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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

Research on SME Financing for Youth

As the chart below illustrates, research on the topic of SME financing for Canadian youth is neither extensive nor deep.

Besides the paucity of published information, there are two other gaps of note in this literature. First, none of these studies were published in peer-reviewed journals; all were instead conducted by government agencies or by consulting companies on behalf of government agencies. The second notable gap is the regional nature of these studies. Of the 5 Canadian studies examined with a focus on Youth, only one was national in scope, with the others being regional or provincial in scope.

Similar to many of the studies on women-owned SMEs, the focus of most of these studies is a general one on 'young entrepreneurs' and their characteristics and experiences, rather than a more specific focus on the challenges this particular Profile Group may be facing in accessing funding for their business ventures. While each report touches on some aspects of access to capital, they do so as an indirect part of the broader picture of youth entrepreneurship, rather than as a direct and specific issue. As is the case with every Profile Group reviewed in this study, the literature on young entrepreneurs does not make distinctions between firms' characteristics (e.g., age, size, sector) and effects on access to capital for this group.

While the various studies note that young entrepreneurs are typically defined as those between the ages of 16-29 (and some programs include those up to the age of 35) there was little distinction made between 'self-employment' and 'small business' development, and as such little discussion regarding the very different financing needs of each group. In addition, there was no real evaluation of the different business support needs of youth using young entrepreneurship programs as seed money for a summer business, and older individuals looking for start-up funding for entrepreneurial ventures. The reliance on family resource (love money) was mentioned, but not examined in any depth.

The diversity of this group results in a similarly diverse set of barriers faced by the youth population attempting to secure SME financing. With respect to debt financing, it is difficult for many youth to access this source of financial capital due to the fact that many are too young to have a substantive credit history, or to have collateral sufficient to secure loans or lines of credit. Because of their age, they are also unlikely to have the type of business experience or track record that financial institutions would look for in assessing creditworthiness. In addition, some potential entrepreneurs may be carrying student debts which will also make it harder to secure debt financing for new ventures. These barriers to debt financing were captured in the findings of the OAYAC (2000) study of young entrepreneurs where it was noted that 66% of study participants had mixed or negative experiences with financial institutions.

These age-related barriers are exacerbated by the typical firm characteristics of businesses started by youth. A 1998 HRDC report states that 77% of youth ventures are owned and operated by a single person, placing these businesses very firmly in the 'microbusiness' category. 75% of youth-owned businesses were in the service sector, a low-growth area. These particular firm characteristics have implications for the access of business capital, as most of these ventures are in the early stages of growth (looking for seed money or start-up funds); have limited tangible assets and low profit margins. These characteristics also limit the availability of angel investors and venture capital as sources of equity financing.

Malatest (2000) note that lack of access to start-up funds is a significant issue for this group. There is anecdotal evidence (Yearwood, 2000) to suggest that the largest source of funding for youth entrepreneurs is love money from friends and family. In cases where young entrepreneurs are looking to start businesses in the information technology sector, barriers to debt financing still appear to exist, likely for the reasons listed above. OAYEC (2000) statistics showing that 46% of new business ventures were financed through personal savings, 38% through love money, and only 28% through loans of lines of credit, and 9% through youth business loans. Statistics for venture capital funding were not given, leading to the possibility that young entrepreneurs do not have adequate access to this source of funding. This may be due to lack of experience in their sector, geographic location, lack of opportunities to network or a combination or the above.

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