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

5. Commercial Debt: A Sectoral Perspective

This section examines the distribution of commercial debt by financial service providers and distinguishes how this distribution differs across sectors. It should be noted that the analysis reflects commercial debt authorized to all businesses in Canada and is not limited to SMEs.

As noted in Part II of this report, industry sector has a strong influence on a business' financial structure. Resource-based (e.g. agriculture and other primary industries) and goods-producing firms have more fixed asset collateral, which enables them to support higher levels of formal debt, and eases their access to formal sources of debt. In fact, as of December 31, 2001, more than one third (36 percent) of commercial debt was authorized to businesses in the goods-producing and resources sectors (see Figure 46).

The service sector constituted the largest (63 percent) portion of commercial debt authorizations as of December 31, 2001. As noted in Part II, compared with firms in the resources or goods-producing sectors, services sector financial structures tend to be more diversified and they use more informal types of financing. This may reflect the range of industries in the services sector and the degree to which they use formal types of financing. At one end of the spectrum are knowledge-based firms that typically have a low asset base and are therefore less likely to use conventional debt instruments. The other end of the spectrum includes industries that use asset-based financing and rely on formal types of financing. A more detailed review of the resource-based, goods-producing and services sectors is presented below.

Figure 46
Distribution of Commercial Debt Authorized by Financial Service Providers by Sector as of December 31, 2001

Resource-Based Sector

As of December 31, 2001, the amounts authorized for firms in the resource-based sector include:

• Agriculture: $55 billion (6 percent of overall authorized debt)
• All other primary industries: $58 billion (7 percent)
• Total resource-based sector: $114 billion (13 percent)

As seen in Figure 46, domestic banks were an important supplier of commercial debt for resource-based firms. Of the $114 billion of commercial debt authorized to all Canadian resource-based firms, over two-thirds (62 percent) was authorized by domestic banks. The remainder was divided among credit unions and caisses populaires (8 percent) and other suppliers (30 percent). This is not surprising given the findings in Part II, which showed that 72 percent of agricultural SMEs used commercial loans (the highest of all sectors). More importantly, 34 percent of an average SME's debt outstanding was to domestic banks and a further 11 percent was owed to credit unions and caisses populaires. Although these preliminary results suggest some consistencies between the demand and supply of commercial debt among SMEs, further data collection and analysis will be required to understand the relationship between the suppliers of formal types of financing and small businesses' demand for commercial debt.

Goods-Producing Sector

As of December 31, 2001, the amounts authorized for firms in the goods-producing sector include:

• Manufacturing: $123 billion (14 percent of overall authorized debt)
• Construction: $39 billion (4 percent)
• Total goods-producing sector: $162 billion (21 percent)

Domestic banks were the most important supplier of commercial debt to businesses in the goods-producing sector, accounting for nearly 71 percent ($115 billion) of debt authorizations in 2001. Of the $115 billion authorized by domestic banks, 75 percent was authorized to manufacturing firms. This was consistent with the findings in Part II, which found that 51 percent of manufacturing SMEs used commercial loans and credit to finance their operations in 2000. Moreover, 27 percent of manufacturing SMEs had debt outstanding to a chartered bank in 2000. Again, limitations of the supply survey data prevent a more thorough examination of the supply of commercial debt to SMEs. Data collection and analysis will illuminate the relationship between domestic banks and small businesses' demands for commercial debt. The concentration of manufacturing industries in Ontario and Quebec helps explain the important market presence of domestic banks in these provinces.

Other banks were also important suppliers to firms in this sector, with 21 percent of other banks' debt authorizations going to manufacturing firms. This tendency was likely due to the nature of their activities and their high asset base to secure collateral. In addition, other banks authorized the second largest amount of commercial debt to firms in the construction industry, accounting for $5 billion (14 percent) as of December 31, 2001.

Services Sector

As of December 31, 2001, the amounts authorized in the services sector include:

• Finance/insurance: $227 billion (26 percent of overall authorized debt)
• Real estate/rental/leasing: $67 billion (8 percent)
• Retail trade: $ 60 billion (7 percent)
• Transportation/wharehousing: $41 billion (5 percent)
• Entertainment/accommodation: $33 billion (4 percent)
• Information/culture: $30 billion (3 percent)
• Utilities: $25 billion (3 percent)
• Professional/scientific/technical: $17 billion (2 percent)
• Education/health care: $20 billion (2 percent)
• Wholesale trade: $38 billion (4 percent)
• Total services sector: $558 billion (63 percent)

Of the more than $500 billion in commercial debt authorized to the services sector, the distribution of debt authorized among financial suppliers, as of December 31, 2001, consisted of:

• Domestic banks: $407 billion (73 percent of debt authorized to this sector)
• Other banks: $50 billion (9 percent)
• Credit unions and caisses populaires: $17 billion (3 percent)
• Other suppliers: $84 billion (15 percent)

For the domestic banks, the majority (53 percent) of debt authorized was to finance and insurance companies. Typically, firms in these industries seek larger authorization amounts, which may explain the tendency of domestic banks to provide large amounts of commercial debt to these firms and may account for these firms' reliance on domestic banks (see Figure 36). Other major service sector industries served by the domestic banks include retail trade, real estate/rental/leasing and knowledge-based industries.

From a general perspective the findings on the supply of commercial debt seem to be consistent with the findings on the demand for debt, which were reported in Part II. Although there was no distinct "services sector" category in Part II, many of these SMEs were categorized as "other industries." As reported in the summary tables of Part II, 47 percent of SMEs in other industries used formal debt to finance their operations — consistent with the national average and similar to the supply of debt noted above. However, nearly one third of an average SME's debt outstanding was to chartered banks in 2000, higher than the national average, and also the highest percentage of debt owed across all sources of financing.

Given the data limitations, these observations about the supply of and demand for commercial debt must remain general. Efforts are under way to improve data and analysis in order to better understand the sectoral distribution of commercial debt. As noted in Part II, understanding the relationship between the supply of and demand for commercial debt across various sectors is key to analyzing the issues surrounding SMEs' access to financing.