SME Financing Data Initiative
sme-fdi.gc.ca
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High-growth SMEs (p. 2 of 6)
FINANCING ACTIVITY
- HGSMEs use a broad range of financing instruments and are more likely than other SMEs to use external financing.
- In 2001, 21 percent of HGSMEs requested debt financing compared with 17 percent of other SMEs and were nearly as likely to be approved (80 percent of HGSMEs were approved compared with 83 percent of other SMEs).
- HGSMEs had higher use of alternative external financing, such as trade credit (45 percent) and leasing (20 percent), than other SMEs.
- Internal resources, such as owners' personal savings (for 36 percent of HGSMEs) and retained earnings (for 34 percent of HGSMEs), played a more important role for these firms than for other SMEs.
More Likely to Make a Request for Financing
As Table 2 illustrates, HGSMEs were more likely to make a request for debt financing than other SMEs. Chartered banks played a central role in the financing of HGSMEs, receiving 67 percent of requests for debt financing compared with 23 percent received by credit unions and caisses populaires. With only 10 percent of the requests for debt financing, Crown corporations and other institutions played marginal roles in financing HGSMEs.
HGSMEs, like most other SMEs, did not shop around to obtain financing in 2001; eight times out of ten, HGSMEs approached their regular financial institutions when they sought debt financing.
More Likely to Request Leasing
HGSMEs appeared to be more inclined to request leasing than other SMEs. Close to 11 percent of HGSMEs requested some form of leasing agreement in 2001, compared with only 6 percent of other SMEs. Despite this difference, HGSMEs saw lower levels of approval in 2001, with 90 percent and 96 percent approval rates for HGSMEs and all other SMEs respectively.
More Likely to Request Equity Financing
Although HGSMEs have great profit potential, they also potentially represent great financial risks (Brigham et al.,1991). High sales growth imposes financial pressures on HGSMEs by creating the need for new employees, space, marketing, distribution and production equipment. HGSMEs are usually too small to become publicly traded companies, and they require major inflows of risk capital to sustain growth. HGSMEs can use debt financing or equity to finance the acquisition of new assets, but they must maintain a reasonable balance between these two financing instruments. In 2001, only one percent of HGSMEs requested equity financing, similar to that of all other SMEs. However, earlier studies (Industry Canada, 2002b, 2003) found that HGSMEs were nearly three times more likely to be financed by angel investors and over 22 times more likely to be financed by venture capitalists than other SMEs. They also demonstrated that HGSMEs used debt and equity financing more than other SMEs.
