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‘It feels like we are being punished’: Companies not yet profitable struggling to access coronavirus-related government loans

Within days of social distancing measures being imposed across Canada, revenue at Flashfood, a grocery deals app, plunged by up to 70 per cent.

The app — which lets users buy surplus grocery items at huge discounts — relies almost solely on grocery employees to post deals on its platform. But the app has taken a huge hit because grocery stores now have very little in the way of excess supplies, if any, due to customers stocking up and store employees have been too busy to post deals anyway.

The obvious solution to temporarily tide the company over is a loan, said founder and chief executive Josh Domingues, so he called on the Business Development Bank of Canada (BDC), hoping for a $2-million stream of financing from its special working capital loan program for businesses impacted by COVID-19.

Instead, Flashfood was rejected twice.

First, a BDC agent said Flashfood was not eligible because it was “not cash flow positive.” After the company proved it was cash flow positive, BDC in an email then said the business had to be “EBITDA positive.”

But the eligibility requirements as stated on the BDC website simply state that businesses need to be “revenue generating” and “financially viable prior to the impact of COVID-19” to receive help. There is no mention of profitability as a criteria.

For Flashfood and other companies that were in a rapid growth phase prior to the pandemic, but not yet profitable, BDC’s criteria appear to be a massive stumbling block in obtaining coronavirus-related loans.

Josh Domingues, founder and CEO of Flashfood, in 2017.

Josh Domingues, founder and CEO of Flashfood, in 2017.

Charlie Pinkerton/The London Free Press

“We need a loan because we don’t want to reduce our staff just yet,” Domingues said. “We think we are going to bounce back really quickly when this is over, and we just need that money to float us for the next few months.”

Flashfood has grown from to 40 employees from just six in the past year, after signing an exclusive deal with Loblaw Cos. Ltd. at the end of 2018. The app has more than one million downloads and was on track to expand internationally before the virus hit.

“Like any fast-growing startup, we are not profitable because we have invested in growth,” Domingues said.

BDC said in an email to the Post that each financing request is evaluated based on a business’s viability, financial health, credit history, risk level, annual revenues and management team’s experience.

“Businesses should have generated revenue, be cash flow positive and show their borrowing and repayment capacity. The profitability is analyzed on a case-by-case basis,” the email said.

Like any fast-growing startup, we are not profitable because we have invested in growth

Josh Domingues, founder and CEO, Flashfood

The criteria appear to be no different than BDC’s usual criteria for dispensing loans, based on information on its website.

But Lunata Inc., a Concord, Ont.-based small business that sells cordless hair tools and accessories, found itself in a similar boat to Flashfood when it attempted to apply for a $2-million working capital loan from BDC. The company is not consistently cash flow positive, nor profitable just yet, but figured it would qualify because it was generating revenue.

In a rejection letter, BDC stated Lunata “would not meet the criteria for this loan as it is not for earlier stage companies that have not hit cash flow positive.” The letter also said a key requirement is that a company should have been able to service the debt “say six months ago, but with COVID, results have deteriorated.”

Daryl Ching, managing partner at Toronto-based Vistance Capital Advisory, said BDC’s stringent lending requirements at an unprecedented time go completely against the federal government’s public statements that it is launching stimulus programs to support small businesses.

“It is pretty clear to me that the government’s priority is to support established medium- to large-sized businesses that are already cash flow positive or profitable and leave early-stage small businesses in the dark,” he said.

The EDC logo in Ottawa.

The EDC logo in Ottawa.

Wayne Cuddington/Postmedia News files

In addition to the BDC working capital loan program, Canadian businesses can apply for loans through the Business Credit Availability Program, a $65-billion initiative that disperses loans through BDC and Export Development Canada (EDC).

That program has two application streams. One is a $40,000 interest-free loan for small businesses that need help quickly, and the other is a co-lending program where small and medium-sized enterprises can receive up to $6.25 million in credit from BDC and commercial banks.

But obtaining this second type of loan appears to be tricky, said Adam Froman, founder and chief executive of Delvinia, a Toronto-based scale-up specializing in digital innovation.

“We’re an existing BDC client. In theory, it should take no more than a few days for our business to get a loan, because BDC has our file, knows our business inside out,” he said. “But the coordination between BDC and the bank is not there. The bank is ready to do this, but it says it hasn’t received instructions from BDC. So what am I supposed to do?”

Tech scale-ups in Canada say their top concern right now is generating revenue and the policy tools that would be most helpful to mitigate revenue declines are interest-free loans and loan guarantees, according to a report released this week by the Innovation Policy Lab at the Munk School of Global Affairs and Public Policy, in collaboration with Methodify by Delvinia.

Wage subsidies ranked third on the list.

One respondent, Ian Paterson of Security Solutions Inc., a Victoria-based digital security firm, was particularly critical of the government’s existing loan support programs for companies in the startup or scale-up phase that are not yet profitable.

“Tech companies focus on growth, not profitability,” he said in the report. “The BDC + EDC direct lending and financing is not available to us.”

Froman believes BDC is simply not designed to deal with startups and scale-ups because it is structured like a traditional bank.

Tech companies focus on growth, not profitability. The BDC + EDC direct lending and financing is not available to us

Ian Paterson of Security Solutions Inc.

“If you have a building, they will lend you money. You need to have the collateral,” he said. “Tech startups, in particular, have no assets so they have nothing to lend against.”

Ben Bergen, executive director of the Council of Canadian Innovators, said BDC traditionally prefers dispensing loans to companies that are already profitable.

But, he said, one thing the Crown corporation could do is maintain lower interest rates on loans so “more high-growth companies in Canada can get the financing they need to scale-up globally.”

That doesn’t help companies such as Flashfood and Lunata that are struggling to find credit in the first place.

Lunata recently had a line-of-credit application to a commercial bank rejected, with the bank stating that if the company had “raised more equity” or had a “purchase order in hand,” it would be more likely to receive help.

“It feels like we are being punished for growing quickly,” said Monica Abramov, Lunata’s co-founder. “Big retailers take sometimes up to 90 days to pay us for their orders, so all we really need is these loans to come through so we have enough runway until the end of this crisis.”

Financial Post

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