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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 Aboriginals

As is the case with SME financing for young entrepreneurs, the research focusing on SME financing for Aboriginals is also quite limited.

Not only is the number of Canadian studies related to Aboriginals and SMEs small, but two of the five studies included here include aboriginals as part of a much larger study. In the case of the study undertaken by the Angus Reid Group (2000), while the focus of the research was national, it includes interviews with only 14 Aboriginals from three provinces (Quebec, Ontario, and Manitoba), and the results of the study include fewer than two pages specific to particular issues faced by Aboriginal peoples.

In addition, two of the other studies draw on the same primary data source; the Aboriginal People's Survey provides the data for the reports of Aboriginal Business Canada (2001) and Caldwell and Hunt (1998).

Based on the findings for this study, the research does not exist to verify a direct bias against Aboriginals by financial institutions. It may be similar to the situation with female entrepreneurs, in that fewer Aboriginals meet the 'threshold bankability' requirements (in part due to laws which restrict reserve lands being used as collateral) and it is more difficult to access capital through traditional bank loans and programs. Significantly more research would be required to address this complex issue with any depth.

Overall, the research on Aboriginal SMEs is general rather than specific, and focuses primarily on characteristics and experiences of Aboriginal-owned small and medium-sized businesses, rather than directly examining barriers to financing that this Profile Group faces. The one exception to this is the report from Aboriginal Business Canada (2001) which has a small section on the financing challenges faced by Aboriginal peoples. The report describes an Aboriginal perception of inadequate access to capital, and remarks that this may result from lack of collateral and underdeveloped relationships with financial institutions. This same report also notes that Aboriginal businesses tend to be less profitable on average than Canadian SMEs as a whole, and that they tend to be concentrated in the primary sector which may affect access to financial capital.

Caldwell and Hunt (1998) determined that 56% of Aboriginal entrepreneurs felt they had inadequate access to debt and equity financing for their businesses. With respect to debt financing, barriers noted by Aboriginals include lack of collateral (40% of respondents); legislation prohibiting the use of on-reserve assets as collateral (30%); lack of local financial institutions to work with (27%); and lack of firm profitability (22%).

With respect to equity financing, the concentration of Aboriginal businesses in low-growth sectors such as primary industries (e.g., logging, farming, mining); recreation and personal services (e.g., casinos, photography); construction and retail/wholesale trade limits, the accessibility of angel investment or venture capital financing. Aboriginal-owned businesses tend to be small scale, with only 12% requiring more than $100,000 in capitalization, while over 60% required less than $25,000 (Caldwell and Hunt, 1998). As mentioned earlier in this report, accessing financial capital for newer, smaller ventures in low-growth sectors is particularly difficult.

Caldwell and Hunt (1998) report that 58% of survey participants believe that lack of personal resources is a barrier to securing SME financing, while 36% noted the lack of venture capital availability. Other barriers identified were the absence of community investment funds (31%) and the inability of friends and family to invest (16%). Access to personal investment and love money is particularly limited for on-reserve Aboriginals due to legislation prohibiting use of on-reserve assets as collateral. All of these factors will be exacerbated in instances where Aboriginals are geographically located in rural and/or remote areas where accessibility to SME financing is typically more limited than in urban and central areas.

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