SME Financing Data Initiative
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Key Small Business Financing Statistics — December 2006
Financing Activity of SMEs
How many SMEs request debt financing?
In 2004, nearly one fifth (19 percent) of small and medium-sized enterprises (SMEs) made a request for new or additional debt from a credit supplier for business purposes. Of those requests, 81 percent were approved (see Table 2). SMEs in the Prairie provinces had the highest rate of requests for debt financing in 2004, likely because agricultural firms, which tend to have a high asset base and low long-term debt-to-equity ratios, account for a high proportion of the region's economy.
Who are the key suppliers of debt financing to SMEs?
Chartered banks were the main suppliers of debt financing to SMEs in Canada in 2004, serving 63 percent of requests made by SMEs (see Figure 3). However, small authorizations of less than $1 million represented only 14 percent of overall lending by chartered banks.Footnote 3 Other key suppliers of debt financing to SMEs were credit unions or caisses populaires. These institutions are primarily situated in the Prairie provinces, which received 34 percent of requests for debt financing, and Quebec, which received nearly 40 percent of such requests. Moreover, although domestic banks play an important role in financing SMEs, credit unions or caisses populaires focus more of their commercial debt authorizations on the smaller amounts (authorization of less than $250 000). In 2004, credit unions or caisses populaires captured nearly a third (29 percent) of the market for authorizations under $250 000 (see Figure 4), compared with 23 percent of the market for all authorizations to SMEs.
Figure 3: Percentage of Total Requests for Debt by Type of Supplier in 2004
Source: SME Financing Data Initiative, Statistics Canada, Survey on Financing of Small and Medium Enterprises, 2004.
Note: Figures may not add to 100 due to rounding.
Figure 4: Commercial Debt under $250 000 Authorized, by Financial Supplier as of December 31, 2004
Source: SME Financing Data Initiative, Statistics Canada, Survey of Suppliers of Business Financing, 2004.
Note: Figures may not add up due to rounding.
Lease financing has been on the rise in Canada, particularly in the asset-based financingFootnote 4 market, because it provides an additional method of external financing beyond bank loans and equity. As noted in a report commissioned by the Canadian Finance and Leasing Association (CFLA), "SMEs have difficulty securing either debt or equity funds because they have few assets to offer as collateral for loans from traditional debt-based financial intermediaries such as banks and few equity markets are organized to provide capital to small firms."Footnote 5 In addition, the flexibility of lease payments allows small businesses to finance most or all of the cost of an asset. This permits small businesses to preserve other financing instruments, such as existing lines of credit, to finance other needs.
How many SMEs request lease financing?
In 2004, 3 percent of SMEs requested lease financing (see Figure 5); almost all requests (96 percent) were approved (see Figure 5). While approval rates for leases have remained stable at 96 percent, compared with 94 percent in 2001, there has been a decline in request rates from 7 to 3 percent during the same period. This may reflect the economic slowdown during that period.
Figure 5: Percentage of SMEs Requesting Lease Financing in 2004
Source: SME Financing Data Initiative, Statistics Canada, Survey on Financing of Small and Medium Enterprises, 2004.
According to the CFLA, leasing is the largest segment of asset-based financing. In 2004, SMEs primarily used leases to finance machinery and equipment such as automobiles (50 percent), heavy-duty vehicles (43 percent), computer hardware and software (11 percent) and other production equipment (see Figure 6).
Figure 6: Lease Financing Used by SMEs in 2004
Source: SME Financing Data Initiative, Statistics Canada, Survey on Financing of Small and Medium Enterprises, 2004.
Note: Figures may not add up due to rounding.
As of December 31, 2004, firms in the transportation and warehousing sectors received 21 percent ($7.3 billion) of leases authorized by all suppliers. The construction industry captured the second-highest proportion with 15 percent ($5.3 billion). These three sectors were the heaviest users of lease financing, accounting for just over a third of the amount of leases authorized in 2004.
Who are the key suppliers of lease financing to SMEs?
In 2004, the total value of leases authorized to all Canadian businesses (regardless of size) amounted to approximately $36 billion, a 12-percent increase from 2000. Finance and leasing companies accounted for a vast majority (81 percent) of the leasing market, while domestic banks maintained less than a fifth of the market (14 percent) (see Figure 7).
Figure 7: Market Share of Commercial Leases Authorized by Financial Suppliers as of December 31, 2004
Source: SME Financing Data Initiative, Statistics Canada, Survey of Suppliers of Business Financing, 2004.
Compared with 2000, the distribution of the leasing market is quite different. Although domestic banks' participation is affected by restrictions imposed by the Bank Act on their personal property leasing — including automobiles and light-duty vehicles — finance and leasing companies are increasing their share of the market and becoming an important player in the leasing industry. This is consistent with findings from the CFLA suggesting that "the leasing industry in Canada is mature with smaller niche or boutique players having grown, while larger companies remain at a significant advantage. Mid-sized companies have almost disappeared as a result of this consolidation."Footnote 6
Which firms typically seek risk capital financing and how many SMEs requested equity financing?
High-growth firms and knowledge-based industries (KBIs) usually develop an idea, concept or product that requires an incubation period before generating revenues and profits. These firms face unique challenges in obtaining access to timely and appropriate financing because they lack sufficient tangible assets to secure bank loans or other types of debt financing. Risk capital is often a more appropriate financing instrument for firms with high-growth potential and start-up SMEs, particularly in KBIs. Figure 8 illustrates the typical growth rates of SMEs. Risk capital can originate from a number of sources, including the entrepreneur's own investment, investments by family and friends ("love money"), informal private investment by wealthy individuals ("angel" investors), venture capital investment and investment through initial public offerings on the stock exchange.
Figure 8: Typical SME Growth Profiles
Source: MacDonald & Associates Limited, Early-Stage VC Investments in Canada, Some Challenges and Prospects: 2002–05.
In 2004, 1 percent of SMEs made a request for equity financing.Footnote 7
How much informal investment was provided to Canadian SMEs?
Informal investors play an important role in the early stages of an SME's development, particularly for start-up firms. Informal investors are defined as individuals who invest their own funds at arm's length in a business owned and operated by a third party, including "angel" investorsFootnote 8 and "love money."
A recent study showed that, in 2001, it was estimated that more than $11.4 billion in informal investments were made by business owners.Footnote 9 Of these, business owners who invested at arm's length in firms in which they did not act as an operator accounted for $3.1 billion (26 percent of the total).
How much venture capital financing was provided to Canadian firms?
Venture capital (VC) is defined as long-term, hands-on equity investments in privately held companies with high-growth potential, which are undertaken and managed by professional investors. These investors normally organize themselves into VC firms (through private partnerships or closely held corporations) that establish one or more VC funds to raise capital from individual and institutional investors — capital that is subsequently invested in equity-type instruments (e.g. shares) issued by SMEs.
VC financing usually comes into play during a firm's early and expansion stages; however, it is important to note that VC financing is not appropriate for all SMEs. Since VC investments represent very high risks for investors, these investors expect to be compensated by high returns (see text box). Therefore, VC financing is generally used only by firms that have high-growth potential.
Investment conditions tightened in 2001 and activity fell steadily until 2003. In 2005, however, the Canadian VC industry was on the rise, increasing its activity with $1.82 billion invested in 633 companies — an increase of 5 percent in the number of financings from 603 firms in 2004, but a 1 percent decline in the amount invested from $1.84 billion (see Figure 9). While the number of firms receiving financing is a somewhat positive development, the amount invested represents a sharp drop from the $3.7 billion invested in 2001, and the $5.9 billion invested in the peak year of 2000.
Figure 9: Canadian VC Activity 1998–2005
Source: MacDonald & Associates Limited, 2005.
Footnote 3. Statistics Canada, Survey of Suppliers of Business Financing, 2004.
Footnote 4. Asset-based financing is the financing of equipment (including vehicles for business/commercial use) by means of a secured loan, conditional sales contract or lease.
Footnote 5. The Centre for Spatial Economics, Asset-Based Financing, Investment and Economic Growth. Prepared for the Canadian Finance and Leasing Association, December 2004.
Footnote 6. Canadian Finance and Leasing Association, Asset-Based Financing and Leasing: Canadian Market Overview. Published in the World Leasing Yearbook, 2005.
Footnote 7. This includes any request for new or additional financing from an investor, venture capital supplier, or friend or family member in exchange for a share of the ownership of the business.
Footnote 8. Although attempts have been made to classify "angel" investors on the basis of personal attributes, behaviour or the nature of their investment activity, there is no consensus on which classification scheme to use.
Footnote 9. A. Riding, Estimating Informal Investment in Canada, Equinox Management Consultants Ltd., March 2005.
