Government-Guaranteed Loans via Corporate Splitting

“Inflation, bankruptcy, the closing of factories, unemployment and poverty were painful realities across Canada, and the banks were becoming increasingly cautious. How could the economy be revived when entrepreneurs couldn’t borrow money to carry out their projects? To solve the problem, the Canadian government adopted a program to guarantee loans for small businesses, up to a maximum of $250,000. In effect, the government would act as guarantor in case of default. The project provided concrete support for small businesses as well as a colossal gift for the big Canadian banks. Fortin discovered that the program offered a solution to the financing dilemma faced by the four shareholders. No problem, he told Bouchard: We’ll split the company into separate units and apply for small business loans. The loans would be guaranteed by the government, so the banks would have no cause to refuse them. Following the advice of the Banque Canadienne Nationale, the group chose a different institution to finance its growth: the Bank of Montreal.”

“the four men had come to a conclusion: They should stay the course. The main reason, in Fortin’s view as a former banker, was that no bank would dare cut off funding for a company with a cash flow of $3 million. “We should continue operating,” he said. But they should also roll up their sleeves, he added, and strive to improve performance.”