SME Financing Data Initiative

Developing a Research Agenda

The preliminary research agenda described here was developed following the evaluation of SME financing information gaps, the views and needs of stakeholders, financing issues that would benefit from analysis in the near term, and budget constraints. The preliminary plan consists, broadly, of demand – and supply – side surveys, referred to as baseline surveys, and specialized surveys and studies.

Of particular interest and importance, given the current Canadian business environment, are firms in knowledge-based industries (KBIs). KBI firms are leading the marketplace, creating employment and wealth. A better understanding of their needs is necessary for them to continue this contribution. Although some surveys and studies conducted to date may have included these firms, none have yet managed to cover all aspects of their financing needs, nor provide a complete picture of how they are supplied. The main assets of many KBI firms are often intangible, such as their employees' technical expertise. Financing products for these firms must be innovative to take into account their lack of conventional collateral.

This is also an area where informal investment and equity for SMEs have been growing. Venture capitalists are making, according to studies conducted by MacDonald and Associates, considerable investments, yet we know little about how they operate – their holdings in SMEs, their specific incentives to invest, etc. Stakeholders must know investee firms' perceptions regarding equity capital, its costs, etc. Furthermore, knowledge-based industries are altering the way businesses function, and this inevitably affects financing as well. Financial products, along with all other products, are becoming increasingly electronic. For these reasons, the availability of electronic means of financing must be explored.

Baseline Surveys

The baseline surveys will allow us to ask, and will aim to answer, the following basic questions:

• How much financing have SMEs received?
• How does this amount change over time?
• What is the purpose of this financing?
• Are there inconsistencies between the demand for and the supply of financing?
• If, indeed, there are inconsistencies, what factors contribute to them?
• What different types of financing suppliers and instruments are there? And what is their relative importance?
• How do these suppliers and instruments change over time?
• What are the risks associated with the financing of SMEs?

Ideally, the baseline surveys would also attempt to measure the total value of new and of outstanding financing by type of supplier and by type of instrument, the proportion of financing approved as a percentage of the amounts requested, the reasons for turn-downs or approvals, as well as the loss provisions and write-offs. They will also attempt to shed light on the proportion of SME owners who do their personal banking with their main business credit supplier, the cost of financing, account manager turnover rate, and private individual investment in small business.

Progress to Date on Baseline Surveys

The partners agreed that it would beneficial to conduct a pilot demand-side survey. This survey is scheduled to be finalized and distributed to a sample of over 2000 SMEs across Canada in June 2000. Limited results and analysis from the pilot will be available to Members of the House Standing Committee on Industry in the Fall of 2000. The full regular demand-side survey is scheduled to be conducted early in 2001.

Work has also begun on the supply-side survey, with the details of specific data elements to be worked out in the June 2000 round of consultations. The first supply-side survey will be conducted early in 2001, and will serve as a pilot for the content and the coverage of the full production supply-side survey, scheduled for early in 2002. The results of the full demand-side survey will also allow fine-tuning of the full supply-side survey, as its results may make it evident that some data elements are better collected through one survey rather than the other.

Specialized Surveys and Studies

The findings of the baseline surveys will allow the partners of the initiative to flag areas that need further exploration, but for which the baseline surveys cannot provide an in-depth analysis. The partners have tentatively identified a number of specialized surveys and studies which might be of interest, and could be undertaken as part of the initiative over the next 4-5 years. Their descriptions follow:

Roles informal investors play in the financing of SMEs: This survey would focus on the profile of informal investors and their investment behaviour. The study would also try to identify the factors that motivate informal investors to invest in SMEs.

SMEs' attitudes about the availability of financing: This survey would deal with attitudinal issues, and would ask SMEs about all significant providers of financing.

SMEs' use and perceptions of informal investments: This survey, possibly conducted every two years, would ask SMEs about the impact of informal investments on their firms as well as the factors that encourage (and discourage) SME owners to seek informal investments. In addition, this survey would analyze the perception of this form of financing and will try to assess the level of readiness of small business for this type of financing.

Price vs. risk study: This research would shed light on the options available for financing riskier SME ventures as the projects move up the risk curve to determine if there are under-served niches.

Venture capital market: This study would analyse the formal venture capital market to determine the impediments of investing in SMEs.

Knowledge-based industries (KBI): This research would identify the financing needs specific to SMEs in the KBI sector.

Electronic means of financing: A study to identify emerging trends in electronic means of financing, as well as their usage by SMEs (for e.g. Internet credit applications and matchmaking services).

Roles 'new' corporate informal investors play in the financing of SMEs: This would focus on the profile of informal investors and their investments behaviour, but would target the 'new' corporate informal investors' group.

Seed and research & development financing needs: This survey would identify the financing needs specific to SMEs in the seed stage of development, and those with significant R&D requirements.

Availability of micro-credit financing: This study would evaluate the issues surrounding micro-entrepreneurs seeking financing amounts of less than $25,000 and the supply of such financing.

Canadian IPO market: This study would examine the environment and the special financing requirements of fast-growing SMEs that are in the pre-IPO and post-IPO phases. A survey will be conducted regarding the experiences of SMEs who went through an IPO.

Youth, gender, Aboriginal, regional, rural vs. urban, language minorities: Surveys or studies to assess the impact of these various factors on obtaining financing for SMEs.