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

Aboriginal Entrepreneurs

Introduction

According to Aboriginal Business Canada (ABC),^{Footnote 62} there were more than 20 000 Aboriginal business owners in Canada in 1996, representing 3.9 percent of the Aboriginal population. This compares with 7.9 percent of the general Canadian population who own businesses. The rate at which Aboriginal Canadians are becoming entrepreneurs is growing at approximately 7 percent per year.^{Footnote 63} Given the relatively small population base of Aboriginal-owned SMEs in Canada, national surveys of the general SME population do not identify a sufficient amount of statistically significant data. Accordingly, in some areas this report has had to rely on supplemental information to offer a more complete portrait of Aboriginal-owned SMEs.

While Aboriginal entrepreneurs face all the same challenges in starting up and finding financing for a business as other SME owners, they face some unique challenges, depending on the location of their business. On-reserve Aboriginal businesses operate within a legal framework that makes accessing financing a challenge, though not necessarily an impossibility. Under the Indian Act, no individual can pledge on-reserve assets – particularly real property – in return for debt financing. While it is possible to create corporate entities to work around this problem, it has been seen as a barrier to on-reserve financing and almost certainly has affected the growth of on-reserve businesses. This is a complex legal-treaty issue whose details are well beyond the scope of this report.

Another key issue for Aboriginal entrepreneurs is the remoteness of some of their communities from key markets and sources of financing. This creates its own special challenges, as the mass of capital and resources critical to building a successful firm can be difficult to find far from major population centres. Likewise, access to markets is more expensive, affecting the margins that firms in remote locations can expect, which in turn impact their ability to attract capital, as they may present an increased risk profile to lenders.

Profile of Aboriginal Entrepreneurs

Overall, according to the 1996 Census, Aboriginal peoples accounted for 3 percent of the Canadian population. In contrast, just 1.4 percent of all Canadian SMEs were majority owned by Aboriginal persons.

Regional Distribution: The pattern of concentrations of Aboriginal business ownership mirrors the distribution of concentrations of the general Aboriginal population. Aboriginal-owned businesses represent the following percentages of all the SMEs in the following regions:

• Alberta and the Northwest Territories – 4 per cent of all SMEs in the region;
• Manitoba/Saskatchewan/Nunavut - 2 per cent; and
• Atlantic provinces – 2 percent.

Sectors of Operation: Aboriginal-owned SMEs represent the following percentages of all the SMEs in the following sectors:

• Agriculture – 2 percent of all SMEs in the sector;
• Primary industries – 2 percent;
• Professional services – 1 percent; and
• KBIs  – less than 1 percent.^{Footnote 64}

Demographics: This rapidly growing cadre of business owners (as noted earlier, the population of Aboriginal business owners is growing by 7 percent per year) is characterized by the presence of young people and the relative absence of Aboriginal women business owners.^{Footnote 65}

• Aboriginal youth are approximately twice as likely as Canadian youth in general to become entrepreneurs.
• Aboriginal women are less than one half as likely to start an SME as Canadian women in general. The number of SMEs owned by Aboriginal women, however, is growing at a rate higher than any other group.

Exports: Recent findings indicate that majority Aboriginal-owned SMEs account for 2 percent of SME exporters in Canada.^{Footnote 66} This is in line with the 1.4 percent of Canadian SMEs that are owned by Aboriginals.

Financing Highlights of Aboriginal-Owned SMEs

Introduction: Overall, information from the recent Survey on Financing of Small and Medium-sized Enterprises^{Footnote 67} was not conclusive on the financing practices of Aboriginal-owned SMEs. As noted above, surveys of the general business population usually do not yield statistically significant data for the study of the Aboriginal-owned businesses.

This section relies on a 1998 study,^{Footnote 68} which found that 56 percent of Aboriginal entrepreneurs had inadequate access to debt and equity capital to finance their businesses. Other significant findings of the study are highlighted below.

Debt Financing Suppliers:^{Footnote 69} Banks are the primary source of start-up capital (47 percent), followed by Aboriginal development corporations (24 percent), federal government programs (11 percent), family and friends (10 percent) and provincial/territorial government programs (7 percent).

Application Process for Debt Financing: Issues seen to affect access to capital included:

• lack of collateral – 40 percent;
• inability to use assets on reserve as collateral – 30 percent;
• lack of local financial institutions – 27 percent; and
• having an unprofitable business – 22 percent.

Debt Financing Instruments: Aboriginal entrepreneurs were asked what sources of financing they used in 1998. The responses^{Footnote 70} may be summarized as follows:

• sourced financing from personal loans from family and friends – 48 percent;
• supplier credit – 30 percent;
• loans from Aboriginal lending institutions – 22 percent;
• non-guaranteed commercial bank loans – 20 percent;
• government guaranteed bank loans – 15 percent; and
• conditional sales agreements – 11 percent.

Equity Financing: The same study asked respondents about their perceptions of equity financing. The most frequently cited reasons for lack of access to this type of financing among Aboriginal entrepreneurs were:

• lack of personal resources – 58 percent;
• lack of access to venture capital – 36 percent;
• inadequate retained earnings – 32 percent;
• absence of community investment funds – 31 percent; and
• inability of family and friends to invest – 16 percent.

Types of Start-up Financing: Of all respondent Aboriginal entrepreneurs who had started a business:

• 88 percent relied on personal investment, vs. 55 percent for all SMEs;^{Footnote 71}
• 31 percent used retained earnings, vs. 60 percent for all SMEs;
• 21 percent received investments from family and friends, vs. 5 percent for all SMEs;
• 7 percent obtained investments from community investment funds; and
• 5 percent relied on venture capital, vs. 2.8 percent of all SMEs.

Requirements Start-up Financing: At start-up, of all Aboriginal firms:

• 32 percent required less than $5000;
• 32 percent required between $5000 and $25 000; and
• 12 percent required more than $100 000.

Risk Capital Usage: Aboriginal SMEs used more equity than debt in their capital structure when starting their businesses:

• 45 percent were entirely financed by equity at start-up; and
• 17 percent were entirely financed by debt at start-up.

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62. This organization, affiliated with Industry Canada, manages the federal government's investments in a network of Aboriginal capital corporations across Canada that provide loans and risk capital financing to Aboriginal businesses, on and off reserve. In this capacity ABC studies the needs of Aboriginal entrepreneurs from a number of angles, including financing.

63. Aboriginal Business Canada, Aboriginal Entrepreneurs in Canada: Progress & Prospects, 2001.

64. These figures correspond with those found in the 1997 Aboriginal Peoples Survey and the 1998 Thompson Lightstone & Company Limited study, which found that Aboriginal-owned SMEs were more concentrated in agriculture, primary and retail sectors, and notably in fishing, logging and mining.

65. Aboriginal Business Canada, Aboriginal Entrepreneurs in Canada: Progress & Prospects, 2001.

66.This figure contrasts with the 6 percent found in the 1997 Aboriginal Peoples Survey and is likely simply a result of the small sample size.

67. Statistics Canada, 2001.

68. David Caldwell and Pamela Hunt, Aboriginal Businesses: Characteristics and Strategies for Growth, Aboriginal Business Canada, Industry Canada Occasional Paper 20, 1998.

69. Ibid.

70. See chart on p. 6 of the Caldwell and Hunt study. Like the methodology used in the 1996 Orser, Gasse and Riding study cited here, respondents were asked to choose all forms of financing they had used, so the results will not equal 100 percent.

71. Ibid.