SME Financing in Canada, 2002 — Part II: A - Profiles of SMEs and Entrepreneurs

Profile of SMEs in Canada

SMEs represent a diverse and dynamic component of the Canadian economy and provide an important source of economic growth and prosperity. SMEs comprise 99.7 percent of the one million employer businesses in Canada.⁴⁵ Fifty-eight percent of employer businesses are considered micro-enterprises, or SMEs, with one to four employees.

Figure 28 – Distribution of Canadian SMEs

Stage of Business Development and Financing

A recent report commissioned by Industry Canada and conducted by Université du Québec à Trois Rivières examined SMEs' financing experiences for the period 1998-2001. As part of this survey, 2200 SME owners/managers were asked to report on how they perceived the state of development of their business, according to the categories defined below. Figure 29 shows that the majority of Canadian SMEs considered themselves in a slow-growth stage. Given what we know from other work, we are beginning to get a picture of what types of financing firms use at which stages of development.⁴⁶

Figure 29 – Stages of Development of Canadian SMEs?

• Slow-growth Firms (52 percent of SMEs): These firms have sales that are slowly growing. They typically finance their growth through a combination of debt, retained earnings and sometimes from an informal investor, friends or family or perhaps employees (love money).
• Mature Firms (21 percent of SMEs): These firms have sales that have stopped growing and typically use retained earnings for the bulk of their financial requirements, often supplemented by short- and long-term debt instruments to meet specific capital needs.
• Fast-growth Firms (13 percent of SMEs): These firms are growing much more quickly than the rate of the economy. Their financing requirements often include risk capital. These firms may also be candidates for quasi-equity financing.
• Declining Firms (9 percent of SMEs): These firms are seeing their sales decrease. They may well be under-capitalized and facing severe to moderate competitive pressures.
• Seed/Start-up Firms (5 percent of SMEs): These firms have no or very little revenue, and are financing their operations through the savings of their principals, love money and short-term debt instruments. Once they are past the establishment phase and are readying their product(s) for market, they may need additional equity. Companies expecting to achieve high growth will seek this in the form of risk capital from informal investors.

Exporters

A critical factor contributing to the competitiveness of Canadian SMEs is their ability to compete in export markets. Certainly there are many SMEs for which exporting is not a strategic objective. This may be because they are operating in a sector (e.g. professional services or the retail sector) for which exporting is not a major activity. However, they may also be indirect exporters, contributing to the exports of their customers (e.g. a components supplier to a computer manufacturer that exports most of its production). As Table 15 illustrates, generally speaking, the larger the firm the more likely it is to export. A previous survey of SMEs conducted by Thompson Lightstone & Company Limited⁴⁷ found that 15 percent of SMEs export, which is not significantly different from the 11 percent found in the recent Statistics Canada survey. Further observations from future surveys will be required to determine whether the difference is attributable to a downward trend or whether it is a case of statistical variation due to different survey techniques.

Table 15 – Percent of SMEs that Export and Invest in R&D by Business Size

Size of Business(Number of Employees)	Percent of SMEs That Export	Percent of SMEs That Invest in R&D for Products, Services and Processes
0	8.4%	22.0%
1-4	9.5%	22.2%
5-19	14.7%	28.7%
20-99	28.4%	41.2%
100-499	47.3%	49.9%
All SMEs	10.6%	23.9%

Source: Statistics Canada, Survey on Financing of Small and Medium-sized Enterprises, 2000

Research and Development

The ability to commercialize research and development (R&D) is a critical determinant of a country's capacity to innovate. This is also a key contributor to the competitiveness of firms. Table 15 illustrates that the larger the SME the more likely it is to invest in R&D for products, services and process activity. Almost one quarter (24 percent) of SMEs stated that they invested in R&D in 2000, and one half of SMEs with more than one hundred employees stated they invested in R&D. However, no matter the size of the firm, R&D activities are a key part of its business investment strategies. For even the smallest firms, one in five makes an investment in R&D. Previous findings by Thompson Lightstone (1998) found that 34 percent of Canadian SMEs carried out R&D activities. While differing definitions and surveying discrepancies may explain this variation, further monitoring of this issue will be required to determine whether a trend is present.

Table 16 – SMEs' Sectors of Operations by Region in 2000

	Agriculture	Primary	Manufacturing	Wholesale/ Retail	Professional Services	KBI Sector	Other Sectors*	Total
Atlantic Provinces	6.6%	9.4%	5.1%	15.0%	7.5%	2.3%	54.2%	100%
Quebec	9.7%	1.7%	7.1%	13.2%	10.8%	4.0%	53.4%	100%
Ontario	8.5%	0.7%	5.6%	10.4%	12.5%	5.6%	56.7%	100%
Man/Sask/Nunavut	44.8%	1.2%	3.0%	8.2%	4.3%	1.9%	36.7%	100%
Alberta/NWT	20.2%	3.8%	3.5%	6.8%	12.3%	5.1%	48.3%	100%
BC/ Yukon	3.9%	3.2%	5.5%	10.2%	12.7%	4.2%	60.4%	100%
Canada	12.9%	2.2%	5.4%	10.6%	11.1%	4.5%	53.4%	100%

Source: Statistics Canada, Survey on Financing of Small and Medium-sized Enterprises, 2000
*Includes construction; transportation, warehousing and couriers; information and cultural industries; real estate, rental and leasing; administration and support; waste management and remediation; health care and social assistance; arts, entertainment and recreation; accommodation and food services; and other services.

Sector of Operations⁴⁸

The key SME sectors in terms of percentage of firms in Canada (as shown in Table 16) are:

• Agriculture (13 percent);
• Professional services (11 percent); and
• Wholesale/retail industries (11 percent).

Regional Perspective

• Atlantic Canada: has higher percentages of SMEs in wholesale/retail (15 percent vs. 11 percent) and primary (9 percent vs. 2 percent) than the Canadian distribution.
• Manitoba/Saskatchewan/Nunavut and Alberta / Northwest Territories: have a high ratio of SMEs in agriculture (45 percent and 20 percent respectively).
• British Columbia / Yukon: region has a much lower percentage of SMEs in agriculture than the rest of Canada (4 percent).

As shown in Table 17 (below), the industrial composition within the regions has a profound impact on the contribution to GDP within each region. Quebec and Ontario have the highest contributions from manufacturing (58 percent and 55 percent, respectively). The contribution to GDP from agriculture is highest throughout the Prairie provinces.

Table 17 – Percentage of GDP of Each Region by Selected Industries,* 2000

	Agriculture	Primary	Manufacturing	Wholesale/Retail Trade	Professional Services	Other sectors
Atlantic Provinces	2.8%	12.7%	23.0%	20.7%	4.5%	36.5%
Quebec	3.2%	3.2%	58.1%	15.6%	0.4%	19.6%
Ontario	2.2%	2.1%	55.5%	17.4%	0.4%	22.5%
Manitoba	11.4%	5.3%	30.4%	19.6%	2.2%	30.8%
Sask/Nunavut	15.1%	24.6%	11.7%	16.7%	3.2%	28.7%
Alberta/NWT	5.0%	36.2%	19.1%	11.8%	0.9%	27.1%
BC/Yukon	3.7%	16.2%	29.6%	15.5%	1.3%	33.7%

Source: Statistics Canada
*Excluding Utilities, Finance and Insurance, Management of Companies and Enterprises, Educational Services, Public Administration, and Hospitals
Note: The above numbers reflect total GDP, not just the GDP contribution of SMEs

Table 18 – Percentage Change in GDP of Each Industry by Region, 2000*

	Agriculture		Primary		Manufacturing		Wholesale/ Retail Trade		Professional Services		Other Sectors
Year	1998- 1999	1999- 2000	1998- 1999	1999- 2000	1998- 1999	1999- 2000	1998- 1999	1999- 2000	1998- 1999	1999- 2000	1998- 1999	1999- 2000
Atlantic Region	3.8%	-1.6%	7.4%	20.4%	8.7%	2.8%	-2.7%	3.9%	-	4.9%	-2.6%	0.6%
Quebec	3.0%	-5.5%	2.4%	2.8%	8.4%	6.8%	-	5.1%	-	4.9%	-	-15.7%
Ontario	2.9%	-3.4%	-6.3%	1.3%	8.9%	4.7%	-	5.8%	-	4.9%	-	3.5%
Manitoba	-1.2%	4.1%	-14.4%	10.3%	-0.5%	0.4%	-	2.9%	-	4.9%	-	0.8%
BC/ Yukon	5.5%	2.3%	7.9%	5.6%	6.7%	4.2%	-	2.7%	-	4.%9	-	3.3%
Alberta/ NWT	-	-2.4%	-	6.6%	-	6.0%	-	18.6%	-	-	-	14.9%
Sask/ Nunavut	-	-4.7%	-	10.7%	-	8.6%	-	5.3%	-	4.9%	-	2.7%

Source: Statistics Canada
*Missing values reflect missing observations in data.
*Excluding Utilities, Finance and Insurance, Management of Companies and Enterprises, Educational Services, Public Administration, and Hospitals. back

Table 19 – SME Business Size Categories by Region in 2000

Employee Size	Canada	Atlantic Canada	Québec	Ontario	Man/Sask/Nunavut	Alberta/NWT	BC/Yukon	Total
0	45.9%	3.8%	18.9%	38.3%	11.5%	14.8%	12.7%	100%
1-4	35.1%	8.0%	24.9%	32.8%	7.4%	12.6%	14.3%	100%
5-19	15.0%	7.9%	24.8%	36.9%	5.9%	11.5%	13.0%	100%
20-99	3.7%	6.9%	27.7%	35.3%	6.0%	10.8%	13.4%	100%
100-499	0.3%	7.2%	32.0%	36.0%	5.1%	14.0%	5.7%	100%

Source: Statistics Canada, Survey on Financing of Small and Medium-sized Enterprises, 2000

Size of Business

As shown in Table 19, nearly half (45.9 percent) of Canadian SMEs have no employees.

Regional Perspective

The distribution for each business size across the regions changes somewhat for larger firms.

• Atlantic Canada: accounts for over 7 percent of Canadian SMEs with over 100 employees, yet it represents only 4 percent of Canada's self-employed segment.
• British Columbia / Yukon: has a somewhat lower percentage of SMEs, with over 100 employees accounting for only 6 percent of Canada's SMEs in this size category. However, this region accounts for 14 percent of Canada's micro-businesses (1 to 4 employees).

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45. According to Statistics Canada's Business Register, the total number of business establishments as of December 2000 was 2 024 508. About one-half of these (1 042 204) maintained a payroll of at least one person (possibly the owner), and are referred to as "employer businesses".

46. The Research Institute for SMEs, Université du Québec à Trois-Rivières, Financing SMEs: Satisfaction, Access, Knowledge and Needs, 2001, commissioned by Industry Canada, 2002. It should be noted that these results are determined by the self-reporting of the firm. These stages of development are somewhat different from those used earlier in discussing venture capital.

47. Thompson Lightstone & Company Limited, Small and Medium-sized Businesses in Canada: An ongoing perspective of their needs, expectations and satisfaction with financial institutions, 1998.

48. The target population for the Survey on Financing of Small and Medium-sized Enterprises, 2000 includes SMEs with fewer than 500 full-time equivalent employees and less than $50 million in annual revenue. Excluded from the population are unincorporated firms with less than $30 000 in revenues, non-profit organizations, government organizations, schools, hospitals, subsidiaries, co-operatives, and financing and leasing companies.