businesses will fail, and those failures will ultimately delay Canada’s overall recovery once the pandemic has cleared.
We propose to work with the government of Canada, BDC, and Canada’s FinTech lenders to implement the Program that will fill gaps not yet addressed by CEBA and other government initiatives.
Kilgour Williams Capital is Experienced, Qualified, and Ready
KWC is a Canadian credit investment management firm that specializes in managing portfolios of FinTech originated loans through the KiWi Private Credit Fund. We currently work with many FinTech lenders and at any given time our fund holds thousands of discrete loans. We have a fully developed and proven infrastructure for managing a large loan portfolio of FinTech originated loans, including:
- Managing cash flows
- Custody of loans and loan documentation
- Portfolio monitoring
- 3rd party valuation of loans
- Fund/portfolio accounting
- Investor reporting
- Standby servicing
KWC is regulated. KWC’s principal regulator is the Ontario Securities Commission (“OSC”) where we are registered as an Investment Fund Manager, Restricted Portfolio Manager, and Exempt Market Dealer. As an OSC registrant KWC maintains a full compliance regime that is subject to periodic inspection audits by the OSC.
KWC are audited. KWC prepares audited financial statements each year, as required by securities regulations, and have done so since 2014.
KWC are experts in a crisis. KWC was founded as a direct result of the onset of the Global Financial Crisis in 2007. KWC were a significant advisor to many Canadian institutions, businesses and individuals holding distressed financial assets. KWC advised securities regulators attempting to identify wrongdoing and make policy changes going forward. KWC were the primary expert witness to the court supervised CCAA restructuring of the Asset Backed Commercial Paper Market, which remains the largest CCAA restructuring in Canadian history.
KWC are well capitalized. KWC has financial backing from Walter Global Asset Management, a Quebec-based private equity firm that is part of the Walter Group (https://waltergroup.ca/).
Canada’s FinTech Lenders Have Distinct Capabilities in the Lending Market
FinTech lenders are online businesses that perform bank-quality processes, including loan underwriting, fraud detection, loan origination, and servicing using algorithms and technology. Fintech Lenders, by design and through online strategy, reach out to and are reachable by the ‘Main Street’ small business segment, which is the segment of the economy in most urgent need and unlikely to have all of its needs met by traditional financial institutions.
The Canadian Lenders Association (CLA) represents Canada’s FinTech lending community. The CLA is an aggregated voice of the small and medium sized business (SMB) and consumer lending industry that works to support a borrower-friendly environment in Canada. All CLA members are vetted and accredited based on their corporate standards and values. The CLA’s mission is to promote transparency and foster responsible and ethical lending practices in the FinTech industry.
FinTech lenders use data and artificial intelligence to adjudicate and provision credit efficiently (within hours) to underserved small businesses and consumers. CLA’s members have made over $2 billion available in the past several years, primarily to local storefront businesses, with an average financing size that typically ranges from $25,000 – $250,000. This represents tens of thousands of small businesses, which in turn support hundreds of thousands of Canadian workers.
Kilgour Williams Capital and the Canadian Lenders will Provide a Turnkey Solution
We propose to establish a special purpose funding vehicle from which Canadian small businesses will access a target of $ billion of funds within 90-120 days through KWC and CLA qualified FinTech lenders. The Program will provide necessary liquidity to small businesses that may not qualify under the BCAP offered through traditional financial institutions with a goal of enabling them to survive the pandemic, position for recovery, and ultimately grow in the future.
The model we are proposing is tried and proven. KWC employs it in their KiWi Private Credit Fund and it will be familiar to BDC and others who are already familiar with indirect or lender finance models. It is an efficient way to allocate capital to small businesses via the FinTech community and also incorporates suitable controls and protections for the capital providers. While it is contemplated that BDC will be the sole funder initially, the model can easily support additional capital providers with multiple risk/return preferences over time.
Figure – Overview of Funding Model
At the core of the model, a dedicated funding Special Purpose Vehicle (‘SPV’) will be established (shown here as BCAP FinTech Funding Vehicle). The SPV will be owned and capitalized initially by federal funds via the BDC. All loans originated under the Program will be owned by the SPV. The SPV will be bankruptcy-remote from the Lenders and will establish and maintain back up servicing arrangements in the event that any Lender is unable to continue to service loans. The design of the SPV will allow for other investors to be added and various tranches of funding to be created, but initially it will be a single tranche 100% funded by the Government/BDC.
KWC will create, manage and administer the SPV and work directly with the Lenders. KWC will:
- Due diligence, qualify, and onboard lenders;
- Review and enforce underwriting criteria, as well as KYC / AML requirements;
- Administer funding vehicle;
- Arrange custody of assets;
- Engage back-up loan servicer;
- Provide independent portfolio valuation and monthly portfolio performance reporting;
- Prepare monthly financial statements / annual audit; and
- Report to BDC and/or other Government stakeholders
The CLA will also support the operation of the SPV. The CLA plays a key role in working directly with the FinTech community, but also provides invaluable functionality that assists in detecting fraudulent loan applications.
Lenders will originate loans on behalf of the SPV. The Lenders will service the loans by providing ongoing monitoring and processing of principal and interest payments. There will be a single loan product that all participating Lenders will originate and service. Product parameters and underwriting criteria will be developed in concert with the Lenders, the CLA, KWC and ratified by the BDC. Suitable fraud and anti-money laundering controls will be established and enforced.
Loans will be extended to qualified small businesses subject to the underwriting criteria. The detailed loan product will be developed in concert with BDC and Lenders but would be modelled somewhat like the $40,000 facilities being offered through banks. Potential product attributes could include:
- Amount up to $250,000
- Interest-free for some period
- Converting to a low-interest term loan after the interest free period
- Some level of debt forgiveness if loan proceeds are used for overhead expenses such as rent, utilities, etc. as determined by the government of Canada
- Restrictions on certain use of proceeds (e.g. limits on owner compensation, dividends, debt repayment beyond regular payments, etc.)
This Program Provides Operational Leverage to Strained Resources
A key benefit of this Program design is that it provides operational leverage to strained government resources. The turnkey nature of the Program allows for rapid implementation and scaling while minimizing the demands on already strained government resources.
The government of Canada can leverage the key competencies of all participants to deploy capital broadly while maintaining prudent controls that protect the government’s investment.
Each Party has a Key Role to Play
While specific roles and responsibilities will be confirmed, the general principle is to leverage the specific expertise that each party brings. The following outlines potential high-level roles and responsibilities for each of the players.
Government of Canada
- BDC to act as agent of Government of Canada (to be confirmed)
- Confirm program objectives and targets
- Ratify product design and underwriting criteria
- Establish a funding commitment with SPV
- Provide funding
- Provide oversight of SPV Administrator
- Report to government on Program results
- Originate, underwrite and service loans
- Report on loans and borrowers monthly
- Remit collections to SPV
Kilgour Williams Capital
- Establish and administer SPV
- In collaboration with the CLA and government, establish Lender eligibility criteria
- Due diligence Lenders as they apply for inclusion in the Program
- Ensure Lender compliance with KYC / AML requirements
- Oversee borrower applications to prevent duplicate processing by Lenders and loan ‘stacking’ by borrowers, enabled by the CLA’s online database software
- Manage cash flows in SPV
- Ensure custody of cash and loan assets
- Maintain standby servicer relationships and ensure continued readiness of standby servicer
- Value portfolio on a regular basis
- SPV fund accounting
- Report regularly to government on performance
- Manage relationships with SPV service providers (auditor, independent valuation agent, back servicer, etc.)
Canadian Lenders’ Association
- Anti-fraud infrastructure to prevent duplicate funding & various forms of fraud api.canadianlenders.org
- Lender FinTech community management and industry / government communication
The Program in an International Context
We have looked at the programs being offered in adjacent and analogous markets (U.S., U.K. and Australia), believe the Program proposed here is best suited for the Canadian context.
The U.S. has passed the CARES Act which launched the Paycheck Protection Program (PPP) administered by the Small Business Administration (SBA). The SBA already routinely works with a roster of 1,800 authorized lenders and has in the past few days extended approvals to select non-bank lenders, such as PayPal and Intuit, and is expected to approve further FinTech applicants. Importantly, unlike in Canada, the U.S. FinTech lending community is a mature sector, having operated in a number of cases for over a decade and comprises a number of public companies with market capitalizations exceeding $1 billion.
The U.K. response has taken the form of the Coronavirus Business Loan Interruption Loan Scheme (CBILS) administered by the government-owned British Business Bank (BBB), which does not itself make loans or investments, instead working with 40 approved partners. The BBB in the past couple of days added FinTech banks such as Starling and OakNorth and is likely that FinTech lender Funding Circle, an investee company of the BBB, Iwoca and others will be added as approved lenders under CBILS. Again, as with the U.S., the FinTech lenders being added are substantially capitalized and in some cases have banking licenses.
Finally, in Australia, a similarly sized and structured market to Canada’s, the response has taken the form of the SME Coronavirus Guarantee Scheme with an initial group of 30 approved lenders. Additional lenders, including FinTech Lenders may apply to the program. SME-focused digital challenger Judo Bank was in the past couple of days given a direct allocation of $500 million; Judo is an established FinTech and last year received a full banking license.
In sum, each of these countries has engaged their FinTech communities to assist with their specific COVID-19 response. Each country has developed a response that reflects the composition, reach, and stage of development of their respective FinTech communities. With that context, we suggest that the approach we have presented here reflects a well-considered response to the pandemic that can effectively leverage the full capabilities of Canada’s Fintech Lenders.
This Program will Position Small Businesses for Recovery, Rebuilding, and Growth
The Canadian economy is entering a period of significant upheaval and, while urgent action is needed today, we must also keep an eye to the future and restore growth to the economy. The Program will certainly play a role in that process.
In the immediate term, this Program will be a vital lifeline for many Canadian businesses whose operations have been devastated by the pandemic. As we move past the pandemic and into recovery, the Program can evolve to be a stable source of moderately priced credit for Canadian small businesses. As recovery gives way to growth, the Program can further adapt, potentially adding additional credit products while also attracting additional private sector credit providers beyond BDC/Finance.