SME Financing in Canada, 2003 — Part III: Financial Services Sector — Providers of Business Financing

4. Commercial Debt: A Regional Perspective

As seen in sections 1–3, a wide variety of firms provide financial services to Canadian SMEs, and the geographic distribution of these providers depends on the scope of their activity. As illustrated in Figure 45, domestic banks are represented across Canada and are an important supplier of debt in each province and territory.⁹⁰ However, as noted in Part II, the regional variations in economic and industrial composition have led to regional concentrations of financial suppliers that focus on particular industries.

Figure 45
Market Share of Financial Service Providers Provision of Commercial Debt by Province/Territory, as of December 31, 2001

For example, although credit unions are located throughout Canada, they are more prominent in the western provinces; the same is true for the caisses populaires in Quebec. As was reported in Part II, this distribution affects SMEs' access to financing in various regions, particularly for formal types of financing such as debt.

Atlantic Canada (see Table 21)

Newfoundland and Labrador:

• Commercial debt authorized: $5 billion
• Commercial debt outstanding: $3 billion

Prince Edward Island:

• Commercial debt authorized: $2 billion.
• Commercial debt outstanding: $1 billion

Nova Scotia:

• Commercial debt authorized: $11 billion
• Commercial debt outstanding: $7 billion

New Brunswick:

• Commercial debt authorized: $8 billion
• Commercial debt outstanding: $5 billion

In 2000, among SMEs in Atlantic Canada: 54 percent used commercial loans and credit (second highest of all regions) 27 percent of an average SMEs' debt outstanding was to chartered banks 2 percent of an average SMEs' debt outstanding was to credit unions and caisses populaires 8 percent used government loans and grants (third highest in Canada) 46 percent used trade credit (highest of all regions)

As seen in Figure 45, domestic banks were an important supplier of commercial debt to businesses in this region in 2001. These findings reflect conclusions from Part II (summarized in the textbox above) — a significant proportion (27 percent) of formal debt owed by SMEs was to chartered banks. Although other providers of commercial debt, such as insurance companies, operate in this region (second largest supplier of debt to this region in 2001), they do not focus on smaller authorization amounts (see Figure 32). The SME Financing Data Initiative will continue to monitor this issue and will collect more detailed data on businesses' access to formal types of financing.

Finance Companies

Finance companies (which include some Government Business Enterprises) are active in this region, particularly in Newfoundland and Labrador (19 percent) and New Brunswick (14 percent). These market shares likely represent GBEs rather than specialized finance companies; however, as discussed earlier more detailed data are needed to determine government programs' roles in Atlantic Canada and their impact on SMEs' access to financing.

Quebec (see Table 21)

• Commercial debt authorized: $148 billion
• Commercial debt outstanding: $73 billion

In Quebec, domestic banks were an important supplier of commercial debt, representing nearly 60 percent of the market for debt authorized to all firms as of December 31, 2001. However, unlike Atlantic Canada and Ontario, businesses in Quebec have access to other providers of formal types of financing — particularly the caisses populaires (18 percent, see Figure  33). As a result, access to formal types of financing is more diversified in Quebec than elsewhere in Canada.

Caisses populaires serve an important role in Quebec, since they concentrate on smaller authorization categories — amounts typically sought by SMEs (see Figure 33). As seen in Part II, nearly half of SMEs in Quebec used a commercial loan or credit in 2000 (see Table 11). The fact that 16 percent of commercial debt authorized to all businesses in Quebec originated from caisses populaires indicates that these institutions are a viable alternative to domestic banks for formal types of financing. More importantly, these institutions tend to authorize debt to high-risk SMEs that domestic banks would be unlikely to consider (see Figure 41). While it is not yet possible to calculate what percentage of commercial debt authorized by financial suppliers flows to SMEs, the demand survey results (summarized in the box) reveal that commercial forms of financing are an important source of financing for Quebec SMEs. More detailed data, coupled with the information found in Part II, will provide a better understanding of the supply of formal types of debt to SMEs in Quebec.

In 2000, among SMEs in Quebec: 51 percent used commercial loans and credit 26 percent of an average SMEs' debt outstanding was to chartered banks 11 percent of an average SMEs' debt outstanding was to credit unions and caisses populaires 8 percent used government loans and grants 37 percent used trade credit

Ontario (see Table 21)

• Commercial debt authorized: $512 billion
• Commercial debt outstanding: $164 billion

Domestic banks were the leading suppliers of debt in 2001, authorizing almost $400 billion (more than 77 percent) in debt financing to Ontario businesses. This may reflect Ontario's industrial and economic landscape and the range and size of businesses in this province. Nearly a quarter of all medium-sized firms (100–499 employees) in Canada are located in Ontario.

In 2000, among SMEs in Ontario: 44 percent used commercial loans and credit (lowest of all regions) 31 percent of an average SME's debt outstanding was to chartered banks (highest of all regions) 3 percent of an average SME's debt outstanding was to caisses populaires 4 percent used government loans and grants (lowest of all regions) 37 percent used trade credit

As seen in Part II, close to 80 percent (see Table 11) of medium-sized firms used a commercial loan or credit, indicating that formal types of financing are an important source of financing for these businesses. Additionally, in 2000 close to 40 percent of an average medium-sized firm's outstanding debt was for loans from chartered banks. These financial institutions are the most important supplier of financing to SMEs in Ontario. Consolidations among these institutions could have an impact on Ontario SMEs' access to formal types of financing.

Other banks and insurance companies were also key suppliers of debt to Ontario businesses; as of December 31, 2001 these suppliers captured 9 percent and 7 percent of the total authorized debt market. However, as noted earlier, these financial service providers do not typically serve the SME market, but tend to focus on larger businesses. Of all regions in Canada, Ontario SMEs' access to formal types of financing will be most affected by financial services consolidation, since they have the highest reliance on formal types of financing and domestic banks.

Western Provinces (see Table 21)

Manitoba:

• Commercial debt authorized: $20 billion
• Commercial debt outstanding: $11 billion

Saskatchewan:

• Commercial debt authorized: $17 billion
• Commercial debt outstanding: $10 billion

Alberta:

• Commercial debt authorized: $93 billion
• Commercial debt outstanding: $48 billion

British Columbia:

• Commercial debt authorized: $69 billion
• Commercial debt outstanding: $43 billion

In 2000, among SMEs in Western Canada: Manitoba/Saskatchewan/Nunavut: 61 percent used commercial loans and credit (highest of all regions) 37 percent of an average SMEs debt outstanding was to chartered banks 12 percent of an average SMEs debt outstanding was to credit unions and caisses populaires (highest of all regions) 14 percent used government loans and grants In 2000, among SMEs in Alberta/NWT: 51 percent used commercial loans and credit In 2000, among SMEs in British Columbia/Yukon: 46 percent used commercial loans and credit

As seen in Part II, SMEs' use of formal types of financing in this region was consistent with the national average (48 percent); in some provinces, such as Manitoba or Saskatchewan, usage rates are higher than the national average (61 percent). This reflects the market share of agricultural and primary-based industries in this region, and their need for asset-based financing.

From a supply perspective, domestic banks were an important provider of commercial debt to all businesses in the western provinces. As of December 31, 2001 domestic banks provided $111 billion out of $198 billion (56 percent of authorizations to all businesses). This was significantly lower than the $121 billion authorized by domestic banks in 2000. Since overall authorizations remained stable, this indicates that other financial suppliers gained market share in the supply of commercial debt — most notably credit unions and other banks.

As seen in Figure 45, credit unions were active in Western Canada and were an alternative to domestic banks for businesses seeking formal types of commercial debt, particularly for SMEs or for businesses seeking authorization amounts under $1 million (see Figures 33 and 34). This is consistent with evidence from Part II, which showed that in 2000, 12 percent of the average SMEs' debt outstanding in these provinces was to credit unions or caisses populaires (significantly higher than the national average of 5 percent). This represented the highest proportion of SME debt to credit unions and caisses populaires of any region in Canada (see Table 11).

Although credit unions were the third largest providers of debt in Saskatchewan and Manitoba , representing 14 and 12 percent of the market in 2001, these suppliers were less active in Alberta and British Columbia. However, other banks were key suppliers of debt to businesses in Alberta and British Columbia, representing one fifth of the debt market. Other banks include provincial deposit-taking agents, such as the ATB Financial Inc., which may explain why these institutions attracted a higher market share than other banks in other regions.

The diversity of financial suppliers in this region may also be related to domestic banks' sale of branches to credit unions over the past decade. While the Public Accountability Statements on the sale and purchase of bank branches provides basic information, there are few data on the actual number of domestic bank branches in Canada. Given that 80 percent of SMEs applied for debt in person at a branch (see Table 18), the availability of access points may determine the choice of institution. However further data collection and analysis will be required to understand the importance of this issue to the patterns of small business demand for debt.

Territories (see Table 21)

• Commercial debt authorized: $1.5 billion
• Commercial debt outstanding: $806 million

As seen in Figure 45, domestic banks were the main source of commercial debt financing for businesses in the Northwest Territories, Yukon and Nunavut. Domestic banks in Yukon authorized $494 million of debt out of a total amount of $671 million (74 percent of the market). Other financial providers, including insurance companies and finance companies, authorized $116 million and $60 million of debt as of December 31, 2001.

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89. Provincial data were collected in the Survey of Suppliers of Business Financing (2000 and 2001), which allows for the groupings listed above. However, data were collected by region in the Survey of SME Financing, 2000. Efforts are being made to ensure consistency between the collection methods of these two surveys so that more in-depth analysis can be pursued.

90. The data are not currently available from the Survey of Suppliers of Business Financing (2000 and 2001) to allow for analysis of SMEs by province, therefore any analysis conducted from a regional perspective covers the entire commercial debt market of all businesses across Canada. Nor are the data available to conduct a regional analysis of the leasing market. Other forms of financing, such as risk capital, are examined in part IV.