Small and medium-sized enterprises financing in Canada

Small and medium-sized enterprises (SMEs) in Canada appeared to exercise more caution when it came to requesting various types of financing in 2001, which may be attributable to the economic slowdown - gross domestic product increased only 1.5% in 2001, less than half its pace in each of the previous four years.

According to the 2001 Survey on Financing of Small and Medium Enterprises in Canada, only 18% of such enterprises applied for debt financing - the most common type of financing sought by SMEs - compared with 23% the previous year. However, 8 in 10 SMEs had their debt applications approved by credit suppliers in 2001, virtually unchanged from 82% in 2000. Nevertheless, credit suppliers were more cautious with respect to amounts approved and the approval process used.

The Survey on Financing of Small and Medium Enterprises in Canada was conducted in partnership with Industry Canada and the Department of Finance, through a federal research program on small and medium-sized businesses. The 2001 survey was conducted in the fall of 2002, and estimates were produced from data obtained in telephone interviews with 3,850 SMEs operating in 2001 with fewer than 500 employees and less than $50 million in revenue. The questions covered such topics as types of credit application, outcomes of applications and planned use of requested amounts.

The results of the 2001 survey were based on a sample of 5,830 SMEs, which is one-third the size of the sample of 17,769 SMEs used in 2000. As a result, they are of lower accuracy than those of the 2000 survey. Therefore, in this article, comparisons of the results of the two surveys should be treated with caution.

Overall decline in demand and supply of financing

Overall, SMEs reported applying for $38.9 billion in debt financing in 2001, down from $54.2 billion in 2000. Similarly, they reported that the total amount of debt financing approved in 2001 was $28.3 billion, down from $44.3 billion in 2000. Only 73% of the total amount applied for was approved, compared with 82% in 2000. The decline could mean that the economic slowdown in 2001 had a dampening effect on credit suppliers' tendency to provide the requested amounts.

Both the approval rate for SME leasing applications and the percentage of SMEs that applied were down from 2000. The approval rate for SME leasing applications declined to 94% in 2001 from 98% the previous year. Only 7% of SMEs reported applying for a lease, compared with 9% in 2000.

On the other hand, the total leasing amount authorized jumped from $6.4 billion in 2000 to $9.1 billion in 2001. As a percentage of total amount applied for in 2001, the total leasing amount approved was 94%, roughly the same rate as in 2000.

Only 1% of SMEs tried to obtain equity financing, compared with 2% in 2000.

Larger SMEs appear to exercise greater caution

The largest percentage of credit applications (27%) came from SMEs with 5 to 19 employees. Companies of larger size (20 to 99 employees) accounted for only 23% of the applications.

With regard to amounts applied for, firms with 20 to 99 employees and those with 100 to 499 employees accounted for only 16% and 10%, respectively, of the total amount ($38.9 billion) of debt financing applied for. In comparison, SMEs with one to four employees and those with 5 to 19 employees each applied for 30% of that amount. One would have expected that larger firms would have a greater need for financing because of their larger operations. SMEs of that size were probably more cautious in response to the economic slowdown.

Despite their apparent caution, larger SMEs retained the confidence of their credit suppliers. Firms with over 100 employees had a 91% approval rate, compared with 80% for businesses with one to four employees, and 77% for businesses with no employees.

Continued preference for term loans and operating credit

In spite of their apparent cautiousness, SMEs' behaviour toward various debt financing instruments (term loans, credit cards and lines of credit) was virtually unchanged. As in 2000, one in three SMEs applied for a term loan. The same proportion tried to obtain a new line of credit. However, mortgage loan applications increased from 10% in 2000 to 16% in 2001. The upswing suggests that more SMEs tried to take advantage of low mortgage interest rates offered by credit suppliers in 2001, when the prime rate averaged 4.5%, compared with 5.7% in 2000.

As in 2000, there were considerably fewer applications for other financing instruments, such as short-term loans and new credit cards.

A slightly more stringent credit application process

The three sets of documents requested most often by credit suppliers in 2001 were business financial statements, an official credit application and the owner's personal financial statements. Specifically, three out of four SMEs had to provide their financial statements, 3 out of 10 submitted an official credit application, and a similar proportion provided the personal financial statements of the owner(s). In 2000, the same documents were required most often, but fewer firms had to provide them, especially in the case of business financial statements; only one out of two SMEs reported submitting them.

In addition, the 2001 survey showed that credit suppliers asked 17% of SMEs for an appraisal of the assets to be financed, compared with 9% in 2000. Also, 12% of SMEs reported providing various "other documents" to their credit suppliers, whereas a mere 5% did so in 2000. This suggests that credit suppliers were taking a slightly more cautious and stringent attitude toward their clients than before.

Nevertheless, this more cautious and stringent approach does not seem to have affected credit suppliers' traditional criteria for evaluating applications, since, as in 2000, many SMEs that were refused the amount requested cited insufficient revenue (27%), poor credit history (20%) and inadequate cash flow (17%) as the main reasons. Only 3% reported being given no reason. The percentages for 2000 were similar.

Other types of financing

Applications to lease automobiles and light duty vehicles continued to outpace leasing applications for other types of assets, accounting for 30% of the total, compared with 35% in 2000. Machinery and equipment, which made up 31% of applications in 2000 and ranked second among types of assets requested, accounted for only 6% of applications in 2001. Leasing applications for heavy vehicles ranked second in 2001, accounting for 20%, almost unchanged from 2000. Applications for other types of assets also remained almost unchanged.

Definitions, data sources and methods: survey number 2941.

The Survey on Financing of Small and Medium Enterprises forms part of the SME Financing Data Initiative. For more information on the initiative, consult the Industry Canada website (www.strategis.ic.gc.ca/fdi).

For more information, or to enquire about the concepts, methods or data quality of this release, contact Christophe Kadji (613-951-3639; christophe.kadji@statcan.gc.ca) or Gilles Paré (613-951-2517; gilles.pare@statcan.gc.ca), Small Business and Special Surveys Division.