Small and Medium-sized Enterprise Financing in Canada — SME Marketplace

Small and medium-sized enterprises (SMEs) are a dynamic and diverse component of the Canadian economy, and cover a broad spectrum of business activities. These businesses play a vital and evolving role in the Canadian economy by stimulating employment and fostering economic growth. In 2001, more than 1.5 million businesses in Canada were considered small or medium-sized enterprises.²

As major engines of growth in the Canadian economy, SMEs help to determine the economy's current performance and future expansion. The financial services sector plays a critical role in this expansion by providing the capital that SMEs need to succeed. Financing allows SMEs to invest in research and development, which increases innovation and productivity. This in turn contributes to the future growth of the Canadian economy through job and new wealth creation. However, due to the heterogeneity of SMEs, the demand for financing is not uniform across region, sector, size or stage of business. As a result, discussing the distribution of SMEs across Canada is critical to understanding the role of financing in SMEs' growth and development. This in turn will help to inform policy-making that will support or expand SMEs' access to financing.

This section describes the SME marketplace in 2001 in three sections:

• The first section provides a snapshot of the distribution of SMEs by region and highlights the different regional economic structures in Canada
• The second section breaks down the distribution of SMEs by sector in 2000 and 2001
• The third section examines SME distribution by size of business (number of employees) and examines the importance of medium-sized firms in light of the new economy

National and Regional Perspective

The distribution of SMEs varies widely across Canada, as shown in Figure 7:

• Atlantic provinces (7 percent of total population): 93 075 (6 percent of all SMEs, a 9-percent increase from 2000)
• Quebec (24 percent of total population): 353 170 (23 percent of all SMEs, an 11-percent increase from 2000)
• Ontario (38 percent of total population): 533 495 (35 percent of all SMEs, a 4-percent increase from 2000)
• Manitoba/Saskatchewan/Nunavut (7 percent of total population): 135 391 (9 percent of all SMEs, a 6-percent increase from 2000)
• Alberta/Northwest Territories (10 percent of total population): 194 799 (13 percent of all SMEs, a 2-percent increase from 2000)
• British Columbia/Yukon (13 percent of total population): 204 426 (14 percent of all SMEs, an 8-percent increase from 2000)
• Canada: 1 514 356 (a 6-percent increase from 2000)

Figure 7
Distribution of Canadian SMEs, 2001

SMEs are concentrated in highly populated regions
The regional distribution of SMEs is governed primarily by population density and by other factors such as sectoral concentration. As illustrated in Figure 7, Ontario and Quebec held more than half of the SME population in Canada in 2001, followed by the western provinces and Atlantic Canada. As will be seen throughout this report, these regional variations in SME populations influence businesses' sector of operations, capital structure (as seen in Part II) and access to financing. To ensure that regional variations are attributed to the appropriate market phenomena, regional comparisons will be made against national averages (where applicable).

Regional economic structures vary across Canada
Some regions depend on agriculture and primary industries; others are dominated by manufacturing, services or knowledge-based firms. As will be seen in Part II, these industrial sectors have different financial services needs; these are also reflected in the regional differences. For example, agriculture is an important sector in Manitoba and Saskatchewan compared with other regions (see Table 9). Since agricultural firms generally require high amounts of debt (which can be secured against the hard assets that are common to most agricultural interests), results for SMEs in these regions can be attributed to the preponderance of the agricultural sector.

Sector Perspective

The sectoral distribution of SMEs across Canada in 2001 was consistent with the findings from 2000.³ Nearly half (47 percent) of SMEs operated in the "other sector"⁴ category, which includes a number of service industries such as health care and social assistance, accommodation and food services, and warehousing and couriers (see Figure 8). A significant number of SMEs operate in agriculture and manufacturing. As will be seen throughout the report, the sector of operation is an important determinant of an SMEs' financial structure (Part II of this report) and ability to access certain types of financing (e.g. commercial debt).

Figure 8
Distribution of Canadian SMEs by Sector in 2001

Size of Business

Nearly all Canadian businesses are small (by number of employees)
More than 80 percent of the SME population is comprised of either self-employed individuals (0 employees) or micro-businesses (1–4 employees). As will be seen in Part II, size of business is an important determinant of an SMEs' financial structure. More importantly, SMEs in the small size categories are typically less profitable, have fewer assets and larger debt/equity ratios than mid-size firms. As a result, these businesses encounter difficulties accessing formal types of financing (e.g. commercial debt).

Size of business varies by sector
As illustrated in Figure 9, the distribution of SMEs by employment size is not consistent across sectors. Agricultural firms and those in the services sector (professional services, KBI and wholesale/retail) have a higher percentage of micro businesses (1–4 employees). By comparison, sectors such as manufacturing and primary industries tend to feature larger businesses. As will be seen in Part II, the relationship between size of business and sector is important — sector of operation may influence the pattern of ownership of certain sizes of businesses. For example, the high percentage of self-employed businesses in the agricultural sector may influence the financial structure of firms in this size category. Similarly, the number of medium-sized firms (100–499 employees) in the manufacturing industry appears to influence the financial structure of medium-sized SMEs. A more detailed discussion is presented in Part II.

Figure 9
Distribution of Canadian SMEs by Size of Business (by Number of Employees) in 2001

Medium-sized firms: potential for growth
Medium-sized firms represent 2 percent of all businesses in Canada, whereas parallel firms in the United States constitute over 5 percent of the business population. While they represent a small proportion of all SMEs, medium-sized firms' characteristics distinguish them from their smaller counterparts and highlight the disproportionate, positive contribution they can make to Canada's economy. For example (all percentages below represent the percentage of medium-sized firms versus the percentage of small firms):

• medium-sized firms are high-growth firms⁵ (22 percent versus 12 percent);
• medium-sized firms perform more R&D (50 percent versus 24 percent); and
• medium-sized firms are more export-oriented (47 percent versus 11 percent).

Most medium-sized firms are found in the manufacturing industry. As high-growth firms, they offer the possibility of high returns on investment. Their R&D performance contributes to product and business strategy innovation and increases Canada's capacity to commercialize research. Finally, their export readiness gives them a head start in successfully taking on global competitors. However, one of the key challenges facing small businesses is making a successful transition from a small to a mid-sized firm.

Research to date shows that few small firms (1–99 employees) grow into medium-sized firms; from 1985 to 1999, just over 3 percent managed to make the leap.

Figure 10
Distribution of SMEs by Employment Size by Sector in 2001

Other Characteristics of SMEs in 2001

Proportion of SMEs that exported their products or services in 2001	11.1%
Main destination for exportation	26% in U.S. 6% in Asia 3% in Europe
Proportion of business that invested in R&D by percentage of budget	73% — 0% of their investment expenditure 13% — 1–5% of their investment expenditure 8% — 6–10% of their investment expenditure 5% — over 10% of their investment expenditures
Proportion of SMEs owned by women (>50 % owned by women)	17.8%
Proportion of SMEs owned by youth(<30)	2.4%
Proportion of SMEs by language	64.9% — English 22.1% — French 13.0% — Other
Proportion of SMEs that are home-based	58%

Source: Statistics Canada, Survey on Financing of Small and Medium-sized Enterprises, 2001.

Summary Table

Table 1 — Distribution of SMEs in 2001

	Number of SMEs	Proportion of SMEs (%)
Total	1 514 356	100
EMPLOYMENT SIZE
0 employees	663 756	44
1–4 employees	565 904	37
5–19 employees	210 982	14
20–99 employees	67 567	4
100–499 employees	6 147	0
SECTOR
Agriculture	189 938	13
Primary	32 235	2
Manufacturing	77 336	5
Wholesale/Retail	235 003	16
Professional services	189 111	12
KBI sector	73 222	5
Other sectors NEC	717 512	47
REGION
Atlantic provinces	93 075	6
Quebec	353 170	23
Ontario	533 495	35
Manitoba/Saskatchewan/Nunavut	135 391	9
Alberta/NWT	194 799	13
British Columbia/Yukon	204 426	13

Source: Statistics Canada, Survey on Financing of Small and Medium-sized Enterprises, 2001.

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2. The target population for the Survey on Financing of Small and Medium-sized Enterprises, 2001 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.

3. Industry Canada, Small and Medium-sized Enterprise (SME) Financing in Canada, 2002.

4. Other sector 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.

5. A high-growth firm is one whose revenues have grown by more than 50 percent over a consecutive three-year period.