The Daily, Tuesday, January 15, 2002. Financing of small- and medium-sized enterprises

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Financing of small- and medium-sized enterprises

Eighty-two percent of small- and medium-sized enterprises that sought a loan or other type of credit during 2000 were able to obtain it, according to a survey conducted in the fall of 2001 on a sample of enterprises in operation at the time.

Statistics Canada conducted the survey, in partnership with Industry Canada and Finance Canada, as part of a larger program of research on small- and medium-sized firms recently started up. Some 11,000 firms with between 0 and 499 employees reported on whether they had made financing requests and on the nature and outcomes of the requests they had made.

Larger firms more likely to have been accepted for financing

Among small- and medium-enterprises, smaller firms were less likely to have been accepted for debt financing than were larger ones. Of those firms with 1 to 4 employees that sought credit in 2000, about 79% said their request resulted in an approval. This rises to 85% of firms with 5 to 19 employees, 87% of those with 20 to 99 employees, and 94% of those with 100 to 499 employees.

Businesses in knowledge-based industries had a lower authorization rate for debt financing. About 70% of these companies were successful in obtaining financing, compared with 93% of companies in agriculture and 88% in the primary sector, which includes companies in forestry and mining.

Knowledge-based industries include firms in several technology sectors, such as telecommunications carriers, video production and computer services. It is a regrouping of Statistics Canada's standard industry categories, and is often used by Industry Canada and other organizations.

Larger firms and farming sector more likely to request financing

In 2000, 23% of the firms surveyed made at least one request for debt financing, but this figure varies by size of business. Among the smallest firms included in the survey-those run solely by their owner-operators with no employees-19% said they sought debt financing in 2000. This rose to 23% of firms with 1 to 4 employees, 33% of those with 5 to 19 workers, 36% of those with 20 to 99 workers, and 35% of those with 100 to 499 employees.

Note to readers

The Survey of Financing of Small- and Medium-sized Enterprises included only firms that were in operation at the time the survey was administered. Thus, the results do not reflect the role that a lack of financing may or may not have played in determining the outcome of businesses that would have ceased operations prior to the survey period. Entrepreneurs who tried to start up a business but failed were also excluded from the survey. Future studies may address these subjects.

The survey was administered to a sample of firms with 0 to 499 full-time equivalent employees. Financing and leasing companies, co-operatives, subsidiaries, not-for profit organizations, government offices, schools, hospitals and other public sector organizations were excluded.

The accuracy of the results declines as statistics for sub-groupings of the target population are broken out. For example, overall results for the population are generally accurate to within 2 percentage points, 19 times out of 20. Results for specified employment size categories (e.g., 0 employees, 1 to 4 employees or 5 to 19 employees) are generally accurate to within 5 percentage points, 19 times out of 20.

The survey also showed a higher incidence of financing requests for firms in the agriculture sector; 39% of such firms made requests in 2000; a higher-than-average proportion approached credit unions or caisses populaires rather than banks. Professional services and the knowledge-based industries, however, had lower incidences-13% and 16%, respectively.

Operating credit instruments requested most often

Most of the requests for debt financing were for some form of operating credit. Forty-three percent of the businesses that sought debt financing in 2000 requested a new line of credit or higher limits on existing lines of credit. A further 12% requested a demand loan with repayment conditions of one year or less. Only a small proportion, 7%, said they sought a credit card.

Term credit accounted for the remainder of the requests for debt financing. About 32% of firms looking for credit said they sought a term loan with repayment conditions of more than one year. Another 10% wanted a mortgage loan.

Most requests made to banks

Banks were the type of lender most commonly approached for debt financing, accounting for 66% of the financing requests made. Credit unions and caisses populaires accounted for 20% of requests, and Crown corporations and other federal, provincial or municipal programs accounted for 8%.

In attempting to obtain debt financing, 83% of the firms said they approached only one credit supplier. About 64% of all firms that sought debt financing reported that the primary reason for choosing the particular credit supplier they approached was because it was their regular financial institution.

Significant use of other financing instruments

Aside from asking about availability of term and operating credit from financial institutions and other lenders, the survey asked separate questions about access to other forms of financing.

The survey estimates that 9% of firms requested leasing agreements to finance equipment or other assets during 2000. As well, 29% requested credit from a manufacturer or supplier to finance supplies and services. This short-term financing was usually for the acquisition of goods or services required in the normal commercial activities of small- and medium-sized firms.

About 2% of firms sought equity financing or grants from government agencies and community programs. Less than 1% sought to finance their business by selling off their receivables to collection agencies or factoring companies.

For more information, or to enquire about the concepts, methods or data quality of this release, contact Patrick Huot (613-951-0583), Small Business and Special Surveys Division.