Survey on Financing of Small- and Medium-sized Enterprises

2004

Debt financing requests have declined since the turn of the millennium, but medium-sized enterprises are still more likely to request financing than their smaller counterparts.

Only one-fifth (19%) of all firms in Canada sought some form of external debt financing in 2004, according to results of the Survey on Financing of Small and Medium Enterprises. This was down from 24% four years earlier.

While the incidence of requests for financing was slightly lower, the overall approval rate remained unchanged. In both 2000 and 2004, just over 80% of the firms that sought a loan were able to obtain it.

Among the smallest firms included in the survey (those run by an entrepreneur with no employees) only 15% sought debt financing in 2004, down from 19% in 2000.

In contrast, one-third (33%) of larger firms with 20 to 99 employees sought external financing, the highest proportion. This was slightly below the proportion of 36% four years earlier.

Businesses in the manufacturing sector had a noticeably lower approval rate (64%) than in 2000 (78%). It appears that credit suppliers were more cautious lending to manufacturers. This is possibly because profits for small- and medium-sized enterprises in this sector fell in tandem with those of larger firms between 2000 and 2004.

If corporations in the booming energy sector were excluded, and if inflation were taken into account, profits of larger Canadian corporations rose by 8.6% during this four-year period. On the other hand, profits of manufacturers fell by 13.4%, as shown by Statistics Canada's quarterly financial statistics.

Higher incidence of financing requests for firms in capital intensive industries

The survey showed a higher incidence of financing requests for firms in the manufacturing sector compared to the all-industry average. In manufacturing, 21% of firms sought debt financing in 2004, and in the primary/agricultural sectors, nearly one-third (32%) sought financing.

These are capital-intensive industries that tend to need significant up-front cash outlays before starting production.

In contrast, financing was sought by only 10% of businesses operating in the human-capital intensive professional service industries, such as accountants, and 13% in knowledge-based industries, such as computer services companies.

Regionally, small- and medium-sized enterprises in the Prairie provinces were more likely to seek external financing. Those in the Atlantic region and British Columbia were close behind. The firms least likely to seek debt financing were in Ontario where only 15% did so in 2004, down from 21% in 2000.

Exporters, manufacturers most likely to cite financing constraints as an obstacle to business growth

Manufacturers and exporters were most likely among small- and medium-sized enterprises to report that they were unable to obtain external financing in 2004, and as a result, the growth of their business was impeded.

Three out of every 10 exporters (29%) reported that difficulties in obtaining financing acted as a brake on their growth, compared to only 19% of non-exporters.

This is consistent with the manufacturing sector, where exporters are concentrated. About 27% of manufacturers reported that financing constraints affected the growth of their businesses.

Manufacturing tends to have larger up-front capital requirements than the service sector. Therefore, financing constraints can be expected to affect business growth. In contrast, the professional services industries, which have fewer exporting opportunities, are also businesses with fewer capital requirements.

Only 13% of respondents in the professional services industries identified the lack of financing opportunities as an impediment to the growth of their businesses.

In addition, data showed that twice as many young enterprises as established firms reported that difficulties in securing financing were an obstacle to growth. (Young enterprises are those that started operation in 2002 or later, while established firms were in operation prior to 1999). One-third (34%) of young enterprises had problems securing financing, double the proportion (17%) among established businesses.

Innovative firms, or those that spend more than 20% of their investment expenditure on research and development, were particularly affected by difficulties in obtaining financing.

Four out of every 10 (40%) innovative firms cited financing as an obstacle to growth, compared to 19% of non-innovating firms.

Most firms satisfied with their credit supplier

The survey asked businesses that made loan requests to identify their level of satisfaction with their credit supplier.

Some 62% of small- and medium-sized enterprises that sought a loan during 2004 were satisfied with the overall quality of service from their credit suppliers, while only 8% were dissatisfied. The remainder had a neutral or no opinion.

Firms were asked about satisfaction with specific progress stages during the loan process. About 8% of businesses indicated they were dissatisfied with the amount of documentation required, interest rates charged and the overall quality of service. About 7% said they were dissatisfied with the time it took to process their application.

The survey also asked businesses about their level of satisfaction with services offered by their main financial institution. Nearly six out of 10 (57%) said they were satisfied with the overall quality of service, while only 5% said they were dissatisfied. The remainder had a neutral or no opinion.

The lowest level of satisfaction was with the level of service charges. About 16% of small- and medium-sized enterprises said they were dissatisfied and only 29% said they were satisfied.

Definitions, data sources and methods: survey number 2941.

For more information, datasets, or to enquire about the concepts, methods or data quality of this release, contact Klaus Kostenbauer (613-951-2904; toll-free 1-877-679-2746), Small Business and Special Surveys Division. Consult Industry Canada's Web page for additional information on small- and medium sized enterprise related research topics and datasets.