Key Small Business Financing Statistics - August 2005

Access to Financing

What sources of financing are used by SMEs at different stages of development?

A firm's financing needs evolve as it grows: the sources of financing used by small and medium-sized enterprises (SMEs) at the start-up stage of development are not the same as those used by established SMEs that have built up equity and collateral.^{Footnote 9} Sources of financing can be broadly categorized as formal or informal. Formal sources of financing originate from external suppliers/sources in the business of financial lending and include such instruments as commercial loans and lines of credit. Informal sources of financing are obtained from suppliers/sources not in the business of financial lending, and are acquired from business activities (e.g. retained earnings) or are derived from the owner(s) (e.g. personal savings).

In 2000, 49 percent of all SMEs used formal commercial financing products and 39 percent used trade credit from suppliers more than any other form of financing; however, all SMEs made substantial use of informal personal financing instruments. As seen in Figure 10, 35 percent of all SMEs financed their operations with personal savings, followed closely by retained earnings (31 percent).

Figure 10: Types of Financial Instruments in Use by SMEs in 2000*

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

* Includes any source used, regardless of whether it was authorized or obtained in a previous year.

Since start-up SMEs often lack both a credit history and the collateral needed to secure a loan, they represent a degree of risk many financial institutions are unprepared to take. As a result, start-ups typically use informal sources of external financing and rely on owners' personal savings and credit to finance their operations.

As shown in Figure 11, 66 percent of start-up SMEs used personal savings to finance their company, compared with 35 percent of all SMEs. In fact, start-ups, more than other SMEs, used all forms of personal credit to finance their business. Only 29 percent of start-up SMEs used formal sources of external financing, such as commercial loans and lines of credit, compared with 49 percent for all SMEs. Informal sources of financing, other than personal financing instruments, are often difficult to identify and obtain, and may require non-standard terms for financing. Furthermore, access to formal sources of financing offers more transparency and allows small businesses to compare price and terms.

Figure 11: Types of Financial Instruments Used by Start-up SMEs*

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

* Reported by SMEs operating in 2000, in relation to their financing experiences of starting up their business, at any time between 1996 and 2000.

How do SMEs apply for debt financing?

SMEs have traditionally obtained access to debt financing through well-established associations with a particular branch of a financial provider. In 2001, 76 percent of SMEs reported they requested debt through a personal discussion in a branch (see Table 3).

Table 3: Application Method Used by SMEs Who Requested Debt in 2001

Method	Percentage of Applicants Applying
Source: Statistics Canada, Survey on Financing of Small and Medium-sized Enterprises, 2001. Note: Numbers do not add to 100 percent because more than one method was used by some businesses.
Personal discussion	58.8
Request at the branch	17.1
Applied by phone	13.1
Approached by credit supplier	3.9
Other	2.9
Mail or courier	1.8
Applied by fax	1.6
Applied by Internet	0.9

Although financial providers have invested heavily in new technologies to provide consumers and businesses with alternative ways to access financial services, SMEs tend not to use these methods. In 2001, only 13 percent of SMEs made a request for debt over the phone (down from 17 percent in 2000), and less than 1 percent made a request over the Internet.

Which documents and types of collateral were requested by debt suppliers?

Table 4 shows the types of documents financial institutions requested as part of the application process for debt financing. Of those SMEs that requested debt financing in 2001, 82 percent had to provide some sort of documentation. Three out of four SMEs had to provide business financial statements in 2001 — a 27-percent increase over 2000.

Table 4: Documents Requested by the Last Credit Supplier Approached for Debt Financing, 2000 and 2001

Type of Document Requested	2000 (%)	2001 (%)
Source: Statistics Canada, Survey on Financing of Small and Medium Enterprises, 2000, 2001.
Business financial statement	48.6	75.5
Formal application for financing	21.1	29.6
Personal financial statement	20.5	27.8
Business plan	13.6	20.0
No documentation requested	16.3	18.3
Appraisals of assets to be financed	9.3	16.6
Cash flow projection	10.6	15.7
All other documents	5.0	12.4
Franchise agreement	1.5	1.9

Financial institutions often require that SMEs seeking financing provide collateral as security. Collateral can include land and buildings or other assets that can be used as security for the debt. Business assets, personal assets or guarantees from third parties are commonly used as security. The amount of collateral that financial suppliers require of SMEs is directly linked to the perceived risk.

In 2001, more than 40 percent of SMEs were asked to provide some sort of collateral (business or personal assets) to guarantee their financing, unchanged from 2000.

Footnote 9. Start-up SMEs are defined as businesses started from scratch by the owner(s) prior to the first sale of products or services, at any time between 1996 and 2000. Established SMEs are defined as firms started prior to 1998. All SMEs includes both start-ups and established firms.