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Young entrepreneurs owned 8 percent of Canadian SMEs in 2000. The changing economic landscape has introduced entrepreneurship as an increasingly attractive and viable alternative for Canadian youth. As an example of this phenomenon, data for British Columbia indicate that the number of young SME owners has grown by more than 70 percent since 1995.Footnote 54 Nonetheless, Statistics Canada reports that 14 percent of Canada's population falls within this age group, yet young people own only 8 percent of businesses.
As shown in Table 22, there is little variation from the national average across the regions, with the exception of Quebec. Given the limited number of observations within the survey sample, it is not clear whether the slightly larger percentage of businesses owned by young entrepreneurs in Quebec is statistically significant. While this percentage appears to be within the margin of error of the survey, more data over time will be needed to determine its significance.
Source: Statistics Canada, Survey on Financing of Small and Medium-sized Enterprises, 2000
Youth-owned SMEs face the same challenges as all new ventures in securing financing, but meeting the criteria of finance providers may be more difficult for the young. In making a credit decision, financiers typically look at factors such as number of years of experience in managing a business and credit history, which puts young applicants at a natural disadvantage. For a higher-risk application, a lender may be more likely to seek additional security in the form of a pledge of personal assets; again, a young entrepreneur may be less likely to be able to meet this requirement. As young entrepreneurs tend to operate smaller businesses (see Table 23), few will likely be able to attract outside risk capital. Therefore, the financing options may be relatively few a personal equity investment and "love money" from family and friends until a financial track record can be established and debt secured.
Source: Statistics Canada, Survey on Financing of Small and Medium-sized Enterprises, 2000
Size of SMEs
As shown in Table 23 (see above), SMEs owned by young entrepreneurs represented 11 percent of all SMEs with 1 to 4 employees, and only 20 percent of SMEs with more than 100 employees. Given this, it is not surprising that businesses owned by youth had less formal corporate structures, for example incorporation, than other SMEs.
Business owners under the age of 30 have achieved the highest level of academic accomplishment compared to other groups of business owners, with 34 percent having earned a university degree and a further 27 percent having earned a college education.Footnote 55
Years of Experience in Industry of Operation
Business owners under the age of 30 have, on average, 7 years of experience in the industries in which they operate, compared with 22 years of experience, on average, for all age cohorts.Footnote 56
Sectors of Operation
As shown in Table 29 at the end of this section, compared to entrepreneurs in general, businesses operated by youth are more heavily concentrated in the new knowledge-based industries. In fact, in 2000, entrepreneurs aged 15-34 accounted for 13 percent of SMEs in the KBI sector, the highest of any sector. The percentage of businesses owned by young entrepreneurs in other sectors is consistent with the percent of their overall business ownership.
Stage of Business Development
As would be expected, the vast majority of youth-owned SMEs are still in the earlier stages of business development. As illustrated in Table 24 (see below),
SMEs majority-owned by young females, visible minorities and Aboriginals
|Stage||30 years old or less||31-40 years old||41-50 years old||51-60 years old||over 60 years old|
Source: The Research Institute for SMEs, Université du Québec à Trois-Rivières, Financing SMEs: Satisfaction, Access, Knowledge and Needs, 2001, commissioned by Industry Canada, 2002.
Fewer SMEs owned by young entrepreneurs exported than did SMEs overall 7 percent, compared to 11 percent on average. As noted earlier, there appears to be a positive correlation between the size of business and the likelihood of its being an exporter (see Table 15). As shown in Table 23 (see above), SMEs majority owned by young people are smaller than other SMEs, and a very small number have 50 employees or more. The fact that a smaller than average percentage of youth-owned SMEs export is very likely attributable to the size of operations.
Figure 35 – Proportion of SMEs Requesting Financing by Age of Owner in 2000
Requests for Financing: Compared with the general population of SMEs, those owned by young people, on average, made more requests for all forms of financing in 2000 (see Figure 35 above):
The fact that younger age groups have a markedly higher demand for financing is not surprising when the resources and needs of younger business owners are taken into consideration. As discussed, youth are typically operating firms that are still in the early, expansion stages of growth. These firms may not yet have the internal financing sources, such as retained earnings, to finance their operations. However, other factors may also be contributing to the higher demand for financing by younger entrepreneurs.
Approval Rates for Debt Financing: Of all requests for debt by firms majority owned by young people in 2000, 78 percent were successful in obtaining financing, compared to 82 percent Footnote 57 for all SMEs. While this variation is within the margin of error of the survey, it may reflect factors such as lack of an earnings history, size of firm and sector of operations. With regard to the latter, it is worth noting that firms majority-owned by young people tend to operate more in the KBI sector, which reported the lowest approval rates of all sectors. The fact is that the firms in this sector, irrespective of their ownership, often lack the kind of tangible business assets that financing suppliers look for as collateral for debt. As we have seen, young entrepreneurs are more often operating smaller, newer businesses, many at the start-up or expansion stages of development. These are often perceived as higher risk and therefore are of less interest to suppliers of debt. As a result, many young entrepreneurs must turn to capital from private sources, including personal savings, loans from family and friends, informal investors, and other sources of risk capital.
Financing Suppliers: Contrasting Figure 36 with Figure 11, we can see that SMEs owned by young people approached the same suppliers of debt in roughly the same proportions as SMEs in general.
Figure 36 – Finance Suppliers Where Majority Young Entrepreneurs Requested Debt in 2000
Application Process for Debt Financing: Similar to the perspectives of many women who reported that they needed financing but did not pursue the application process, young entrepreneurs cited more frequently than other age groups the likelihood of a turndown and the difficulty of the application process as the primary reasons for their reluctance to apply for financing.
Collateral Requirements for Debt Financing: Providing collateral, particularly in the form of personal assets, is another oft-cited problem for young entrepreneurs seeking access to financing. A report by Angus Reid Group suggested that the young entrepreneur's lack of personal assets was the major impediment to obtaining financing.Footnote 58 Findings in 2000 about the experience of young entrepreneurs, however, did not support this claim. Given that proportionally more SMEs owned by young people made requests for financing of all types as noted above, it is rather surprising that the Survey on Financing of Small and Medium-sized Enterprises, 2000Footnote 59 found that young entrepreneurs were required to provide fewer personal and business assets as collateral than other businesses:
54. B.C. Stats, Western Economic Diversification Canada, and B.C. Ministry of Small Business, Tourism and Culture, Small Business Profile 2000: A Profile of Small Business Growth and Employment in British Columbia, 2000, http://www.wd.gc.ca
55. The Research Institute for SMEs, Université du Québec à Trois-Rivières, Financing SMEs: Satisfaction, Access, Knowledge and Needs, 2001, commissioned by Industry Canada, 2002.
57. Statistics Canada, Survey on Financing of Small and Medium-sized Enterprises, 2000.
58. Angus Reid Group, Financing Services to Canadian Small and Medium-sized Enterprises: A Report to the Business Development Bank of Canada, 2000, http://www.bdc.ca
59. Statistics Canada, Survey on Financing of Small and Medium-sized Enterprises, 2000.