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Rural-Based Entrepreneurs

Small Business Financing Profiles - October 2008

Christine Carrington and Lubaki Zantoko
Small Business and Tourism Branch, Industry Canada

Table of Contents

Drawing on the comprehensive database of the SME Financing Data Initiative, specifically the Survey on Financing of Small and Medium Enterprises, 2004, this article presents a profile of Canada's rural-based entrepreneurs and examines the unique financing needs and practices of rural-based SMEs and compares them with urban-based SMEs.

Highlights in 2004 of the profile of rural-based entrepreneurs

In 2004, rural-based small and medium-sized enterprises (SMEs) represented 28 percent of the estimated 1.4 million SMEs in Canada, somewhat higher than the 20 percent of the population living in rural Canada.
The Prairie provinces had the highest share of rural-based SMEs (36 percent), followed by Quebec (24 percent), Ontario (21 percent), the Atlantic provinces (11 percent) and British Columbia (8 percent).
In 2004, nearly one third of rural-based SMEs operated in agricultural and primary industries, such as mining, fisheries and forestry.
SMEs located in rural areas are more established, have fewer employees and are more likely to be self-employed operations.
The financial performance of rural-based SMEs is weaker than businesses based in urban centres.
Rural-based SMEs are more likely to request formal sources of financing such as commercial credit, and are more likely to be approved.
More than one third of rural-based SMEs do their day-to-day banking with credit unions and Caisses populaires compared with only 15 percent of urban-based SMEs.
Rural-based SMEs are more likely to deal with one financial institution for longer periods of time than urban-based SMEs.

Definitions

Rural-based small and medium-sized enterprises (SMEs) are defined as commercial businesses with fewer than 500 employees and less than $50 million in revenues. Excluded from the SME population are non-profit or government organizations, schools, hospitals, subsidiaries, co-operatives, and finance and leasing companies.

There are several definitions used to categorize rural areas (du Plessis et al., 2001). In this article, unless otherwise stated, Canada's rural areas are primarily identified by postal code — a zero as the second digit in a postal code denotes rural areas.

This definition of rural-based SMEs was extracted from the Survey on Financing of Small and Medium Enterprises, 2004. The survey has recently adopted the rural and small town (RST) definition to identify rural areas. RST includes the population living in regions outside the commuting zone of larger urban centres (populations over 10 000). Future research related to the SME Financing Data Initiative will use the RST definition.

Population Trends in Rural Canada

Not since 1921 has the population residing in Canada's rural areas exceeded that living in urban centres. While rural areas have experienced a moderate degree of natural population growth since then, it has not matched the rapid pace of growth in urban areas illustrated in Figure 1.^{Footnote 1} In 2006, only 20 percent of Canadians lived in rural areas.

Figure 1: Population Trends in Canada's Rural and Urban Areas, 1851–2001*

* Rural population for 1981 to 2001 refers to persons living outside centres with a population of 1000 and outside areas with 400 persons per square kilometre. Prior to 1981, the definitions differed slightly but consistently referred to populations outside centres of 1000 population.
Source: Statistics Canada, Censuses of Population, 1851–2001.

Many factors contribute to Canada's urbanization. Research has found a steady trend of out-migration from many rural areas, chiefly among rural-based youth (Fellegi, 1996). A "youth exodus" from rural areas has been underway since 1971 as younger people seek education and work experience in urban centres (Tremblay, 2001). At most, only 39 percent of these youth will return to their rural community ten years later (Dupuy et al., 2000). In 2001, the intensity of unskilled occupations was sizably higher in predominantly rural regions, while managerial and professional occupations were more concentrated in predominantly urban regions (Alasia and Magnusson, 2005). Degree holders are more prevalent in larger cities than in rural areas. These developments may present a problem for rural-based businesses that require skilled labour.

There is also a tendency for immigrants to head into Canada's urban centres as opposed to rural areas. In 2001, 18 percent of the Canadian population were immigrants and 89 percent of these immigrants were located in urban areas (Beshiri and Alfred, 2002). This trend is significant and has negatively impacted rural-based businesses as it has been estimated that 70 percent of labour force growth in Canada between 1991 and 2001 may be attributed to immigrants.

Substantial changes are also occurring in the rural labour market. Traditionally, employment in many rural areas was highly dependent on businesses operating in the resource sector. As will be discussed later in this article, technological advances and automation are changing the way work is done in these industries. This is particularly the case in agriculture. The agricultural sector is shedding jobs as workers are gradually being replaced by machinery (Mwansa and Bollman, 2005). The Statistics Canada Census of Agriculture even found the number of farms in Canada is decreasing, dropping 11 percent over the five years from 1996 to 2001.

Rural-Based Entrepreneurship

In 2004, rural-based SMEs represented 28 percent of the estimated 1.4 million SMEs in Canada, or 392 000 firms, somewhat higher than rural Canada's proportion (20 percent) of the overall population (Table 1). This means that Canadians residing in rural areas were more likely to be engaged in entrepreneurship activities than those living in urban centres.^{Footnote 2}

Table 1
Regional Distribution of SMEs and Population in Rural and Urban Areas, 2004
Provinces	Rural-Based		Urban-Based
	Population*	SMEs	Population*	SMEs
	(%)		(%)
* Statistics Canada's Census defines an urban area as having a minimum population of 1000 persons and a population density of at least 400 persons per square kilometre. All territory outside urban areas is classified as rural. Taken together, urban and rural areas cover all of Canada. Source: SME Financing Data Initiative, Statistics Canada, Survey on Financing of Small and Medium Enterprises, 2004. Statistics Canada, Census 2001.
Atantic Provinces	46	51	54	49
Quebec	20	31	80	69
Ontario	15	17	85	83
Prairies	23	46	77	54
British Columbia	15	16	85	84
Yukon, Nunavut and Northwest Territories	46	N/A	54	100
Canada	20	28	80	72

Table 1 shows that more than half of the SMEs in the Atlantic provinces exist in rural areas, a share in keeping with the 46 percent of the population that is rural based. In all regions, the shares of rural-based SMEs are higher than the shares of the populations residing in rural areas.

Figure 2 shows how rural-based SMEs are distributed across the country. The highest share is found in the Prairies, with 36 percent, followed by Quebec (24 percent), Ontario (21 percent), the Atlantic provinces (11 percent) and British Columbia (8 percent).

Figure 2
Regional Distribution of Rural-Based SMEs

Figure 2: Regional Distribution of Rural-Based SMEs

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

In 2004, rural-based SMEs earned $216 billion in combined annual revenues compared with $623 billion earned among urban-based businesses. This translated into 26 percent of total revenues of Canada's SMEs in 2004.

As shown in Figure 3, on average rural-based SMEs have been in operation somewhat longer than firms in urban centres. Approximately 77 percent of rural-based SMEs were over five years old in 2004 compared with only 67 percent of urban-based SMEs. This could mean that between 1999 and 2004 the rate of business start-ups in rural areas lagged slightly behind that occurring in urban areas (4 percent per year, on average, compared with 6 percent in urban areas). Prior research covering the period between 1993 and 1996 also found that the rate of business start-ups was lower in smaller communities than that observed in larger communities (Mendelson, 1999).

Figure 3
Year Business First Starting Selling Products and Services*

Figure 3: Year Business First Starting Selling Products and Services*

* Applicable to firms still in operation in 2005 and excluding firms that began operations but exited the market prior to 2005.
Source: SME Financing Data Initiative, Statistics Canada, Survey on Financing of Small and Medium Enterprises, 2004.

Excluding firms operating in the agriculture sector, however, brings the age profile of rural-based SMEs more in line with that of their urban-based counterparts. Agricultural SMEs and, more specifically, family farms have generally been in business for longer than firms in other sectors. In fact, less than 15 percent of agricultural SMEs were established after 1999.

Business Growth and Perceived Obstacles

To establish and to grow a business can be challenging for entrepreneurs. Rural-based entrepreneurs, and particularly those in remote areas, are likely to face additional impediments such as increased distance to markets and business services. Figure 4 shows the perceived obstacles to business growth by rural- and urban-based SMEs. A comparison of these obstacles identified by both urban- and rural-based SMEs indicates many similarities on the following obstacles: obtaining qualified labour, obtaining financing, instability of consumer demand and management capacity. Levels of taxation are considered to be the biggest obstacle by both urban- and rural-based SMEs, while management capacity is the smallest obstacle. These findings are similar to those found by St-Pierre and Beaudoin (2002). Rural-based SMEs appear to be affected more by the level of taxation, insurance rates, low profitability and government regulations than their urban counterparts.

Figure 4
Perceived Obstacles to Business Growth and Development

Figure 4: Perceived Obstacles to Business Growth and Development

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

^{Footnote 1} Natural population growth (natural increase) occurs when the number of births exceeds the number of deaths.

^{Footnote 2} Business density measures the number of businesses in a population divided by the number of individuals in that population. Based on 2006 Statistics Canada Census and Business Register data, 6 percent of people living in rural areas owned an SME compared with a business density of 4 percent in urban areas.