Small and Medium-Sized Enterprises in the Prairie Provinces (p. 3 of 5)

FINANCING ACTIVITY

During 2004, 30 percent of Prairie region SMEs applied for some form of external financing compared with 24 percent of firms nationally. Table 4 presents an overview of the financing activity of SMEs in the major regions of Canada during 2004. It summarizes, by region, rates at which SMEs applied for various forms of financing and corresponding rates of approval.

Table 4
Financing Request and Approval Rates, 2004

Type of Financing		British Columbia	Prairie Provinces	Ontario	Quebec	Atlantic Provinces	Canada
		%
* Data not available due to low quality or confidentiality concerns. Source: SME Financing Data Initiative, Statistics Canada, Survey on Financing of Small and Medium Enterprises, 2004.
Debt Financing	Request Rate	20	23	15	18	20	19
	Approval Rate	82	82	77	88	82	81
Lease Financing	Request Rate	4	5	2	3.2	3	3
	Approval Rate	88	99	98	97	94	96
Equity Financing	Request Rate	1.1	0.9	1.3	1.4	1.7	1.2
	Approval Rate*	78	—	—	—	80	—
Government Grant or Subsidy	Request Rate	1.8	6	1.5	3.1	3.9	3
	Approval Rate	—	72	72	68	80	70

Table 4 shows that 23 percent of Prairie region SMEs applied for commercial loan financing. Approximately 49 percent of these loan applications were made to chartered banks and 34 percent were made to cooperative lenders such as credit unions (see Figure 4). The most frequent types of loan applications were from owners seeking to finance fixed assets (51 percent of loan applications) or to finance working capital (49 percent of loan applications).

Table 4 also reports the rate at which loan applications were approved; however, among those that were not approved were instances where loan applications were pending at the time of data collection as well as instances where the application had been withdrawn. After allowing for these events, approximately 11 percent of loan applications from Prairie region SMEs were turned down, a rate that is slightly lower than the 12 percent national average. At the same time, 59 percent of SMEs in the region that sought financing were satisfied with the overall level of service provided by their credit supplier (compared with a national average of 62 percent).

Approximately 5 percent of Prairie region business owners sought lease financing and approval rates were high (99 percent), commensurate with those reported in other regions.

Rates of application for equity financing were low in all regions, with fewer than 2 percent of firms seeking equity financing during 2004. Differences across regions were not statistically significant.

Financing Environment in the Prairie Provinces

According to the 2005 SME Financing Data Initiative Survey of Suppliers of Business Financing, approximately $868 billion in commercial lending was authorized in almost 2 million transactions nationwide. In the Prairie provinces, lenders authorized a total of $164 billion in debt financing in almost 594 000 transactions.

Nationally, loan authorizations of less than $250 000 (arguably, most of these were loans to smaller enterprises) comprised more than $70 billion and were made available in the course of approximately 1.6 million transactions. Of the latter, $42 billion was outstanding at the end of 2005.^{Footnote 6}

SMEs in the Prairie provinces appear to have faced somewhat similar application requirements as firms elsewhere in Canada (see Figure 5).

Capital Structure

SME owners typically look to informal sources of financing, such as personal loans and personal savings, when starting a business or funding day-to-day operations. Figures 6 and 7 list sources of financing used by an average Prairie region firm compared with the average firm in Canada during start-up and for established operations in 2004.

At the start-up stage, the primary sources of financial capital in the Prairie provinces were personal savings and personal credit instruments. This pattern was repeated for SMEs in all regions. Prairie region firms were relatively more likely to draw on formal sources of financial capital at the start-up stage. Among established firms, Prairie region companies were more likely than other regions to have used informal sources, such as retained earnings and personal credit cards.

Risk Capital

Risk capital is a means of financing often used by high-growth, knowledge-based or technology-based firms.^{Footnote 7} Risk capital includes angel investment (venture financing provided by a high net worth individual), loans from friends and family, and formal venture capital, as well as subordinated debt and capital from public share offerings on capital markets. Firms that seek risk capital tend to be early stage or in the process of developing a concept or product and bringing that product to market. Since these firms are often not yet generating revenues and lack tangible assets, they have problems accessing credit.^{Footnote 8} Risk capital is more suitable for such firms as it offers a means to raise money that does not require an immediate cash flow to support repayments. Of Canadian firms that had, at some point in their development, sought risk capital,

• 23 percent approached friends or family for financing,
• 22 percent sought out business angels,
• 20 percent looked to existing stakeholders, and
• 7 percent contacted a venture capital firm.

Approximately 15 percent of businesses in the Prairie provinces have received angel financing over their history and 21 percent have received financing from friends and family.^{Footnote 9}

More than 35 percent of SME owners in the Prairie region intend to expand their business in the next two years. These Prairie region SME owners appeared to be more willing to share ownership of their firm in order to attract equity capital, with 56 percent of owners having stated they were willing to share equity in their business to achieve their growth objectives.

By comparison, 39 percent of business owners across Canada expect to grow and 46 percent of Canadian entrepreneurs were willing to share ownership in their business to obtain growth capital.

Venture Capital Activity in Prairie Region, 2000–2006

Venture capital (VC) is a form of risk capital used to support a small number of high-growth early-stage firms as they expand and move beyond the seed financing stage. During 2006, institutional venture capital firms invested a total of $76 million in Prairie region enterprises. This represents a disproportionately low share of venture capital, less than 5 percent of the $1.693 billion national total in a region that comprises 17 percent of Canada's population and almost 20 percent of knowledge-based firms.

Figure 8 shows recent trends in venture capital investment in the Prairie region. The pattern displayed is not unlike that in other regions or nationally. Venture capital investing spiked during the technology boom of the late 1990s and has since moderated, a consequence of the bursting of the technology bubble in 2000.

Figure 9 compares the share of venture capital investments in each of Canada's major regions with their share of knowledge-based industries (KBIs). The chart shows that the Prairie region's share of venture capital activity is substantially lower than would be expected based on its share of knowledge-based businesses.

^{Footnote 6} SME Financing Data Initiative, Statistics Canada, Survey of Suppliers of Business Financing, 2005. Note that total authorization amounts are defined as the sum of clients' maximum amount of money they are permitted to borrow from a supplier. This may not be the amount the client actually borrows. Outstanding debt is defined as the principal amount of money that a client has actually borrowed but not yet paid back, aggregated over all clients.

^{Footnote 7} Industry Canada, "Canadian Venture Capital Activity: An Analysis of Trends and Gaps, 1996–2002."

^{Footnote 8} SME Financing Data Initiative, Industry Canada, "Small and Medium-Sized Enterprise Financing in Canada, 2003."

^{Footnote 9} Riding, A. and Belanger, B. "Small Business Financing Profiles: Informally Financed SMEs," SME Financing Data Initiative, Industry Canada, September 2006.