Financing SMEs in Canada: Barriers Faced by Women, Youth, Aboriginal and Minority Entrepreneurs in Accessing Capital — Phase 2: Gap Analysis and Recommendations for Further Research

Introduction

The purpose of this project was to address whether certain business owner profiles (women, youth, Aboriginal, visible minorities and language groups) faced greater barriers in accessing financing for entrepreneurial ventures than the SME population in general. Phase 1 comprised a literature review of existing research and reports on this topic. Phase 2 identifies the barriers to financing noted in the literature on each of the Profile Groups, but also highlights the significant gaps which exist in this research. Based on this gap analysis, Phase 2 concludes with a framework for future research and data collection that would address these gaps, and provides insights into barriers faced by SMEs in accessing financing. This framework would be robust enough not only to address questions of barriers faced by the identified Profile Groups, but also to yield broader insights into barriers faced by other segments of the Canadian SME population.

The contents of this report can be divided into three broad sections. The first section provides background and contextual information, including a summary of findings from Phase 1 and Phase 2 research, an analysis of gaps in the existing research that are relevant to an examination of the impact of business-owner profiles on access to SME financing, and an overview of SME financing. The second section focuses specifically on the gaps identified in the research for particular business owner profiles: women, youth, Aboriginals, and visible minorities and language groups. This section also highlights any barriers noted in the literature that might affect access to SME financing. The final section proposes a framework for research that will help to fill the gaps noted above, and to provide adequate data to identify the barriers that particular Profile Groups may face in accessing SME funding in Canada.

Summary of Findings

Examination of existing, available data indicates that while each of the Profile Groups may face particular barriers to financing, there are also significant barriers to financing encountered by various profiles of SMEs in general. For example, SME size, industry sector, geographic location, and stage of business development all have significant effects on financing available to individual SMEs. As such, while the focus of this project remains on evaluating financing barriers faced by various Profile Groups, for analytical purposes it is useful to contextualize these findings by situating them within the broader context of SME financing.

The literature reviewed during Phase 1 indicates that the specific barriers faced by each Profile Group are more dependent on factors such as the overall risk associated with the venture, stage of the venture, type of financing, and industry, than on business owner characteristics – such factors as gender, age or minority status. This is particularly true for businesses that are in the later stages of development.

More mature businesses are generally perceived as a lower risk for financing, and thus financing arrangements can be made on the strength of the existing business rather than owner characteristics. For earlier stage financing, where the business is less mature and the risks higher, the investment is being made as much in the owner/founder as the business proposition itself. The implication of this is that there are significant barriers to accessing financing for early stage SMEs, but the existing data does not support a direct correlation between barriers to SME financing and the particular Profile Groups.

However, there may be indirect linkages that affect the Profile Groups more than the general SME population (although it should be stressed that there is not enough empirical data to clearly support this conclusion). For example, all of the profile groups reviewed were primarily starting new or microbusinesses in traditional, low growth industries (e.g., service and retail). As the low growth rates and higher risks associated with these industries make them less appealing to potential financiers, it may appear as though the Profile Groups are facing barriers that others are not, but the financing data summarised for each group based on owner characteristics may mask other factors affecting access to financing for SMEs in general. It is possible that the Profile Groups may be affected by this, but there is no clear evidence that 'underfinancing' is related to their personal characteristics, rather than the overall nature of financing for less established SMEs.

The data suggests that SMEs competing in non-traditional and high growth industries face similar barriers to any other company in that sector, small and young companies face similar barriers regardless of ownership characteristics; and access to equity financing is very difficult if the SME owner lacks established networks. It is worth noting again the possible existence of indirect barriers (e.g., there may be many reasons it is more difficult for members of Profile Groups to become part of the established funding networks) but the existing data on SME financing is not comprehensive enough to draw definitive conclusions about this.

Gap Analysis

It is important to distinguish between two different types of gaps identified in the research data: gaps in the research literature; and gaps in availability or accessibility of financing for the Profile Groups. Both of these distinct types of gaps are discussed in this section.

There are few national level Canadian studies that evaluate the range of SME types and also provide data that can be disaggregated according to any of the Profile Groups.

There is ample evidence that business owners face different barriers depending on the industry, business type, age, stage, and type of financing required. As such, it is critical to have reliable baseline data on the barriers faced by SMEs as a whole that can be disaggregated according to these categories, in order to provide a relevant comparison point for examining whether certain business owner profiles face greater barriers because of their gender, age, or ethnicity. The existing baseline data for SMEs as a group is inadequate to provide a starting point for this.

The various studies that were reviewed for Phase 1 and 2 of this project were published over a 7 year period, and may be drawing on data that is considerably older than this. In addition, each has its own focus, reference group, and objectives, and as such, each study employs specific research methodologies targeted to its objective(s). As well, some of the studies have a regional or provincial focus rather than national. The majority of the studies reviewed for this project focused on the SME sector as a whole, and were not designed in a way that would allow for disaggregation of data to examine barriers to financing by type of industry, stages or maturity of business. These factors make it difficult to draw accurate, broadly-based conclusions regarding barriers to SME financing from the cross-section of Canadian literature available.

As many of the referenced studies dealt with barriers to financing for only one of the business-owner profile groups (with women being the predominant focus of research) it is difficult to draw broad conclusions about the accessibility of financing by comparing the existing research across the Profile Groups. It is even difficult to do intra-group comparisons based on existing research, as the methodologies, scope of research, sample size and research focus varied significantly from study to study.

From a research perspective, much of the published literature on barriers to SME financing lacks rigour. For example, of the 37 studies found pertaining to SME financing barriers, only 6 both utilized a control group and used Canadian data. Of these, all focused on women, so there is no comparable existing published data focusing on barriers faced by other Profile Groups. Only a handful of the articles used in this study were published in peerreviewed journals; the majority were reports conducted by or for particular types of organizations (e.g., banks, small business organizations, groups representing particular interests). In a few cases, one data set has been used to produce two or more research papers in this area (e.g., BDC, 1997 and BDC, 1998; Caldwell and Hunt, 1998; Aboriginal Business Canada, 2001). This is of particular concern for drawing conclusions regarding financing when so few papers have been published on topics such as barriers to SME financing for aboriginals.

Finally, any research of this type is limited in its access to those businesses which were not able to access any funding and were therefore unable to move even to the start-up stage. This is a real loss when trying to evaluate barriers to financing and whether particular groups face greater barriers than others. Methodologically, however, it would be very difficult to identify this group for survey purposes, as financial institutions and other funding sources are unlikely to release information regarding unsuccessful candidates, and those who are unable to start SMEs would be difficult to find without very large scale sampling.