SME Financing in Canada, 2003 — Part I: Financing Conditions for SMEs in 2001

3. Type of Debt Instrument Requested by SMEs

This section highlights the requests for various types of financing instruments in 2001. As with the results from 2000,¹⁴ the type of debt instrument requested is linked to an SMEs' sector of operation. For example, SMEs in agricultural and primary industries had the highest (53 percent and 45 percent) request rates for term loans, which reflects the type of assets that these firms finance through debt — machinery and equipment, land and buildings. A more detailed discussion of the types of financing used by SMEs is provided in Part II.

Among SMEs that applied for debt financing in 2001:

• 33 percent requested a term loan
• 32 percent requested a new line of credit
• 16 percent requested a mortgage loan
• 9 percent requested an increase in the credit limit of current lines
• 3 percent applied for a new credit card

3.1 Conditions for accessing debt

The financing conditions imposed by financial institutions could represent barriers for SMEs seeking debt financing. For example, the amount of documentation and collateral requested or delays in financial suppliers' decisions could force SMEs to seek alternative forms of financing (i.e. personal lines of credit). This section will examine whether tightening credit conditions compelled suppliers of financing to change their behaviour in 2001 by:

• Requesting more documentation as part of the application process
• Increasing requirements for collateral

Requests for Documentation
As seen in Table 2, more than 82 percent of SMEs that requested financing in 2001 had to provide some sort of documentation — a 2-percent increase from 2000 — most commonly in the form of financial statements. Three out of four SMEs who requested financing had to provide a business financial statement in 2001 — a 25-percent increase over 2000.

The overall increase in the level of documentation requested by financial suppliers may have reduced access to financing for some small businesses; for example, this documentation represents a cost to SMEs. The trend in 2001 indicated that financial suppliers were applying more due diligence to their credit decisions.

Increasing Requirements for Collateral
Financial institutions often require that SMEs seeking financing provide collateral as security. Collateral can include land and buildings or security that can be used for the payment of debt. The businesses' assests, the entrepreneurs' personal assets, or guarantees from third parties are commonly used as security. The level of guarantee that financial suppliers require of SMEs is directly linked to the perceived level of risk. It is important to note that a request for collateral by the financial supplier increases the SMEs' overall financing cost.

In 2001, more than 40 percent of SMEs were asked by their financial suppliers to provide some sort of collateral (business or personal assets) to guarantee their financing, unchanged from 2000. Moreover, there was no preference in the type of collateral provided; financial suppliers requested personal and business guarantees with the same frequency.

Other key findings regarding collateral include:

• Small business: A size of business analysis reveals significant variation in the type of collateral requested from SMEs — micro-enterprises were requested more often to provide personal assets, rather than business assets. By contrast, a higher proportion of medium-sized firms (100–500 employees) were asked to provide business assets, rather than personal assets in 2000.¹⁵
• Agriculture and primary-based: Sectoral analyses reveal differences in the asset mix requested by financial suppliers. For example, financial suppliers requested a larger proportion of business assets from firms in well-established sectors such as agriculture and primary sectors, whereas KBI firms were asked to provide a higher proportion of personal assets.

Table 2 — Documents Requested by the Last Credit Supplier Approached as Part of the Application Process for Debt Financing, 2000 and 2001

	2000 (%)	2001 (%)	Variation (%)
No documentation requested	16.3	18.3	2.0
Formal application for financing	21.1	29.6	8.5
Business financial statement	48.6	75.5	26.9
Business plan	13.6	20.0	6.4
Personal financial statement	20.5	27.8	7.3
Appraisals of assets to be financed	9.3	16.6	7.3
Franchise agreement	1.5	1.9	0.4
Cash flow projection	10.6	15.7	5.1
All other documents	5.0	12.4	7.4

Source: Statistics Canada, Survey on Financing of Small and Medium-sized Enterprises 2000, 2001.

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

15. Data do not permit such a comparison for 2000.