Key Small Business Financing Statistics - August 2005

Financial and Ownership Structures

What is the average financial structure of an SME?

As described earlier, small and medium-sized enterprises (SMEs) used a wide range of formal and informal fi nancial instruments in 2000. As shown in Figure 12, informal sources of debt, supplied through loans from individuals and trade credit from suppliers, are as important to SMEs' debt structure as formal sources. Informal types of fi nancing accounted for nearly 40 percent of the outstanding debt owed by Canadian SMEs in 2000. This was equivalent to the amount of debt owed to formal financial providers, including chartered banks, credit unions, caisses populaires, government sources and lessors. With few exceptions, the financial structure of SMEs is fairly consistent across Canada.

Figure 12: Average Distribution of Debt Owed by SMEs in 2000, by Supplier

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

What is the ownership structure of an SME?

Business owners can obtain significant amounts of capital by selling equity shares in their firms. This financing strategy is often used by firms that require substantial amounts of growth or expansion capital, or by those that lack collateral.

In 2000, however, the majority of ownership rested in the hands of the business owner/operator (see Figure 13), with very limited use of equity financing from other sources. Since so few use equity as a financing strategy, debt intensity is high among Canadian SMEs. Using long-term debt-to-equity ratio as a measure of the reliance of SMEs on debt as their primary source of financing, debt accounted for 75 percent of SMEs' long-term financing structure in 2000.^{Footnote 10} It seems that equity capital comes at too high a cost to many SME owners — 41 percent of Canadian SME owners said they would refuse to share ownership in their firms in return for equity capital.^{Footnote 11}

Figure 13: Distribution of Ownership Capital in SMEs, 2000

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

Footnote 10. See Table II: Percentage of SMEs Using Financing in 2000, by Instrument Type, in the Summary Tables provided at the end of this report.

Footnote 11. The Research Institute for SMEs, Financing SMEs: Satisfaction, Access, Knowledge and Needs, 2001, a report prepared for Industry Canada (Université du Québec à Trois-Rivières, 2002).