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

Debt Financing: Application and Approval Rates

In 2000, 23 percent of SMEs made a request for debt and 82 percent were approved (see Table 5). These figures vary somewhat from other recent surveys done on similar issues. A 1998 study, for example, done for the Canadian Bankers Association⁷, found that 38 percent of SMEs had applied for debt and that the approval rate was 93 percent. The CFIB reported in a study that 60 percent of firms responding to a survey of their members applied for either a term loan, new line of credit or an increase in an existing line of credit in the past three years. The CFIB also states that there has been a “steady downward trend [over 1987 – 2000 in applications for debt financing] that does not appear to be related to the business cycle”⁸. Therefore, the findings of the recent survey by Statistics Canada may be the latest indicator of a decreasing demand for debt by SMEs, however additional research will assist in affirming this claim.

The Statistics Canada Survey on Financing of Small and Medium-sized Enterprises will be administered regularly every three years, and this will provide a stable set of data to identify trends.

There are clear differences in request and approval rates across different sizes of businesses. As illustrated in Figure 5, larger businesses were more likely to request debt financing. This is consistent with findings in the 2001 survey by the CFIB.

Figure 5 – Debt Request Rates by Size of Business in 2000

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Figure 6 illustrates the trend in approval rates across businesses of different sizes.

These approval rates are consistent with the findings of the study completed by UQTR, which show that firms with more employees are more likely to have their requests approved for a line of credit or a medium- or long-term loan. The CFIB also reports that larger firms experience lower rates of loan rejection.

Figure 6 – Debt Approval Rates by Size of Business in 2000

These approval rates are consistent with the findings of the study completed by UQTR,⁹ which show that firms with more employees are more likely to have their requests approved for a line of credit or a medium- or long-term loan. The CFIB also reports that larger firms experience lower rates of loan rejection.

Figures 7 and 8 illustrate request and approval rates, respectively, of firms in different industries. Firms in the agricultural sector were most likely to make a request for debt, while those in the professional services or KBI¹⁰ sectors were least likely to do so in 2000. As well, businesses in the agriculture or primary sectors had very high approval rates for their requests for debt, while businesses in the wholesale/retail trade, and KBI sectors had the lowest approval rates. Agricultural firms usually have land or equipment to use as collateral, while firms in the services sector may not have many business assets. More than 55 percent of agricultural businesses that requested debt in 2000 used business assets as collateral, as compared with 41 percent for all SMEs (see Table 8).

Figure 7 – Debt Request Rates by Industry in 2000

Figure 8 – Debt Approval Rates by Industry in 2000

There was some variation in the request and approval rates for debt in 2000 across the different regions of Canada (see Figures 9 and 10). As noted earlier, any analysis of the regional distribution of request and approvals must take into account the economic structure of the regions being studied. For example, as we have seen, agriculture has high debt request and approval rates. This sector also makes a large contribution to the Manitoba and Saskatchewan economies (see table 17), so these are probably factors contributing to the Prairies' high debt request rates (see Figure 9) and high approval rates (see Figure 10). When the agriculture sector is removed from the figures, the variation between regional request and approval rates and the national average is reduced considerably.

Figure 9 – Debt Request Rates by Region in 2000

Figure 10 – Debt Approval Rates by Region in 2000

Another important factor to consider is the differing structure of the financial services industries in the various parts of the country. The major chartered banks are found in every region of the country, while credit unions and caisses populaires have a greater presence in Quebec and Western Canada than elsewhere. The concentrations of credit unions and banks have been changing over the last couple of decades as well. For example, in Manitoba and Saskatchewan combined, there has been a 16-percent decline in the number of bank branches from 1988 to 2000, ¹¹ whereas the number of branches grew in every other part of the country but Alberta. Table 4 indicates a strong tendency to seek face-to-face contact with financial service suppliers; so, taking the decline in bank branches into account, perhaps it is not surprising to see credit unions receiving a much larger proportion of applications in Manitoba/Saskatchewan and Alberta. The availability of access points may well be a determining factor in the choice of institution; however, until now there has not been as much of a focus on this factor, so further data collection and analysis are required to understand its importance to the patterns of small business demand for debt.

Results suggest that SMEs in British Columbia and the Atlantic regions had lower authorization rates than SMEs overall when requesting debt. Regional economic conditions may possibly explain the variance of approvals for debt financing in these regions. It is equally possible that this a statistical phenomenon, for example, the variation in the confidence intervals of the survey estimates could account for this variation. However, it is also worth noting that firms in each of these regions are among the heaviest users of chartered banks, and chartered banks show slightly lower than average rate of approval. Determining which factor is the major contributor to these variations, will require further analysis and observations.

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7. Thompson Lightstone & Company Limited, Small and Medium-Sized Businesses in Canada: An Ongoing Perspective of their Needs, Expectations and Satisfaction with Financial Institutions, prepared for the Canadian Bankers Association, 1998. http://www.cba.ca/eng/Small_Business/1998sme.htm
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8. Canadian Federation of Independent Business, Banking on Entrepreneurship, March 2001. back

9. The Research Institute for SMEs, Université du Québec á Trois-Rivières, Financing SMEs: Satisfaction, Access, Knowledge and Needs, 2001, commissioned by Industry Canada, 2002. back

10. See Appendix A for a description of the North American Industrial Classification System (NAICS) classification of a knowledge-based industry (KBI). back

11. Canadian Bankers Association Web site: http://www.cba.ca/eng/Statistics/stats/db144Aweb.htm
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