SME Financing in Canada, 2002 — Part II: Demographic Factors

Visible-Minority Entrepreneurs

Introduction

The 1996 census reported that visible minorities constituted 11 percent of the Canadian population. Visible-minority owners of SMEs accounted for majority ownership in 7 percent of all Canadian SMEs in 2000. Regionally, visible-minority-owned SMEs had a higher concentration in Ontario and British Columbia, representing 9 percent and 13 percent of SMEs in those provinces, respectively. In Quebec, visible-minority business entrepreneurs owned 3 percent of the overall population of SMEs.

As compared with all SMEs operating in Canada, those majority owned by visible minorities have several distinct characteristics. The research outlined here begins the work of building our understanding of them, and of the factors and issues that may arise in relation to their seeking financing. As mentioned in the Note on Interpretation at the beginning of this report, the degree of statistical accuracy of survey results declines rapidly for sub-groups of the SME population. A case in point is the 11 percent of SMEs that reported having majority visible-minority owners; the sample was too small to use to draw anything more than preliminary inferences about behaviour and performance.

Profile of Visible-Minority owned SMEs

Size of Business
SMEs owned by visible minorities tended to be larger than average, accounting for 9 percent of all SMEs with between 20 and 99 employees in 2000, but represented only 6 percent of the self-employed in Canada. Similarly, the 1998 Thompson Lightstone study ^{Footnote 60} found that visible-minority entrepreneurs tended to own larger firms, on average, in terms of both employees and annual revenues.

Corporate Structure
In 2000, 64 percent of visible minority-owned SMEs were incorporated, compared with 53 percent of Canadian SMEs in general.

Sectors of Operation
As compared with their 7 percent contribution to the overall SME population, majority visible-minority-owned SMEs were found disproportionally in the KBI sector (representing 11 percent of all SMEs in that sector) and the wholesale/retail sector (representing 10 percent of SMEs in that sector); and least often in the agricultural sector (representing 2 percent of SMEs in that sector) and the primary industries sector (representing 2 percent of SMEs in that sector).

Demographics

There was no statistically significant variation in age between visible-minority-owned firms and non-visible-minority-owned firms; however, there were a number of other distinctions:

• Gender of Business Owner: Male and female ownership among visible-minority-owned businesses followed a slightly different pattern than that for SMEs overall:
  • 18 percent of visible minority-owned SMEs were majority female-owned vs.15 percent for businesses overall; and,
  • 60 percent of visible-minority-owned SMEs were majority male-owned, vs. 66 percent for businesses overall.
  
  
• Experience of Business Owner in Industry of Operation: As illustrated in Table 25, visible minority entrepreneurs have fewer years of managerial experience (73 percent have more than 9 years experience vs. 86 for all SMEs). This study does not make it clear whether the number of years of experience a firm's owner has in the industry contributes positively or otherwise to the SME's access to financing. However, it is reasonable to suppose that bankers might consider this factor, among others, in assessing the risk of lending to younger businesses, particularly ones operating in riskier sectors.
  
  
• Educational Attainment: Visible-minority business owners are more likely to hold a university degree than other SME owners: 51 percent of visible-minority entrepreneurs have a university education, compared with only 31 percent of other SME owners.^{Footnote 61}

Table 25 – Years of Experience in Industry of Operation reported by Visible-Minority-Owners in 2000

	Visible-minority-owned Firms	Other Firms
Less than 2 years	3%	2%
2 to 5 years	14%	6%
6 to 8 years	9%	6%
More than 9 years	73%	86%

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

Exports

SMEs owned by visible minorities were slightly more likely to be exporters than were SMEs overall – 13 percent compared to 11 percent. As stated earlier (with respect to female-owned firms), this finding is likely correlated to size of business. However, for some in this group, particularly those owners who are relatively recent immigrants, family or business connections abroad may also be a factor.

Financing Highlights of Visible-minority-owned SMEs

Overall, the supply of and demand for financing by visible-minority-owned SMEs in 2000 did not vary substantially from those of other SMEs.

Request Rates for Debt Financing: In 2000, there was no difference between visible-minority-owned SMEs and other firms in their request rates for financing.

Approval Rates for Debt Financing: There was no variation in the rates of approval for debt financing between SMEs owned by visible-minority entrepreneurs and other SMEs in 2000 – 83 percent compared with 82 percent, respectively.

Figure 37 -Suppliers Where Majority Visible-Minority-owned SMEs Requested Debt in 2000

Suppliers of Debt Financing: SMEs owned by visible-minority entrepreneurs were much more likely than the general population of SMEs to approach chartered banks for their debt financing in 2000 – 90 percent compared to 66 percent (for comparative data, (see Figure 11). Visible-minority-owned SMEs were not as likely to approach credit unions or caisses populaires (5 percent), or Crown corporations or other government lending programs (4 percent), compared with 21 percent and 9 percent respectively for other SMEs. The overall demand for debt from chartered banks is high in the regions where visible-minority-owned firms are most heavily concentrated. So the location of visible-minority-owned firms, rather than any particular preference for chartered banks, may explain this outcome.

Application Process for Debt Financing: Survey findings indicate differences in the preferences and perceptions of visible-minority entrepreneurs toward the financing process. Visible-minority-owned SMEs reported that they were required to provide more documents, such as financial statements and appraisals of assets, than other SMEs. For 17 percent of non-visible- minority-owned firms, no documents were required, compared with only 8 percent of visible-minority-owned firms. Perhaps related to this, visible-minority-owned SMEs perceived more difficulty in the application process for financing. This reason was cited by visible-minority entrepreneurs more frequently than by other SME owners – 7 percent compared with 2 percent – in their decision not to pursue debt financing in 2000, despite a need for it. A number of factors may explain these findings. First, visible-minority-owned firms are found to be more concentrated than other SMEs in the KBI and wholesale/retail sectors. These sectors sometimes have more difficulty in securing debt. Secondly, visible-minority-owned firms tend to have fewer years of experience in operation than other firms. Thirdly, visible-minority-owned firms tend to secure debt from chartered banks, which have a slightly lower than average approval rate for SMEs overall (at 79 percent vs. 82 percent overall). Additional data and analysis will be required to determine the weights in the factors that explain the different experience of visible-minority entrepreneurs.

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60. Thompson Lightstone & Company Ltd., Small and Medium-sized Businesses in Canada: An Ongoing Perspective of Their Needs, Expectations and Satisfaction with Financial Institutions, a report prepared for the Canadian Bankers Association, 1998.

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