SME Financing Data Initiative
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Key Small Business Financing Statistics - August 2005
Financing Activity of SMEs
How many SMEs request debt financing?
In 2001, nearly one fifth (18 percent) of small and medium-sized enterprises (SMEs) made a request for new or additional debt from a credit supplier for business purposes. Of those requests, 80 percent were approved (see Table 2). These figures are down slightly from 2000, when 23 percent of SMEs requested some form of debt and 82 percent of requests were approved. SMEs in the Prairie provinces had the highest rate of requests and approvals for debt financing, likely because agricultural firms, which tend to have a high asset base and low long-term debt-to-equity ratios, account for a high proportion of the region's economy.
Who are the key suppliers of debt financing to SMEs?
Chartered banks were the main suppliers of debt financing to SMEs in Canada in 2001, serving 67 percent of requests made by SMEs (see Figure 3). However, small authorizations of less than $1 million represented only 12 percent of overall lending by chartered banks.Footnote 3 Other key suppliers of debt financing to SMEs were credit unions and caisses populaires, which are primarily situated in the Prairie provinces and Quebec respectively. These institutions received 45 percent of requests for debt financing in the Prairie provinces and nearly half (47%) of such requests in Quebec. Moreover, although domestic banks play an important role in financing SMEs, credit unions and caisses populaires focus more of their commercial debt authorizations on the smaller amounts (authorization of less than $250 000). In 2001, credit unions and caisses populaires captured 25 percent of the market for authorizations under $250 000 (see Figure 4), compared with 19 percent of the market for all authorizations to SMEs.
Figure 3: Percentage of Total Requests for Debt by Type of Supplier in 2001
Source: Statistics Canada, Survey on Financing of Small and Medium Enterprises, 2001.
Note: Figures may not add up due to rounding.
Figure 4: Commercial Debt under $250 000 Authorized, by Financial Supplier as of December 31, 2001
Source: Statistics Canada, Survey of Suppliers of Business Financing, 2001.
Crown corporations, such as the Business Development Bank of Canada, provided 7 percent of debt financing to SMEs.
Lease financing has been on the rise in Canada, particularly in the asset-based financingFootnote 4 market, because it provides an additional method of external financing beyond bank loans and equity. As noted in a report commissioned by the Canadian Finance and Leasing Association (CFLA), "SMEs have difficulty securing either debt or equity funds because they have few assets to offer as collateral for loans from traditional debt-based financial intermediaries such as banks and few equity markets are organized to provide capital to small firms."Footnote 5 In addition, the flexibility of lease payments allows small businesses to finance most or all of the cost of an asset. This allows small businesses to preserve other financing instruments, such as existing lines of credit, to finance other needs.
How many SMEs request lease financing?
In 2001, 7 percent of SMEs requested lease financing; almost all requests (94 percent) were approved (see Figure 5). Both requests and approvals for leases have dropped off from a 9-percent request rate and 98-percent approval rate in 2000, which reflects the economic slowdown during that period.
Figure 5: Percentage of SMEs Requesting Lease Financing in 2001
Source: Statistics Canada, Survey on Financing of Small and Medium Enterprises, 2001.
According to the CFLA, leasing is the largest segment of asset-based financing. In 2001, SMEs primarily used leases to finance transportation equipment such as automobiles (29 percent), heavy-duty vehicles (20 percent), computers (11 percent), office equipment (8 percent) and other production equipment (see figure 6).
Figure 6: Lease Financing Used in 2001 by SMEs
Source: Statistics Canada, Survey on Financing of Small and Medium Enterprises, 2001.
Firms in the transportation and warehousing sectors received 25 percent ($8.2 billion) of leases authorized by all suppliers as of December 31, 2001. The manufacturing sector captured the secondhighest proportion, with 23 percent ($7.5 billion). These three sectors were the heaviest users of lease financing, accounting for just under half the amount of leases authorized in 2001.
Who are the key suppliers of lease financing to SMEs?
In 2001, the total value of leases authorized to all Canadian businesses (regardless of size) amounted to $32.4 billion, a 20-percent increase from 2000. Finance and leasing companies accounted for two thirds (66 percent) of the leasing market, and domestic banks maintained approximately one quarter of the market (27 percent) (see Figure 7).
Figure 7: Market Share of Commercial Leases Authorized by Financial Suppliers as of December 31, 2001
Source: Statistics Canada, Survey of Suppliers of Business Financing, 2001.
Domestic banks' participation is affected by restrictions the Bank Act imposes on their personal property leasing, including automobiles and light-duty vehicles, which accounted for most leasing requests by SMEs in 2000.
For authorizations under $1 million, domestic banks were less involved in supplying leasing than other suppliers, likely due to the Bank Act restrictions.
Which firms typically seek risk capital financing and how many SMEs requested equity financing?
High-growth firms and knowledge-based industries (KBIs) usually develop an idea, concept or product that requires an incubation period before generating revenues and profits. These firms face unique challenges in obtaining access to timely and appropriate financing, since they lack sufficient tangible assets to secure bank loans or other types of debt financing. Risk capital is often a more appropriate financing instrument for firms with highgrowth potential and start-up SMEs, particularly in KBIs (see Figure 8). It can originate from a number of sources, including the entrepreneur's own investment, investments by family and friends ("love money"), informal private investment by wealthy individuals ("angel" investors), venture capital investment and investment through initial public offerings on the stock exchange.
In 2001, less than 3 percent of SMEs made a request for equity financing, a finding similar to that in 2000.Footnote 6
Figure 8: Typical SME Growth Profiles
Source: MacDonald & Associates Limited, Early-Stage VC Investments in Canada, Some Challenges and Prospects: 2002–05.
How much informal investment was provided to Canadian SMEs?
Informal investors play an important role in the initial phases of SMEs' development, particularly for startups and firms in the early stage of development. Informal investors are defined as individuals who invest their own funds at arm's length in a business owned and operated by a third party. Informal investment includes "angel" investors and "love money" (investments made by relatives, friends and associates).Footnote 7
A recent studyFootnote 8 estimated that in 2001 more than $11.4 billion in informal investments were made by business owners. Of these, the business owners who invested at arm's length in firms in which the investor did not act as an operator accounted for $3.1 billion (26 percent of the total).
How much venture capital financing was provided to Canadian firms?
Venture capital (VC) is defined as long-term, hands-on equity investments in privately held companies with high-growth potential, which are undertaken and managed by professional investors. These investors normally organize themselves into VC firms (through private partnerships or closely held corporations) that establish one or more VC funds to raise capital from individual and institutional investors — capital that is subsequently invested in equity-type instruments (e.g. shares) issued by SMEs.
VC financing usually comes into play during a firm's early and expansion stages; however, it is important to note that VC financing is not appropriate for all SMEs. Since VC investments represent very high risks for investors, these investors expect to be compensated by high returns (see text box). Therefore, VC financing is generally used only by firms that have high-growth potential.
The tightening of investment conditions in 2001 continued in recent years, and activity fell steadily until 2003. In 2004, however, for the first time since 2000, the Canadian VC industry increased its annual investment, with $1.8 billion invested in 589 companies — an increase of 6 percent from the $1.7 billion invested in 647 firms in 2003 (see Figure 9). While this is a positive development, this figure represents a sharp drop from the $3.8 billion invested in 2001 and the $5.8 billion invested in the peak year (2000).
Figure 9: Canadian VC Activity 1998–2004
Source: MacDonald & Associates Limited, 2004.
Footnote 3. Statistics Canada, Survey of Suppliers of Business Financing, 2001.
Footnote 4. Asset-based financing is the financing of equipment (including vehicles for business/commercial use) by means of a secured loan, conditional sales contract or lease.
Footnote 5. The Centre for Spatial Economics, Asset-based Financing, Investment and Economic Growth. Prepared for the Canadian Finance and Leasing Association, December 2004.
Footnote 6. This includes any request for new or additional financing from an investor, venture capital supplier, or friend or family member, in exchange for a share of the ownership of the business.
Footnote 7. Although attempts have been made to classify "angel" investors on the basis of personal attributes, behaviour or the nature of their investment activity, there is no consensus on which classification scheme to use.
Footnote 8. A. Riding, Estimating Informal Investment in Canada, Equinox Management Consultants Ltd., March 2005.
