Small and Medium-sized Enterprise Financing in Canada — Part I: Financing Conditions for SMEs in 2001

1. The Economic Environment in 2001

Review of the main economic indicators in 2001: Gross domestic product growth fell to 2 percent in 2001, compared with 5 percent in 2000 — weakest annual growth since 1992 Interest rate: 4 percent at the end of 2001 — a 50-year low, down from over 7 percent at the end of 2000 Consumer spending: declined until the final quarter of 2001. Tax reductions increased consumers' disposable income Inflation: 2.6 percent in 2001 — consistent with 2000 (2.7 percent) Commercial bankruptcy: Slight increase of 3 percent from 2000 Unemployment: increased to 7.2 percent in 2001 — up from 6.8 percent in 2000

Requests (demand for) and approvals (supply of) of formal types⁷ of commercial debt are influenced by the overall economic climate. This section reviews the Canadian economy in 2001 to provide context to the results of the supplemental Survey on Financing of Small and Medium-sized Enterprises, 2001. This section establishes the analytical framework adopted throughout Part I, and discusses the relationship between changing economic conditions and SMEs' access to financing.

In 2001, the Canadian economy slowed, as illustrated by falls in a number of key macroeconomic indicators — the growth rate of gross domestic product (GDP), interest rates and consumer spending (see text box). As seen in Figure 11, nominal GDP fell to 1.5 percent in 2001, a decrease of 3 percent from 2000. In fact, the Canadian economy experienced negative growth in the third quarter of 2001, though it did rebound in the fourth quarter.

Figure 11
Gross Domestic Product of Canada, 1998-2002

Similarly, interest rates dropped more than 3 percent between 2000 and 2001 to reach a 50-year low (see Figure 12). Falling interest rates carry significant impacts for an economy. First, consumers' tendency to take advantage of cheaper credit raises consumer spending. After dropping initially in 2001 (before recovering in the fourth quarter), consumer spending has been growing at an annual average rate of 3 percent.⁸ Second, low interest rates benefit SMEs directly by lowering the cost of financing and increasing business credit. However, as Part I will demonstrate, these links do not apply to all types of financial instruments, or to all regions and sectors.

Figure 12
Interest Rate Variations, 1998-2002

According to some research,⁹ small business activity was relatively unaffected by the economic slowdown in 2001. In fact, for the first time in more than 20 years, small business' economic activity outpaced that of the rest of the economy during a period of economic slowdown. This is significant, since small businesses have tended to suffer more than larger firms during periods of tightening economic conditions. The 2001 survey revealed similar findings — SMEs' access to financing was relatively unchanged between 2000 and 2001, despite the economic slowdown. The following sections expand on these results.

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7. Formal types of financing are instruments obtained from suppliers/sources, external to the firm, that are in the business of providing financing.

8. Benjamin Tal. Canadian Small Business — A Growing Force. CIBC World Markets, September 2003.

9. Benjamin Tal. Canadian Small Business — A Growing Force. CIBC World Markets, September 2003.