7. Canada
In 2022, Canadian small businesses establishments (1-99 employees) constituted 98% of all businesses. Small businesses employed 6.6 million individuals at the enterprise level, or 41.1% of the private sector labour force.
Supply-side survey data show that outstanding debt held by all businesses increased in 2022 to CAD 1 236 billion. Lending to small businesses increased to CAD 140.4 billion (from CAD 125.7 billion in 2021). As a result, small businesses’ share of total outstanding business loans in 2022 was 11.4%.
Small business credit conditions tightened in 2022. The average interest rate charged to small businesses increased from 4.1% in 2021 to 6.2% in 2022, with an average business prime rate (the rate charged to the most creditworthy borrowers) of 4.1% (from 2.5% in 2021). The business risk premium (measured as the difference between the average small business interest rate and the business prime rate) stood at 2.1%, reflecting a tightening in access to financing for small businesses in Canada. Bank of Canada survey results indicate that lenders reported that overall business lending conditions tightened towards the end of the second half of 2022. Borrowers also reported tightening of credit conditions during the same period.
In 2022, the small business 90-day delinquency rate fell to 0.33% after reaching 0.66% in 2021 and 0.76% in 2020.
Total venture capital (VC) investment levels in Canada reached a peak of CAD 14.4 billion in 2021, followed by a decline to CAD 9.8 billion in 2022.
The Business Development Bank of Canada (BDC), a crown corporation with the mandate to support Canadian entrepreneurship, had CAD 47.8 billion in financing and investments, as of 31 March 2022, committed to 95 000 clients operating across Canada. As the most active VC investor in Canada, the BDC invests both directly into firms and indirectly through external VC funds, with the objective of making Canadian VC a financially viable and attractive asset class for private sector investors and institutional investors.
The Government of Canada has further supported the development Canada’s VC ecosystem by convening public, private, and institutional sources of financing through its Venture Capital Action Plan (VCAP) and Venture Capital Catalyst Initiative (VCCI). Taken together, the Government of Canada has invested CAD 761 million, resulting in a combined total of over CAD 3 billion in capital raised from public and private sources to help Canadian companies start up and grow.
The Government of Canada has established a number of programmes to provide support targeted to entrepreneurs from underrepresented groups. The Government has made total investments of nearly CAD 7 billion in the Women Entrepreneurship Strategy (WES); of CAD 265 million in the Black Entrepreneurship Program (BEP); of CAD 38 million for Futurpreneur, a programme to support youth entrepreneurs; and of CAD 150 million for the Indigenous Growth Fund launched by the National Aboriginal Capital Corporations Association alongside with the BDC. The Aboriginal Entrepreneurship Programme also provides support to First Nations, Inuit and Métis Nation entrepreneurs by lowering the cost of business financing and offering business support services.
The Government of Canada launched Canada’s Export Diversification Strategy in Fall of 2018. In total, the Export Diversification Strategy is a CAD 1.1 billion investment over six years, that aims to help Canadian businesses access new markets and increase Canada’s overseas exports by 50% by 2025.
Overall, the lending condition environment during 2022 was impacted by a number of macroeconomic factors, including: continued growth in employment and moderate growth in gross domestic product (GDP); supply chain issues, high and broad-based inflation, the tightening of monetary policy by the Bank of Canada to curb inflation. GDP at market price was nearly unchanged in the fourth quarter of 2022, following a 0.6% rise in the third quarter. According to the Bank of Canada, growth of GDP is expected to slow about 1% in 2023, on an annual average basis, from 3.6% in 2022. From January 2022 to December 2022, employment slightly rose in average by 0.3% each month to 19.9 million and the unemployment rate was 5.0% at the end of 2022 (from 6.5% in January). Statistics Canada’s Canadian Survey on Business Conditions Q4 2022 shows that 52% of businesses considered that supply chain challenges have worsened over the last three months. The consumer price index (CPI) rose 6.3% year over year in December 2022, following a 6.8% increase in November and is projected to fall around 3% in the middle of 2023 and reach the 2% target in 2024, according to the Bank of Canada. The policy interest rate rose from 0.25% in January 2022 to 4.25% in December 2022.
In 2022, Canadian small businesses establishments (1-99 employees) constituted 98.0% of all businesses. Small businesses employed 6.6 million individuals at the enterprise level, representing 41.1% of the private sector labour force. 78.1% of the private sector labour force was employed in the services sector and 21.9% in the goods sector.1
Figure 8.1 shows the major suppliers of small business financing in 2022. Most small business financing (85.6%) was provided by banks (domestic and foreign), credit unions and caisses populaires. The remainder came from finance companies, financial funds and insurance companies.
Note: Finance companies comprise establishments, both public (government-sponsored enterprises) and private, primarily engaged in extending credit or lending funds raised by credit market borrowing, such as by issuing commercial paper and other debt instruments, and by borrowing from other financial intermediaries.
Source: Statistics Canada, Survey of Suppliers of Business Financing 2022.
Supply-side survey data, which include only lending from the private sector and exclude lending funded by the Government, show that outstanding debt to all businesses increased by 12.7% in 2022 to CAD 1 236 billion, while outstanding debt to small businesses increased by 10.1%, to CAD 140.4 billion (Figure 7.2). Small businesses’ share of total outstanding business loans decreased by 0.2 percentage points, to 11.4% in 2022. The declining trend of the small business’ share is explained by the fact that outstanding debt for small businesses grew marginally compared to the growth of outstanding debt for medium-sized and large businesses. Over the 2007-22 period, outstanding debt for small, medium-sized and large firms increased by 68.2%, 116.3% and 195.0%, respectively. Over the longer 2000-22 period, outstanding debt grew, in terms of annual average, for small, medium-sized and large firms by 2.4%, 4.9% and 7.2%, respectively (see Figure 7.2). As a result, small businesses’ share of total outstanding business loans declined over the 2000-22 period.
Note: Firm size is proxied by loan authorization level. Small firms are proxied by loans with an authorization level below CAD 1 million, medium firms are proxied by loans with an authorization level between CAD 1 million and less than CAD 5 million; large firms are proxied by loans with an authorization level greater than CAD 5 million.
Source: Statistics Canada, Survey of Suppliers of Business Financing, 2000–2022; and Innovation Science and Economic Development Canada.
Supply-side survey results show that lending activity for businesses decreased in the second half of 2022 for small and medium-sized businesses and increased for large businesses. During that period, lenders disbursed approximately CAD 145 billion in new loans to large businesses. This represented a 7.4% increase in disbursals compared to the first half of 2022. Lending activity decreased for medium-sized businesses, with loan disbursals diminishing by about 4.1% and by 2.1% for small businesses. In particular, the Bank of Canada tightened monetary policy significantly in 2022, through quantitative tightening and rapid increases in its policy interest rate. The increases to the policy interest rate were the first increases since 2018 and raised the overnight rate from 0.25% in January 2022 to 4.25%, its highest level since before the 2007-2008 financial crisis, by the end of H2 2022.Total lending activity in 2022 compared to 2021 increased by 13.7% and by 15.1% for large businesses, and increased by 10.3% and 7.3% for medium-sized and small businesses, respectively.
The results of the 2022 Credit Conditions Survey showed that the request rates for debt financing slightly increased in 2022 to reach 17.7% from 16.7% recorded in 2021. The 2022 ratio of funds authorised to funds requested was 91%, close to the 2010-2021 average of 89%.
The average interest rate charged to small businesses in 2022 increased to 6.2% from 4.1% in 2021. The average business prime rate (the rate charged to the most creditworthy borrowers) increased to 4.1% in 2022 from 2.5% in 2021. The business risk premium (measured as the difference between the average small business interest rate and the business prime rate) increased to 2.1% from 1.6% in 2021. This last indicator reflects a tightening in access to financing for small businesses in Canada, from the lenders’ perspective.
Close to 62% of small businesses were asked to pledge collateral to secure their loans in 2022, in comparison with 58% in 2021.
Inflation in Canada was high and broad-based in 2022. In an effort to curb inflation, the Bank of Canada has begun quantitative tightening in April 2022. The Bank of Canada also rose substantially the policy interest rate during the year, from 0.25% in January 2022 to 4.25% in December 2022, its highest rate since 2008. Bank of Canada survey results indicate that lenders reported that overall business lending conditions tightened towards the end of the second half of 2022. Borrowers also reported a tightening of credit conditions during the same period.
Leasing
In 2022, the request rate for lease financing was 4.0%, while the approval rate has exceeded 97.4%. Request rate for lease financing reached its highest level in 2019 (13%) and has been on a downward trend since (6% in 2020 and 2021).
Equity financing
Total venture capital (VC) investment levels in Canada reached a peak of CAD 14.4 billion in 2021 followed by a decline in 2022 to CAD 9.8 billion.
Between 2021 and 2022, seed capital increased by 7.8% to reach CAD 0.7 billion, early-stage capital decreased by 25.5% reaching CAD 3.8 billion, later stage capital decreased by 18.5% reaching CAD 3.8 billion, and growth stage capital decreased by 75.1% reaching CAD 0.8 billion.
The business insolvencies trended downwards over the period 2007-2021, but it increased in 2022. Specifically, the incidence of insolvencies per thousand businesses fell from 2.14 in 2020, to 1.91 in 2021 and increased to 2.55 in 2022 The decline in insolvencies should be interpreted with caution. In particular, the pandemic support programs introduced by the Government of Canada likely helped some businesses avoid or delay insolvency. Furthermore, insolvency figures do not comprise all closures, since they do not include businesses that terminated operations without filing for bankruptcy. The business prime rate remained low until 2021. This helped keep small business financing costs low and, as a result, allowed them to maintain healthy and more manageable balance sheets. However, the business prime rose in 2022.
The 90-day delinquency rate increased significantly during the pandemic of COVID-19 from 0.48% in the fourth quarter of 2019 to 0.83% in the fourth quarter of 2020. During the same period, GDP decreased by 3%. In 2022, the 90-day delinquency rate was 0.18% in the fourth quarter of 2022, trending downward since the fourth quarter of 2020.
Source: PayNet Inc (Equifax); Statistics Canada and Innovation, Science and Economic Development Canada calculation.
The BDC, a crown corporation, has a mandate to support Canadian entrepreneurship, with a particular focus on SMEs. It offers direct lending, growth and transition capital, venture capital (VC), securitization, and advisory services. It offers financing products and advisory services that complement those available from private sector providers. It also fulfils a countercyclical role, increasing its support for Canadian entrepreneurs during times of economic turmoil. In response to the COVID-19 pandemic, the BDC increased its direct lending activities tenfold by leveraging its online financing platform and new working capital loans. As of March 31, 2022, the BDC had CAD 47.8 billion committed to 95 000 entrepreneurs. As the most active VC investor in Canada, the BDC invests both directly into firms and indirectly through external VC funds, with the objective of making Canadian VC a financially viable and attractive asset class for private sector investors and institutional investors like pension funds.
The Government of Canada has further supported the development Canada’s VC ecosystem by convening public, private, and institutional sources of financing through its Venture Capital Action Plan (VCAP) and Venture Capital Catalyst Initiative (VCCI). Taken together, the Government of Canada has invested CAD 761 million, resulting in a combined total of over CAD 3 billion in capital raised from public and private sources to help Canadian companies start-up and grow. As part of Budget 2021, funding was renewed for VCCI to build on earlier investments to ensure Canadian businesses continue to enjoy access to a globally competitive VC ecosystem capable of nurturing entrepreneurial talent and creating high-quality, middle-class jobs.
The Canada Small Business Financing Program (CSBFP) is a statutory loan-guarantee programme, which facilitates indirect lending to small businesses, especially younger, smaller, and higher risk firms, typically with low collateral, less experience, or shorter credit history. Over the past two years (2021-23), the CSBFP has averaged over CAD 1.3 billion per year in indirect financing and, with recent legislative and regulatory enhancements, is expected to increase annual financing by CAD 560 million. This additional financing will support the needs of more growth-oriented firms by providing eligibility for investments in intangible assets and working capital.
Through Budget 2021 and 2022, the government outlined action to improve access to financing for small businesses by expanding the CSBFP. In June 2021, the Budget Implementation Act made amendments to the Canada Small Business Financing Act to allow not-for-profit, charitable, and religious enterprises as eligible businesses. In July 2022, amendments to the Canada Small Business Financing Regulations came into force to introduce a line-of-credit financing option, increase loan amounts, and to expand loan-class eligibility to include the financing of intangible assets, like intellectual property (e.g., patents, copyrights, trademarks), and working capital.
Futurpreneur Canada, a not-for-profit organisation which provides financing, mentoring, and business support tools to young entrepreneurs, received CAD 38 million in funding over five years, starting in 2019-20, to continue its support of the next generation of entrepreneurs. The organisation provides young entrepreneurs between the ages of 18 and 39 up to CAD 20 000 in start-up loans for flexible three- to five-year terms, with compulsory mentoring lasting a minimum of two years. Futurpreneur loan recipients can receive an additional CAD 40 000 in loans from BDC. Futurpreneur has had a focus on supporting equity-deserving young entrepreneurs and in 2021-22, 44% of the business they supported were women-led, 17% had Black founders and 5% had Indigenous founders. Through their Black Entrepreneur Startup Program and Indigenous Entrepreneur Startup Program, the organisation continues to support young, diverse entrepreneurs across Canada.
Supporting women entrepreneurs continues to be one of the key focus areas for the Government of Canada. The Women Entrepreneurship Strategy (WES) is a whole-of-government approach to increasing women-owned businesses’ access to the financing, talent, networks, and expertise that they need to start-up, scale-up, and access new markets. The WES represents nearly CAD 7 billion in investments and commitments, including an investment of CAD 146.9 million in 2021. This support is providing affordable financing while strengthening capacity within the entrepreneurship ecosystem. As part of the Strategy, WES partners including BDC and EDC have set ambitious new support targets.
The Government of Canada has made investments of up to CAD 265 million in collaboration with the BDC to help thousands of Black business owners and entrepreneurs across the country grow their businesses. The Black Entrepreneurship Program (BEP) has three main components: CAD 100 million for the National Ecosystem Fund to support not-for-profit Black-led business organisations across the country in their capacity to provide support, mentorship, financial planning, and business training for Black entrepreneurs; CAD 5 million for the Knowledge hub to conduct research on Black entrepreneurship in Canada and to help identify barriers to success and opportunities for growth; and, the Black Entrepreneurship Loan Fund is an investment of CAD 160 million (CAD 30 million from the Government of Canada, CAD 130 million from the BDC) to support Black business owners and entrepreneurs. The Loan Fund provides loans of up to CAD 250 000 to Black business owners and entrepreneurs across the country to start, build and grow their businesses.
The Aboriginal Entrepreneurship Program provides support for First Nations, Inuit, and Métis Nation entrepreneurs by lowering the cost of business financing, providing equity, and offering business support services. The programme helps Indigenous entrepreneurs access affordable loans to start and grow their businesses. Additional Indigenous entrepreneurship support include: the CAD 150-million Indigenous Growth Fund, launched by the National Aboriginal Capital Corporations Association alongside the BDC, to help Indigenous small businesses attract investment and take on more ambitious projects; and the BDC 's Indigenous Banking loan, which provides financing tailored to Indigenous entrepreneurs.
In addition, the Government of Canada’s launched Canada’s Export Diversification Strategy in Fall of 2018. In total, the Export Diversification Strategy is a CAD 1.1 billion investment over six years, which aims to help Canadian businesses access new markets and increase Canada’s overseas exports by 50% by 2025. It is focused on investing in infrastructure, providing businesses with resources to execute their export plans and enhancing trade services, including targeted support to underrepresented groups in trade. This includes enhancements to Canada’s Trade Commissioner Service (TCS), which offers free key services to Canadian businesses and has a majority SME client base. As part of these enhancements, the TCS has strengthened its service offerings related to growing areas of trade that are increasingly important to Canadian SMEs, such as digital, e-commerce and intellectual property. The Strategy includes providing CAD 50 million over five years to help SMEs explore new export opportunities, as well as CAD 100 million over six years towards CanExport and related programs to help SMEs looking to reach new markets overseas.
Established in 2016, the Trade Commissioner Service’s CanExport provides CAD 33 million per year in grants and contributions to Canadian SMEs, innovators, associations, and communities to help them diversify exports and expand their international footprint. In line with Canada’s Trade Export Diversification Strategy, the CanExport funding program seeks not only to diversify where Canada exports, but also who exports. To this end, the program launched a dedicated Concierge Service for women and Indigenous entrepreneurs, to encourage more diversity in its applicants, and to better support those who have been disproportionately impacted by the COVID-19 crisis. CanExport also allows companies participating in women-focused trade missions organized by Global Affairs Canada to submit a project under the CAD 20 000 budget limit for consideration.
Source: Table 7.1
References
Bank of Canada, Senior Loan Officer Survey,
www.bankofcanada.ca/publications-research/periodicals/slos/
Bank of Canada, Business Outlook Survey,
www.bankofcanada.ca/publications/bos/
Statistics Canada, Biannual Survey of Suppliers of Business Financing, http://www.ic.gc.ca/eic/site/061.nsf/eng/h_01569.html
Innovation, Science and Economic Development Canada, Credit Conditions Survey,
http://www.ic.gc.ca/eic/site/061.nsf/eng/h_02192.html
Statistics Canada, Survey on Financing and Growth of Small and Medium Enterprises, http://www.ic.gc.ca/eic/site/061.nsf/eng/h_02774.html
PayNet Inc. (Equifax), Canadian Business Delinquency Index,
http://www.paynetonline.ca/issues-and-solutions/all-paynet-products/paynet-canadian-business-delinquency-index-cbdi/
Note
← 1. The Agriculture sector is excluded.