copy the linklink copied!8. Canada
copy the linklink copied!Key facts on SME financing
In 2018, Canadian small businesses (1-99 employees) constituted 98.0% of all businesses and employed 8.4 million individuals, or 69.8% of the private sector labour force.
Supply-side survey data show that outstanding debt held by all businesses increased in 2018 to CAD 898 billion. Lending to small businesses increased to CAD 105.1 billion. Small businesses’ share of total outstanding business loans was 11.7%.
Small business credit conditions have remained relatively stable since 2011. The average interest rate charged to small businesses in 2018 increased to 5.7% with an average business prime rate of 3.6%. The business risk premium reverted to its 2014 level of 2.1%, the lowest level since the 2009 recession reflecting an easing in access to financing for small businesses in Canada.
The small business 90-day loan delinquency rate has returned to pre-recession levels. In 2018, the 90-day loan delinquency rate reached 0.55%.
Total venture capital (VC) investment levels in Canada has had over eight straight years of growth reaching CAD 3.8 billion in 2017 followed by a modest decline in 2018 to CAD 3.7 billion. These are the highest levels of VC investment recorded in Canada since 2001.
In 2018-19, the Government of Canada continued its commitment to support entrepreneurship and the growth of SMEs.
The Business Development Bank of Canada (BDC), a crown corporation, with its mandate to support Canadian entrepreneurship had CAD 31 billion in financing, as of March 31, 2018, committed to 56 000 clients operating across Canada.
The government of Canada has also made CAD 450 million available for the Venture Capital Catalyst Initiative (VCCI) to increase late-stage venture capital available to Canadian entrepreneurs. VCCI will inject more than CAD 1.5 billion into the Canadian innovation capital market by leveraging funds from the public sector and private sector.
Futurpreneur Canada, a not-for-profit organisation, which provides financing, mentoring, and business support tools to young entrepreneurs, also received CAD 38 million in funding over five years, starting in 2019-20 to continue its support of Canada’s next generation of entrepreneurs.
Supporting women entrepreneurs continues to be one of the key focus areas for the government of Canada. In Budget 2018, the government announced approximately CAD 2 billion investment in the first Women Entrepreneurship Strategy. It provides support by increasing access to financing, talent, networks, and expertise to encourage more women to start and grow their businesses, as well as to work with them to move into exporting.
copy the linklink copied!SMEs in the national economy
In 2018, Canadian small businesses (1-99 employees) constituted 98.0% of all businesses and employed 8.4 million individuals, representing 69.8% of the private sector labour force. 76.8% of the private sector labour force was employed in the services sector and 23.2% in the goods sector.
copy the linklink copied!SME lending
Figure 8.1 shows the major suppliers of small business financing in 2018. Most small business financing (83.9%) was provided by banks (domestic and foreign), credit unions and caisses populaires. The remainder came from finance companies, financial funds and insurance companies.
Source: Statistics Canada, Survey of Suppliers of Business Financing 2018.
Supply-side survey data show that outstanding debt to all businesses increased by 9.0% in 2018 to CAD 898 billion, while lending to small businesses increased by 2.5%, to CAD 105.1 billion (Figure 8.2). Small businesses’ share of total outstanding business loans decreased by 0.7 percentage points, to 11.7% in 2018 - its lowest level since 2000. This decline is explained by the fact that outstanding debt for small businesses grew slower than for medium-sized and large businesses. Over the 2007-18 period, outstanding debt for small, medium-sized and large firms increased by 25.9%, 70.4% and 109.1%, respectively. Over the longer 2000-18 period, outstanding debt grew, in terms of annual average, for small, medium-sized and large firms by 1.3%, 4.7% and 6.8%, respectively (see Figure 8.2). As a result, SME’s share of total outstanding business loans declined over the 2000-18 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, 2000–2018; and Innovation Science and Economic Development Canada.
Supply-side survey results show that lending activity for businesses of all sizes increased in both halves of 2018. In the second half of 2018, lenders disbursed approximately CAD 105 billion in new loans to large businesses. This represented a 7.5 increase in disbursals compared to the first half of 2018. Similarly, lending activity increased for medium-sized businesses, with loan disbursals rising by about 0.5% and by 2.0% for small businesses. Total lending activity in 2018 compared to 2017 increased by 15.3% and by 17.8%, 8.5% and 7.8% for large, medium-sized and small businesses, respectively.
copy the linklink copied!Credit conditions
The results of the 2018 Credit Conditions Survey showed that credit conditions continued to remain stable in 2018, as they have been since 2011, after having recovered from the 2009 recession. Request rates for debt financing slightly increased in 2018 to reach 27% from 26% recorded in 2016 and 2017. The 2018 ratio of funds authorised to funds requested was 88% close to the 2010-2017 average of 89%.
The average interest rate charged to small businesses in 2018 increased to 5.7% from 5.2% in 2017. The average business prime rate (the rate charged to the most creditworthy borrowers), that remained at 3.0% during the period 2011-14, increased to 3.6% in 2018 from 2.9% in 2017. The business risk premium (measured as the difference between the average small business interest rate and the business prime rate) reverted to its 2014 level of 2.1%, the lowest level, recorded for a second time, since the 2009 recession. This last indicator reflects an easing in access to financing for small businesses in Canada, from the lenders perspective.
Close to 70% of small businesses were asked to pledge collateral to secure their loans in 2018.
copy the linklink copied!Alternative sources of SME financing
Leasing
Since 2011, the request rate for lease financing has varied between 7% and 11%, while the approval rate has exceeded 94% every year.
Equity financing
Total venture capital (VC) investment levels in Canada has had over eight straight years of growth reaching CAD 3.8 billion in 2017 followed by a modest decline in 2018 to CAD 3.7 billion. These are the highest levels of VC investment recorded in Canada since 2001.
Between 2017 and 2018, seed capital increased by 28.4% to reach CAD 0.3 billion, early stage capital decreased by 21.7% reaching CAD 1.5 billion and later stage capital increased by 17.5% reaching CAD 1.8 billion.
copy the linklink copied!Other indicators
The declining trend in business insolvencies continued into 2018. Specifically, the incidence of insolvencies per thousand businesses fell from 2.84 in 2017, to 2.79 in 2018. The business prime rate remains low. This helps keep small business financing costs low and, as a result, allows them to maintain healthy and more manageable balance sheets.
The small business 90-day loan delinquency rate has returned to pre-recession levels. In 2018, the 90-day loan delinquency rate reached 0.55%, lower than the 2007 level of 0.71%. Specifically, the 90-day delinquency rate rose from 0.7% in the first quarter of 2007 to 1.2% in the third quarter of 2008, and then as the economy contracted, reached a high of 1.6% in the second and third quarter of 2009. The 90-day loan delinquency rate declined to 0.6% in the fourth quarter of 2010 as the economy recovered and continued to decline slowly, reaching 0.4% by the end of 2014. After increasing in 2015, the 90-day loan delinquency rate decreased to 0.5% at the end of 2018.
Source: PayNet Inc; Statistics Canada and Innovation Science and Economic Development Canada calculation.
copy the linklink copied!Government policy response
In 2018-19, the government of Canada continued its commitment to support entrepreneurship and the growth of small and medium-sized enterprises (SMEs).
The Business Development Bank of Canada (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, securitization and advisory services. It offers financing products and advisory services that complement those available from private sector providers. As of fiscal 2018, BDC had CAD 31 billion committed to 56 000 clients operating in all industries and located across Canada.
Total venture capital (VC) investment levels in Canada has had over eight straight years of growth reaching CAD 3.8 billion in 2017 followed by a modest decline in 2018 to CAD 3.7 billion. These are the highest levels of VC investment recorded in Canada since 2001. This growth has in part been attributed to the successful Government Venture Capital Action Plan policy launched in 2012, the ongoing direct and indirect VC investments placed by the BDC with a VC portfolio of approximately CAD 1.3 billion, as well as to a maturing of the Canadian VC industry.
In addition of this, recent Government of Canada Budgets have made CAD 450 million available for the Venture Capital Catalyst Initiative (VCCI) to increase late-stage venture capital available to Canadian entrepreneurs. It will build a VC portfolio through three streams: large funds-of-funds, alternative models that strengthen and broaden the Canadian VC ecosystem, and VC funds investing primarily in the clean technology sector. VCCI will inject more than CAD 1.5 billion into the Canadian innovation capital market by leveraging funds from the public sector and private sector.
The Strategic Innovation Fund (SIF) was introduced in Budget 2017 to consolidate and simplify existing innovation programming. Total SIF funding from all sources is more than CAD 2 billion, with the funds spread out over several years. The Strategic Innovation Fund's objective is to spur innovation that produces economic and social benefits for Canadians. The program has five streams, each with its own precise objective:
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Stream 1: Encourage R&D that will accelerate technology transfer and commercialization of innovative products, processes and services;
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Stream 2: Facilitate the growth and expansion of firms in Canada;
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Stream 3: Attract and retain large scale investments to Canada;
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Stream 4: Advance industrial research, development and technology demonstration through collaboration between the private sector, researchers and non-profit organizations; and
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Stream 5: Support large-scale, national innovation ecosystems through high impact collaborations across Canada.
To complement initiatives like SIF, the government strengthened the programming of its regional development agencies to place a greater emphasis on business scale-up and productivity and on regional innovation ecosystems with the Regional Growth through Innovation (REGI) initiative. REGI aligns with national objectives while ensuring that the regional development agencies’ funding programs are tailored to fit regional needs. Under REGI, investments will focus on two new program streams. The first will look to enhance business scale-up support for both domestic and global market growth. The second focuses on developing regional innovation ecosystems.
The Canada Small Business Financing Program continues to improve access to financing for small businesses. Over the past several years, there have been a number of changes to enhance the programme’s appeal to lenders and better meet the needs of small businesses. As a result, the programme has experienced an increase in loan values and volumes. In 2018-19, the programme registered over 6 000 loans valued at CAD 1.3 billion. In 2019-20, the programme will be conducting a 5-year comprehensive review, which will include recommendations to continue improving access to finance moving forward.
Futurpreneur Canada, a not-for-profit organisation, which provides financing, mentoring, and business support tools to young entrepreneurs, also received CAD 38 million in funding over five years, starting in 2019-20 to continue its support of Canada’s 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.
Supporting women entrepreneurs continues to be one of the key focus areas for the government of Canada. In Budget 2018, the government announced approximately CAD 2 billion investment in the first Women Entrepreneurship Strategy. It provides support by increasing access to financing, talent, networks, and expertise to encourage more women to start and grow their businesses, as well as to work with them to move into exporting. Canada’s target is to double the number of women majority-owned small and medium sized enterprises by 2025. As part of the Strategy, the BDC is providing CAD 1.4 billion in financing over three years to majority women-owned businesses, and the BDC’s Women in Technology Venture Fund is committing CAD 200 million over five years to women-led technology companies. This funding is complemented by other federal government initiatives, including CAD 105 million for nationally coordinated, regionally tailored investments to help women entrepreneurs and strengthen the regional innovation ecosystems that support them.
As well, the Government of Canada’s Fall Economic Statement, released in November 2018, announced the intention to launch Canada’s Export Diversification Strategy. In total, the Export Diversification Strategy will invest CAD 1.1 billion over six years, starting in 2018-2019, which will continue to ensure that the government’s programs and approaches support SMEs, to make the most of new opportunities after trade agreements are signed. It will focus on investing in infrastructure, providing businesses with resources to execute their export plans and enhancing trade services. As part of this Strategy, the Government will provide CAD 10 million over three years to help mobilize SMEs to export through awareness raising and export capacity building activities. In addition, the government will provide CAD 50 million over five years to help SMEs explore new export opportunities. The Strategy also includes CAD 100 million over six years towards CanExport and related programs to help SMEs looking to reach new markets overseas. This is in addition to CanExport’s initial CAD 50 million over five years, which was launched in 2016.
Also, in April 2018, Canada unveiled its new Intellectual Property Strategy. The government of Canada is committing CAD 85.3 million over five years to make sure that Canadian businesses, creators, entrepreneurs and innovators have access to the best possible IP resources through IP awareness, education and advice, strategic IP tools for growth, and IP legislation. The Strategy includes a patent collective pilot project, a new team of IP advisors to guide programme recipients, an IP marketplace, and changes to IP registration and enforcement.
Source: See Table 8.5.
References
Bank of Canada, Senior Loan Officer Survey,
www.bankofcanada.ca/publications-research/periodicals/slos/
Statistics Canada, Biannual Survey of Suppliers of Business Financing, http://www.ic.gc.ca/eic/site/061.nsf/eng/h_01569.html
Industry 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., Canadian Business Delinquency Index,
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