SME Financing Data Initiative
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Key Small Business Financing Statistics — December 2006
Access to Financing
What sources of financing are used by SMEs at different stages of development?
A firm's financing needs evolve as it grows: the sources of financing used by SMEs at the start-up stage are not the same as those used by established SMEs that have built up equity and collateral.Footnote 10 Sources of financing can be broadly categorized as formal or informal. Formal sources originate from external suppliers/sources that are in the business of financial lending, and include such instruments as commercial loans and lines of credit. Informal sources are obtained from suppliers/sources not in the business of financial lending, and are acquired from business activities (e.g. retained earnings) or are derived from the owner(s) (e.g. personal savings).
In 2004, SMEs used different formal financing instruments to finance their operations, such as trade credit owing to suppliers (52 percent), lines of credit from financial institutions (50 percent) and commercial loans from financial institutions (44 percent). However, SMEs were also likely to use informal forms of financing. Figure 10 illustrates the different financial instruments used by all SMEs in 2004, showing that more than half (57 percent) of SMEs financed their operations with personal savings, followed closely by retained earnings (54 percent).
Figure 10: Types of Financial Instruments Used by All SMEs in 2004*
Source: SME Financing Data Initiative, Statistics Canada, Survey on Financing of Small and Medium Enterprises, 2004.
* Includes any source used, regardless of whether it was authorized or obtained in a previous year. Multiple responses were possible.
Start-up SMEs often lack both a credit history and the collateral needed to secure a loan, thus they represent a degree of risk many financial institutions are unprepared to take. As a result, start-ups typically use informal sources of external financing and rely on owners' personal savings and credit to finance their operations.
As shown in Figure 11, 77 percent of start-up SMEs used personal savings to finance their company, compared with 57 percent of all SMEs (see Figure 10). In fact, start-ups — more than other SMEs — used all forms of personal credit to finance their business. However, given the strong economic conditions over the past few years, start-up SMEs also benefited from formal sources of financing in 2004, with 45 percent receiving commercial loans from financial institutions. Access to formal sources of financing benefits SMEs due to more transparency and the ability of small businesses to compare terms and prices.
Figure 11: Types of Financial Instruments Used by Start-up SMEs in 2004*
Source: SME Financing Data Initiative, Statistics Canada, Survey on Financing of Small and Medium Enterprises, 2004.
* Reported by SMEs operating in 2004, in relation to their financing experiences of starting up their business at any time between 2003 and 2004. Multiple responses were possible.
How do SMEs apply for debt financing?
SMEs have traditionally obtained access to debt financing through well-established associations with a particular branch of a financial provider. In 2004, 64 percent of SMEs reported they requested debt through a personal discussion in a branch or with their account manager (see Table 3). This is down from 76 percent of SMEs that reported applications through a personal discussion in a branch in 2001.
Conversely, the use of new technologies by SMEs — alternative ways to access financial services for consumers and businesses, such as the Internet — increased significantly in 2004, with 29 percent applying for debt financing by phone and 4 percent using the Internet. This contrasts sharply with 2001, when only 13 percent of SMEs applied by phone, and less than 1 percent used the Internet to apply for financing.
Which documents and types of collateral were requested by debt suppliers?
Table 4 shows the types of documents requested by financial institutions in 2004 as part of the application process for debt financing. Of the SMEs that made requests, 82 percent were required to provide some documentation, with nearly two thirds (61 percent) providing business financial statements. While some firms were not required to submit any information, for those that were, substantially more SMEs reported being asked to provide several types of supporting documentation in 2004 compared with requests for documentation in earlier years.
Financial institutions often require that SMEs seeking financing provide collateral as security. Collateral can take the form of land, buildings, or other business or personal assets that can be used as security for the debt, or guarantees from third parties. The amount of collateral required is directly linked to the perceived risk. In 2004, more than 40 percent of SMEs were asked to provide collateral (business or personal assets) to guarantee their financing.
Footnote 10. Start-up SMEs are defined as businesses started from scratch by the owner(s) prior to the first sale of products or services, at any time between 1996 and 2000. Established SMEs are defined as firms started prior to 1998. All SMEs include both start-ups and established firms.
