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SME Financing in Canada, 2002 — Part I: Debt Financing

Debt is the major source of financing for SMEs in Canada. This section of the report analyses the results of the Survey on Financing of Small and Medium-sized Enterprises, 2000 by Statistics Canada and a variety of other sources to create a profile of the demand for debt financing in Canada. The report outlines key issues such as application and approval rates; the suppliers and instruments used by SMEs; the collateral and application requirements faced by firms of different employment sizes, industries and regions; and other factors.

Use of Debt Financing: Short-Term vs. Long-Term instruments

Debt financing is available in a variety of short-term and long-term instruments. Short-term debt includes operating lines of credit, supplier credit and credit cards. Longer-term debt includes term and demand loans. Sound corporate finance practice dictates linking the revenue stream from an asset to the payment stream for the financing instrument. For example, firms buying equipment or a building would normally use longer-term debt, repaying it over the life of the asset. Similarly, firms financing inventory would normally use short-term debt, as inventories turn over quickly.

One critical difference between short-term and long-term debt is the predictability of payments. Short-term debt is often given at a variable rate, and in any event is subject to changes in interest rate when the debt comes due and is re-financed. Long-term debt can come with a variable interest rate, but is generally made at a fixed interest rate. Normally inventories and receivables are financed using short-term instruments that can rise and fall according to need. It does not make sense to have a long-term loan outstanding, paying interest on the entire balance, when needs vary over time. Financing a large, long-term asset using short-term credit instruments can expose a firm to the risk that interest rates will rise, resulting in increased interest costs without an increase in the ability to meet this expense.

• Demand for Debt Financing: Contributing Factors
• Debt Financing: Application and Approval Rates
• Demand for Debt by Type of Institution
• Reasons Requests for Debt are Rejected
• Types of Instruments most Required
• Conditions for Accessing Financing: Collateral
• Conditions for Accessing Debt: Documentation and Application Process

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