_and medium sized businesses.”...“The loans, investments, and guarantees are to fill out or complete services available from commercial financial institutions._ ” (BDC Act of 1995) BDC’s mandate has an important number of advantages: first, it is short and clear, defining the objective as supporting Canadian entrepreneurship, with particular consideration to the need of SMEs. Secondly, it defines the role of BDC as complementary to the commercial banks and mainly for the purpose of completing the market. Thirdly, it allows BDC to operate with multiple instruments (loans, investments and guarantees), which gives the Board and the management of the company the necessary flexibility to service its clients. Although it is not in its mandate, the government requires BDC to be commercially viable and to earn a return on equity at least equal to the Government’s average long-term cost of capital.

BDC has a high quality database with disaggregated data on Canadian SME companies since 1980, which together with state of the art risk management systems allow BDC to price by risk and to run a profitable business in segments of the market that are not serviced by commercial banks. BDC is generally more expensive than the market in funding companies / projects that have other sources of funding, but it is an attractive source of funding for riskier projects that are less attractive or unattractive to commercial banks. On the basis of rational decision making, borrowers with other sources of funding do not use BDC.<sup>8</sup> Since pricing is the source of market selection, many companies initially funded with BDC look for refinancing with commercial banks at cheaper rates. Approximately 6.5 percent of BDC’s clients fully prepay their loans every year (based on average of number of clients over the past ten years). While a commercial bank may consider this as a business failure as the model depends on keeping the good clients, BDC considers this a success since projects can get funding directly from the market and do not depend on official support. However, this imposes an important challenge on the BDC management to bring new clients and rebuild the portfolio of clients on a regular basis. As a term lender (with minimum term offering of five years), BDC’s average portfolio term is approximately seven years.

BDC has also implemented other mechanisms to avoid displacing the private sector. First, it works in partnership with all other Canadian financial institutions in support of Canadian SMEs in an effort to complement their services rather than compete with them. Secondly, BDC has invested in corporate research that regularly tracks changes in the SME market conditions and identifies needs of the Canadian SMEs that are not being serviced by other financial institutions. In this context, BDC examines the impact of BDC products and services on the SME market as well as on other financial institutions. BDC conducts SME research via its own internal resources, and also partners with external third parties (Industry Canada, CIRANO, and Statistics

> 8 BDC has a small group of some large clients as well, which voluntarily stay with DBC due to their longer term vision of the projects, in particular during stress episodes. BDC participates also with in pari passu lending.

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