Pooling startup credit backstops would ignite entrepreneurship, investment and productivity
I signed my first personal guarantee at the age of 19. I was starting a digital marketing company and needed to secure a lease and a line of credit from a major Canadian bank. Luckily, I owned a small condo that I could pledge. I was 19, but I was “bankable.”
Since then, I have personally guaranteed millions in business debt over more than 30 years as a Canadian entrepreneur. The possibility of doing so is a privilege not every founder has. But it also changes how businesses are run and how ambitious they are. When a founder’s house is on the line, decisions that might be good for the company are not always good for the founder.
It is a distinctly Canadian problem and one that is holding back entrepreneurship, investment and productivity.
When people discuss Canada’s productivity challenges, they usually focus on taxes, regulation, venture capital or culture. The role of personal guarantees receives remarkably little attention. Perhaps that is because most Canadians do not realize that in both the United States and Europe – jurisdictions heavily outperforming us in terms of scaling highly-productive businesses – personal guarantees are replaced by state-backed guarantees.
In 2018, I co-founded Fieldless Farms, an indoor agriculture company based in Cornwall, Ontario. Like many equipment-intensive businesses, growth required both equity and debt financing. To secure that debt, my co-founders and I signed personal guarantees. Without them, the company would likely never have grown beyond an idea.
The guarantees were substantial enough that our homes were effectively on the line. If that wasn’t enough, we were required to place $25,000 on deposit with a major Canadian bank to obtain a business credit card with a $25,000 limit.
As CEO, the guarantees occasionally created an uncomfortable reality: my personal financial interests were not always aligned with the growth ambitions of my shareholders.
After exiting Fieldless earlier this year, I found myself thinking less about the guarantees I signed and more about the companies that never get started because their founders are not considered bankable enough to sign them.
Our system routinely asks entrepreneurs to risk their homes, savings and financial future before lenders will extend credit. This disproportionately affects first-time founders, young entrepreneurs, new immigrants, minorities and entrepreneurs whose previous venture failed – the exact demographics we need active in entrepreneurship.
A skilled immigrant may arrive in Canada with decades of experience and a promising business idea but lack the collateral required to secure financing. A founder whose first company failed may have gained invaluable experience but lost the balance sheet needed to try again.
In practice, we are financing past success, not future potential. That needs to change.
The consequences are felt across the economy. Since Canadian investment in machinery and equipment peaked in 2008, it has fallen dramatically while comparable U.S. investment has increased substantially. Many factors contribute to that divergence, but our approach to startup credit is likely one of them.
The federal government should establish the creation of a Startup Credit Guarantee Corporation (SCGC).
In place of personal guarantees, startups would pay modest premiums into a pooled guarantee fund. Lenders would retain a portion of the risk, while the remaining exposure would be covered through a professionally managed guarantee pool backed by initial public capitalization.
This would not be a grant program or subsidy. It would function much like mortgage insurance or export credit insurance: a risk-sharing mechanism that allows capital to flow where it otherwise would not.
With an initial capitalization of roughly $250 million, such a system could unlock between $1 billion and $2 billion in additional startup credit each year unlocking many times that in new equity capital.
Most importantly, it would expand the pool of Canadians who can build businesses, create jobs and increase tax revenues for governments, in the first place – or again.
Some argue a stronger startup ecosystem is a cultural challenge in Canada. But after having worked or spent time with hundreds of Canadian founders, and building multiple companies here, I am convinced of two things: 1) It’s not, and 2) personal guarantees are a major obstacle to Canadian ambition.
At a time when Canada desperately needs more builders, investment and growth, it’s a problem we can no longer ignore.
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