Key Small Business Financing Statistics — December 2006

SME Business Owner and Financial Characteristics

Demographic Trends in Canadian Entrepreneurship

The face of Canadian entrepreneurs has become increasingly diverse throughout the past two decades (see Figure 13). Women, in particular, have taken on the risks and rewards of entrepreneurship in ever-increasing numbers and now have whole or part ownership in over 47 percent of SMEs.

As Canada's demographic trends continue to shift toward an older population, youth will also play an increasingly important role in small business growth. The Canadian Imperial Bank of Commerce reports that more than 500 000 Canadian entrepreneurs are heading into retirement within the next five years, followed by an additional 30 percent by 2020.^{Footnote 11}

Visible minority entrepreneurs are also having a noticeable affect in the Canadian economy in terms of growth, innovation and job creation. Canada's population of visible minorities has grown more than threefold over the past two decades — from 1.1 million in 1981 to almost 4 million in 2001 (13 percent of the population). The Conference Board of Canada estimates that by 2016, visible minorities will constitute approximately 20 percent of Canada's population and 18 percent of the labour force.^{Footnote 12}

Figure 13: Regional Distribution of Women, Visible Minorities and Young Entrepreneurs, 2004

Source: SME Financing Data Initiative, Statistics Canada, Survey on Financing of Small and Medium Enterprises, 2004.

Women Entrepreneurs

SMEs entirely owned by women entrepreneurs tend to be smaller than those owned by men, and are more concentrated in the service industries. Micro-businesses, which employ fewer than five employees, constituted 90 percent of women-owned firms, compared with 83 percent owned by men, and the two sectors that are key drivers of Canada's economic growth and innovation — knowledge-based industries (KBIs) and manufacturing — attracted only 4 percent of all women entrepreneurs in 2004.

A substantial number of women are also found operating the smallest, albeit most numerous, of Canada's businesses — those of the self-employed. Of the 2.4 million self-employed Canadians in 2004, over 830 000 were women.^{Footnote 13} Over the past decade, the number of self-employed women grew by 24 percent, somewhat higher than the 19 percent growth by men.

In 2004, women entrepreneurs were less likely than men to approach financial institutions for financing. These lower request rates were not a matter of access; rather, 91 percent of women business owners reported that external financing was not necessary, and 6 percent felt their application would be rejected and so avoided approaching financial institutions.

Women entrepreneurs who did apply for financing in 2004 were somewhat less likely than men to be approved (74 percent approval rate among women versus 82 percent among men) (See Table 5). Research has shown that this was related primarily to the sector in which they operate rather than their gender. Terms and conditions attached to the financing received, however, were similar for both groups. Financial institutions required 31 percent of women-owned SMEs to pledge personal assets as collateral (compared with 38 percent for men), and required co-signatories on 9 percent of applications by women (compared with 8 percent for men).

Table 5: Financing Request and Approval Rates, Ownership Characteristics (2004)

	Debt Financing		Capital Leasing		Equity Financing
	Request	Approval	Request	Approval	Request	Approval
	%		%		%
Source: SME Financing Data Initiative, Statistics Canada, Survey on Financing of Small and Medium Enterprises, 2004. Note: Dash indicates estimates suppressed to meet confidentiality requirements of the Statistics Act and/or for low data quality reasons.
All Small and Medium-Sized Enterprises
	18.5	81.4	3.2	96.3	1.2	46.0
Gender of Owner
Entirely female-owned	12.6	73.9	—	89.3	1.1	—
Male/female partnership	22.2	83.5	2.7	98.0	0.7	—
Entirely male-owned	17.4	81.8	3.8	95.9	1.0	44.7
Age of Majority Owner
Under 30	21.4	81.5	1.7	99.3	—	—
30 to 39	24.1	77.9	4.7	98.2	1.5	—
40 to 49	19.6	80.8	3.9	97.1	1.5	47.0
50 to 64	17.8	83.1	2.5	92.8	1.1	—
65 and over	7.6	89.2	1.1	—	0.5	—
Ethnicity of Majority Owner
Visible minority	16.5	71.3	1.4	—	0.5	87.6
Other SMEs	18.7	82.1	3.3	—	1.3	44.9

Young Entrepreneurs

There are several characteristics of SMEs owned by youth that may complicate access to financing for younger entrepreneurs, including

• their firms are newer (76 percent created within the past five years) and may be perceived as riskier (i.e. have less credit history); they are slightly more concentrated in knowledge-based industries (which often have fewer tangible assets to pledge as collateral); and they are often higher growth (which has been associated with higher financial risk);
• their firms are relatively smaller and less established than SMEs owned by other groups in their sectors of operation;
• although financially viable, their firms do not perform as well as businesses owned by older entrepreneurs; and
• younger owners have fewer years of management experience.

At the same time, many of these factors also increase the capital needs of youth-owned SMEs. As new, fast-growing businesses, youth-owned SMEs have slightly higher financing request rates than SME owners over the age of 40 (21 percent versus 18 percent). In 2004, young entrepreneurs received similar financing approval rates as owners in older age categories, which is a slight improvement from 2000, when only 78 percent of their credit applications were approved (compared with 82 percent for older business owners) (see Table 5). Fewer years dealing with a financial institution — on average, young entrepreneurs have been dealing with their main financial institution for only four years — and a lack of a solid credit history may have contributed to the lower approval rating. Perhaps as a result, youth-owned SMEs finance their operations through informal financing methods, such as personal savings, personal credit, and loans from friends and family, more often than firms owned by older entrepreneurs.

Visible Minority Entrepreneurs

While access to financing was not reported as the main concern for visible minority entrepreneurs, in 2004 it was still ranked as a serious problem by more visible minorities than other business owners. In fact, 29 percent of visible minority SME owners identified obtaining financing as a significant barrier to firm growth and development, compared with only 19 percent of other business owners. More research is needed to determine how much impact the sector of operation has on this difference.

The financing activity of visible minority-owned SMEs in 2004 demonstrates why access to financing may be a concern. While demand for financing was similar from all SME owners, visible minority entrepreneurs were far less likely to win approval for their financing applications (71 percent approval rate compared with 82 percent among other SMEs) (see Table 5). Furthermore, of those visible minority entrepreneurs who did not apply for financing, a significant number (10 percent) claimed it was due to difficulties associated with the application process compared with other SMEs (3 percent).

The vast majority of financing requests by visible minority owners were to chartered banks (76 percent versus 63 percent for other entrepreneurs). This can be explained by the stronger market shares enjoyed by banks throughout Ontario and British Columbia, particularly in the urban centres of these regions, where there are higher concentrations of visible minorities (see Figure 13).

For those financial debt applications that were approved in 2004, visible minority entrepreneurs received similar terms and conditions as other SME owners. Forty-three percent of applicants pledged as collateral their personal assets, 44 percent pledged business assets and 11 percent required co-signatories (compared with 42 percent, 41 percent and 6 percent, respectively, for other SMEs).

Footnote 11. CIBC World Markets. "Are Canadian Entrepreneurs Ready for Retirement?" Canadian Imperial Bank of Commerce, 2005.

Footnote 12. Antunes, P., J. MacBride-King and J. Swettenham. "Making a Visible Difference: The Contribution of Visible Minorities to Canadian Economic Growth." Conference Board of Canada, 2004.

Footnote 13. Statistics Canada, CANSIM, table 282-0012 and Catalogue No. 89F0133XIE.