Financing Innovative Small and Medium-Sized Enterprises in Canada

Table of Contents

• I. Introduction
• II. Literature Review
• III. Data
• IV. Results and Analysis
  • a) Accessing Financing
  • b) Financing Terms and Conditions
• V. Multivariate Analysis
• VI. Summary and Conclusions
• References
• Appendix

Acknowledgements

The assistance of many people was invaluable to the production of this research paper. My thanks go to Allan Riding from Telfer School of Management at the University of Ottawa for his comments on the multivariate analysis. Special thanks go to Denis Martel and Richard Archambault from Industry Canada for their feedback and suggestions.

Abstract

This paper examines whether the financing activities and experiences of innovative small and medium-sized (SMEs) in accessing financing are different from those of non-innovative SMEs. This paper also examines whether innovative SMEs face different financing terms and conditions than non-innovative SMEs seeking financing. After controlling for firm category, size, age of the owner and industry sector using logistic and linear regression models, results show that innovative SMEs had greater financing needs than non-innovative ones but were less successful in obtaining the financing requested. The results also show that innovative SMEs face more constraining financing terms and conditions than non-innovative SMEs. In general, innovative SMEs paid higher interest rates and got shorter loan terms.

I. Introduction

Innovation is crucial for maintaining firm competitiveness and increasing standards of living. Financing innovation can be difficult as innovative activities and assets are usually intangible, thereby making assessment of their monetary values difficult. In addition, innovative firms are usually considered more risky as their chances of success are more difficult to assess. This paper describes financing activities of innovative small and medium-sized enterprises (SMEs) in Canada and provides a comparison with non-innovative SMEs. In this analysis, research and development (R&D) intensity is used as a measure of innovation. SMEs that spend more than 20 percent of their total investment expenditures on R&D are defined as innovative firms; those that spend 20 percent or less of their total investment expenditures on R&D are defined as non-innovative SMEs.

There exists a substantial body of research that addresses the topic of innovation; however, there is little research on financing innovative SMEs. Thus, studying financing of innovative SMEs will provide valuable information on experiences, instruments used and financing conditions.

The paper uses the comprehensive database of the Survey on Financing of Small and Medium Enterprises. This survey was launched in 2000 by Statistics Canada in partnership with Industry Canada and Finance Canada and is conducted every three years. It measures the demand for and sources of financing of Canadian SMEs, including data on the application process, firm profiles and demographic characteristics of SMEs ownership. The results presented in this paper are based on the data of the Survey on Financing of Small and Medium Enterprises, 2004, which include 13 042 observations.

This paper tries to address the following research questions:

1. Are the financing activities and experiences of innovative SMEs in accessing financing different from those of non-innovative SMEs?
2. Do innovative SMEs face different financing terms and conditions than non-innovative SMEs seeking financing?

To answer these questions, this paper is organised as follows. Section II summarizes the related literature on the capital structure and financing experience of innovative firms. Section III discusses the data and methodology employed. Section IV describes the empirical results. Section V presents the multivariate analysis. Section VI summarizes and concludes the paper.

II. Literature Review

Many studies have investigated the capital structure of firms. Ben-Ari (2007) finds that knowledge-intensive firms tend to rely largely on equity financing. Baldwin and Johnson (1995) find that innovative firms rely more heavily on outside sources, such as venture capital, public equity, and parent companies and affiliates for sources of financing and rely less heavily on suppliers and financial institutions. Using data on publicly traded United Kingdom (U.K.) firms, Aghion et al. (2004) investigate whether financing choices differ systematically with research and development (R&D) intensity. The authors find a nonlinear relationship with the debt/asset ratio: firms that report positive but low R&D use more debt finance than firms that report no R&D. The use of debt finance falls with R&D intensity among those firms that report R&D. The authors find a simpler relationship with the probability of issuing new equity: firms that report R&D are more likely to raise funds by issuing shares than firms that report no R&D, and this probability increases with R&D intensity. Baldwin, Gellatly and Gaudreault (2002) suggest that the relationship between knowledge-intensity and capital structure is bi-directional. The authors find that, after controlling for a range of industry- and firm-level covariates, firms that devote a higher percentage of their investment expenditure to R&D also exhibit less debt-intensive structures. Conversely, debt-intensive structures also act to constrain investments in R&D.

The question of whether the financing experiences of innovative firms differ from those of other firms is investigated in several studies. Westhead and Storey (1997) develop a variety of regression equations using information from a survey of 171 SMEs located on and off science parks in the U.K. The equations regress the degree of difficulty in obtaining finance on a wide range of firm characteristics, including: the extent to which the firm is high-tech (R&D expenditure in relation to turnover, the number of qualified scientists engaged in R&D in relation to total employees, and the number of patents taken out in the last year); the age of the firm; legal status; industrial sector; growth rate; profitability; and location. The authors conclude that firms with relatively high R&D expenditures are more likely to report continuing financing constraints. Based on data from a sample of small firms in Northern Britain that applied for a bank loan over the period 1998–2001, Freel (2007) records that the proportion of loan successfully applied for and estimates a series of tobit models using a number of proxy measures for innovation (in terms of inputs, outputs, and commercial significance to the firm). Results show that the most innovative firms are less successful in obtaining loans than their less innovative peers.

The literature has shown that capital structure and financing experiences of more innovative firms are different from those of less innovative firms. However, to our knowledge, no study in the economic literature has used R&D expenditure in relation to total investment expenditure to define innovative firms. Therefore, in this paper, 20 percent of total investment expenditures spent on R&D is used as a cut-off to define innovative and non-innovative firms. We will see if the results are similar to those presented in the literature using other proxy measures for innovation.

III. Data

The cross-sectional data used in this report are taken from Statistics Canada's Survey on Financing of Small and Medium Enterprises, 2004, a joint initiative of Statistics Canada, Finance Canada and Industry Canada. It was conducted between September 2004 and March 2005. The final sampling frame contained 1 939 780 enterprises. After adjusting the initial sample weights to account for refusals, non-responses and those enterprises that could not be contacted, the total target population count was 1 357 348 enterprises. There were 13 042 SMEs that responded to the survey. Statistics Canada considered this sample size to be large enough to reflect all the SMEs in Canada. The survey was comprised of two parts. The first part consisted of a computer-aided telephone interview of primary owners of the business in the sampling frame. This portion of the survey collected extensive firm and owner demographic information as well as data regarding the firms' most recent application for financing. Estimates of loan outcomes were generated from responses obtained from 13 042 SMEs. Estimates related to the second part of the survey (financial statement information) were generated from fax-back responses to a paper questionnaire obtained from 3500 of the 13 042 respondents.

The survey distinguishes innovative firms (those that spent more than 20 percent of their investment expenditures on R&D). Table 1 presents the population of innovative and non-innovative SMEs.

The unweighted sample consists of 13 042 observations. Excluding non-responses to the question about percentage of total investment expenditure was devoted to R&D, there were 8112 respondents remaining: 425 innovative SMEs and 7687 non-innovative ones. The weighted sample consists of 1 357 348 observations: 57 009 innovative SMEs and 1 300 339 non-innovative SMEs. The weighted sample is used in this report as it reflects the whole economy.

Table 2 illustrates the differences in characteristics between innovative SMEs and non-innovative SMEs.

IV. Results and Analysis

This section presents findings on the financing activities and experiences of innovative SMEs and non-innovative SMEs. Part a) focuses on accessing financing and Part b) looks at financing terms and conditions for SMEs.

a) Accessing Financing

Innovative SMEs were more likely to seek external financing

Innovative SMEs have greater financing needs than other SMEs. As shown in Figure 1, innovative SMEs were more likely than non-innovative SMEs to seek external financing with 34.5 percent of innovative SMEs seeking external financing compared with only 23.2 percent of non-innovative SMEs.

Figure 1: Percentage of SMEs that sought external financing

Source: Statistics Canada, Survey on Financing of Small and Medium Enterprises, 2004

Innovative SMEs were more likely to request debt financing

Among all types of external financing, as shown in Figure 2, innovative SMEs, like non-innovative SMEs, financed their investments through debt more than any other financial instrument with 30.8 percent of innovative SMEs requesting debt financing compared with 18.0 percent of non-innovative SMEs.

Figure 2: Type of financing

Source: Statistics Canada, Survey on Financing of Small and Medium Enterprises, 2004

It is worth noting that innovative SMEs were also using other financial instruments to a greater extent than non-innovative SMEs. Innovative SMEs were about four times more likely to request equity financing than non-innovative SMEs at 4.9 percent and 1.1 percent respectively. Equity financing encompasses money from friends or relatives of the business owner, employees of the business, business angels, venture capital firms, and crown corporations or government institutions. Among those innovative SMEs that sought equity financing, 25.8 percent were start-ups^{Footnote 1} and 65.1 percent had no full-time employees.

There might be two main reasons why more innovative SMEs sought equity financing. First, innovative SMEs tend to be younger than non-innovative SMEs as there were more start-ups among innovative SMEs than non-innovative SMEs (22.1 percent versus 15.2 percent). In the beginning, a firm is unlikely to have sufficient collateral and uncertain prospects to generate the income required to pay back the loan. Start-ups among innovative SMEs had higher request rates (84.6 percent) for debt financing than their non-innovative counterparts (77.9 percent). However, start-ups among innovative SMEs also had lower approval rates (62.5 percent) for debt financing than their non-innovative counterparts (70.6 percent). The second reason more innovative SMEs sought equity financing might be that financial institutions are unwilling to lend to innovative SMEs because they represent a higher risk than non-innovative SMEs, so innovative SMEs have to find other ways to finance their business.

Innovative SMEs were more likely to be turned down by credit suppliers

As mentioned earlier, innovative SMEs were more likely to request debt financing; however, they were less successful in obtaining loans than non-innovative SMEs. As shown in Figure 3, only 54.2 percent of innovative SMEs that requested debt financing received authorization for credit compared with 83.0 percent of non-innovative SMEs. Innovative SMEs were about twice as likely to be turned down by credit suppliers as non-innovative SMEs (24.5 percent versus 11.8 percent). Moreover, innovative SMEs were about six times more likely to have their loan application still under review at the time the survey was conducted. These findings are consistent with the view that financial institutions consider innovative SMEs more risky than non-innovative SMEs. Higher turndown rates and applications still under review suggest that financing requests from innovative firms may be more difficult to assess and result in lower approval rates.

Figure 3: Authorised and unauthorised debt financing request^{Footnote 2}

Source: Statistics Canada, Survey on Financing of Small and Medium Enterprises, 2004

There were more discouraged borrowers among innovative SMEs

As shown in Figure 4, more innovative SMEs were discouraged (5.3 percent) than non-innovative SMEs (3.9 percent). Discouraged borrowers are those firms that are worthy of receiving financing, but decide not to apply because they think they would be turned down. The higher rate of discouraged borrowers may be due to the fact that some innovative SMEs hear that similar firms have had difficulty obtaining financing, so they refrain from applying for financing.

Figure 4: Rate of discouraged borrowers^{Footnote 3}

Source: Statistics Canada, Survey on Financing of Small and Medium Enterprises, 2004

Innovative SMEs tended to rely mostly on chartered banks for debt financing

Close to 80 percent of innovative SMEs approached chartered banks to request new or additional credit compared with approximately 60 percent of non-innovative SMEs (see Figure 5).

Figure 5: Type of financial institution approached

Source: Statistics Canada, Survey on Financing of Small and Medium Enterprises, 2004

As a result, fewer innovative SMEs approached credit unions or Caisses populaires (primarily found in the province of Quebec in Canada, francophone equivalent of a credit union) for new or additional credit than non-innovative SMEs (15.1 percent versus 24.0 percent). Results also show that more innovative SMEs chose the transactional approach and fewer the relational approach to obtain financing than non-innovative SMEs.^{Footnote 4}

Innovative SMEs were less likely to be approved for debt financing by credit unions or Caisses populaires than chartered banks

As mentioned earlier, innovative SMEs were less successful in obtaining loans than non-innovative SMEs. Moreover, Figure 6 indicates that credit unions or Caisses populaires were less likely to approve debt requested by innovative SMEs than chartered banks (33.3 percent versus 56.8 percent). It is worth noting that the approval rates did not differ much between chartered banks and credit unions or Caisses populaires for non-innovative SMEs at 81.3 percent and 83.3 percent respectively.

Figure 6: Debt approval rate

Source: Statistics Canada, Survey on Financing of Small and Medium Enterprises, 2004

A new line of credit was the most popular credit instrument choice among innovative SMEs

As shown in Figure 7, more than 60 percent of innovative SMEs requested a new line of credit from credit suppliers compared with 32.9 percent of non-innovative SMEs. A similar proportion of non-innovative SMEs requested a term loan (33.3 percent). Innovative SMEs, on the other hand, were about 1.5 times less likely to request term loans, 4.7 times less likely to request mortgage loans and 1.3 times less likely to request an increase in the credit limit of current lines of credits than non-innovative SMEs.

Figure 7: Type of loan requested

Source: Statistics Canada, Survey on Financing of Small and Medium Enterprises, 2004

Close to 80 percent of innovative SMEs intended to use the financing requested for working and operating capital

Working capital is the backbone of any business. It is used for financing the day-to-day operations of the business, such as the purchase of inventory or paying suppliers. Without enough working capital, business could lose their flexibility and credibility with financial institutions, suppliers and customers. Figure 8 indicates that 78.9 percent of innovative SMEs intended to use the financing requested for working and operating capital compared with 54.6 percent of non-innovative SMEs. A similar proportion of non-innovative SMEs intended to use the financing requested for fixed assets (50.3 percent). It is worth noting that innovative SMEs were about six times more likely to use the financing requested for research and development than non-innovative SMEs (16.6 percent versus 2.8 percent).

Figure 8: Purpose of debt financing

Source: Statistics Canada, Survey on Financing of Small and Medium Enterprises, 2004

Equity financing accounted for the highest share of the total financing authorised for innovative SMEs

Innovative SMEs received higher average amounts of lease and equity financing but lower average amounts of debt financing than non-innovative ones (Table 3).

It is worth noting that for each financing instrument, the median amount was much lower than the average amount. This indicates that a small number of firms received large amounts of financing (see the maximum amount received by innovative and non-innovative SMEs for each type of financing instrument), which brings the average up. For example, the median amount of debt financing authorised for innovative SMEs was CAD 20 000, indicating that 50 percent of innovative SMEs received less than CAD 20 000 and 50 percent of innovative SMEs received more than CAN$ 20 000, whereas the average amount of debt financing authorised for innovative SMEs was CAD 51 181. The average amount of equity financing authorized for innovative SMEs did not differ much from that authorized for non-innovative SMEs (CAN$ 466 315 versus CAN$ 447 183); however, the median amount of equity financing for innovative SMEs was only about one-third of the median for non-innovative SMEs. This finding could, a priori, be somewhat surprising given, as noted previously, that innovative SMEs use other financing instruments to a greater extent than non-innovative SMEs. However, the lower amount of equity raised can be explained by the fact that there are more start-ups among innovative SMEs, and they rely more on money from friends and relatives for their financing needs.

As illustrated in Figure 9, debt financing accounted for the highest share of the total financing authorised for non-innovative SMEs, but equity financing accounted for the highest share for innovative SMEs. Lease financing accounted for 22.8. percent of the total financing authorised for innovative SMEs compared with 8.0 percent for non-innovative SMEs. Although the average amount of equity financing received by innovative and non-innovative SMEs did not differ much (CAD 466 315 versus CAD 447 183), the amount of equity financing received by innovative SMEs represented 44.3 percent of the total financing received, whereas the amount of equity financing received by non-innovative SMEs represented only 8.7 percent of the total financing received. This indicates that innovative SMEs are more dependent on equity financing than non-innovative SMEs.

Figure 9: Share of authorised financing

Source: Statistics Canada, Survey on Financing of Small and Medium Enterprises, 2004

Innovative SMEs were three times more likely to request equity financing from a venture capital firm

Figure 10 shows that innovative SMEs tended to approach business angels and friends/relatives to request equity financing. They were about three times more likely to approach a venture capital firm than non-innovative SMEs. Typically, innovative SMEs have few physical assets, often base their strategic plans on new technologies and have higher than average business risks. Because of these high risks, it is difficult for innovative SMEs to access debt financing. Venture capital firms, on the other hand, finance high-risk firms in which traditional financial institutions are unwilling to invest. Although venture capital involves a time horizon of many years and many failures, the potential returns on a winning venture portfolio are very high. Moreover, there are more start-ups among innovative SMEs than non-innovative SMEs and Canada's venture capital firms emphasize early-stage financing.^{Footnote 5} The amount of financing provided by angel investors and venture capital firms represented 90 percent of total equity financing received by innovative SMEs compared with only 42.3 percent received by non-innovative SMEs.

Figure 10: Type of financier approached for equity financing^{Footnote 6}

Source: Statistics Canada, Survey on Financing of Small and Medium Enterprises, 2004

b) Financing Terms and Conditions

Financing terms and conditions of innovative SMEs reflect their high-risk profile: loan terms were shorter and interest rates were higher

Table 4 shows the average interest rate and the average length of term of authorised credit that Canadian SMEs had in 2004. Innovative SMEs paid higher interest rates for short-term loans, term loans, new lines of credit and increases in the credit limit of current lines of credit. For term loans, innovative SMEs had slightly higher interest rates for shorter terms (46 months versus 62 months). A better comparison can be made by adjusting the length of loan terms to the same period, to 60 months. This adjustment shows that the interest rate paid by innovative SMEs was 0.5 percentage points higher than that paid by non-innovative SMEs (6.8 percent versus. 6.3 percent).

Fewer innovative SMEs were requested to offer collateral or to meet co-signing requirements as a condition of obtaining financing

Fewer innovative SMEs were requested by credit suppliers to provide business or personal assets as collateral to obtain financing. As shown in Figure 11, 31.1 percent of innovative SMEs were requested to provide business assets as collateral to obtain financing, compared with 42.3 percent of non-innovative SMEs. Similarly, 33.1 percent of innovative SMEs were asked to provide personal assets compared with 42.6 percent of non-innovative SMEs. These findings could reflect the fact that innovative SMEs often lack collateral that can be used to secure bank loans. Since financing assets pledged as collateral is less risky, innovative SMEs have more difficulties in obtaining financing.

Figure 11: Type of collateral requested

Source: Statistics Canada, Survey on Financing of Small and Medium Enterprises, 2004

Over 50 percent of innovative SMEs were asked to provide business financial statements or formal applications for credit applications

A business financial statement was the most frequently requested document for a credit application. As Figure 12 shows, 55.9 percent of innovative SMEs were requested to provide a business financial statement for credit applications compared with 61.8 percent of non-innovative SMEs. Formal applications were also a common document requested by lenders: with 56.0 percent of innovative SMEs requested to provide a formal application for credit compared with 52.9 percent of non-innovative SMEs.

Figure 12: Documentation required as part of the application process

Source: Statistics Canada, Survey on Financing of Small and Medium Enterprises, 2004

V. Multivariate Analysis

The descriptive analysis presented so far has shown some differences between innovative and non-innovative SMEs in terms of financing activities, experiences, and terms and conditions. To investigate the differences in more depth, several research approaches were used: binary logistic regression model, multinomial logistic regression model and linear regression model.

It has been shown that innovative SMEs were more likely to request external financing than non-innovative SMEs. Moreover, innovative SMEs were more likely to request debt and equity financing than non-innovative ones. However, innovative SMEs were less successful in obtaining the loans. Four binary logistic models were employed in order to investigate if the differences were statistically significant after controlling for some firm-specific characteristics such as firm size and sector. The reason why the binary logistic models were used was because the dependent variables were dummy variables. For example, in the first binary logistic model, the dependent variable was whether (=1) or not (=0) a respondent had requested external financing. In the second binary logistic model, the dependent variable was whether (=1) or not (=0) a respondent has applied for debt financing. In the third binary logistic model, the dependent variable was whether (=1) or not (=0) a respondent had applied for equity financing. In the last binary logistic model, the dependent variable was whether (=1) or not (=0) a respondent got credit approved. The firm-specific characteristics used were: firm status (a dummy variable 1=start-up and 0=non-start-up); firm size (a dummy variable 1=number of full-time employees greater than or equal to 0 and 0=number of full-time employees fewer than 5); firm's growth intention (1=firm has growth intention and 0=firm has no growth intention); industrial sector; number of years with the financial institution; and the type of firm (1=innovative and 0=non-innovative).

In general, the results were reflective of those already presented in the descriptive analysis, as shown in Table 5. The results from Model 1 indicates that innovative SMEs were 1.68 times more likely to request external financing than non-innovative ones, after controlling for the firm-specific characteristics. Moreover, Model 2 and Model 3 show that innovative SMEs were 1.18 times more likely to request debt financing and 4.48 times more likely to request equity financing than non-innovative SMEs.

Table 6 shows the results from the last binary logistic model. The results from Model 4 confirm that innovative SMEs were less likely to get the credit approvals than non-innovative SMEs. The coefficient associated with innovative SMEs is negative and statistically significant at the p<0.05 level. The odds of getting credit authorized among innovative SMEs were estimated to be 26 percent lower than among non-innovative SMEs (1−0.74=0.26), after controlling for the firm-specific characteristics.

Multinomial logistic regression is the extension for the binary logistic regression when the categorical dependent variable outcome has more than two levels. In the following analysis, the dependent variable "collateral" has four levels: personal collateral required; business collateral required; both personal and business collaterals required; and neither required. "Neither was required" was chosen as a reference group for comparison.

Table 7 shows the results from the multinomial logistic regression. The second column of Table 7 has the outcome of "personal collateral required" compared to "neither was required." Comparing with innovative SMEs, non-innovative SMEs were about 3.5 times more likely to be asked for personal collateral. Conversely, we can say that innovative SMEs were less likely to be asked for personal collateral, odds ratio is 0.29 (given by the reciprocal of 3.5). The third column has the outcome of "business collateral required" compared to "neither was required." Non-innovative SMEs were 6.2 times more likely to be asked for business collateral compared to innovative SMEs. The last column has the outcome of "both personal and business collateral required" compared to "neither was required." Non-innovative SMEs were 1.3 times more likely to be asked to provide both types of collaterals.

Table 8 shows the linear regression results on loan terms for three types of loans: short-term loan, term loan and mortgage loan. For term loan, comparing the length of terms offered to innovative and non-innovative SMEs, we would expect the length of term for innovative SMEs be 29 months shorter, on average, holding all the other independent variables constant. It is worth noting that, for short-term loan and mortgage loan, the difference was not statistically significant.

Table 9a shows the linear regression results on fixed interest rates charged by the financial institution for six different financing instruments. The seventh financing instrument on fixed rates for increasing in the credit limit of current lines of credit was excluded from the analysis due to low response rates. For short-term loans, compared to the fixed rates paid by non-innovative SMEs, we would expect the fixed rates paid by innovative SMEs be 0.9 percentage points higher, on average, holding all the other independent variables constant. However, for mortgage loans and new credit cards, we would expect the fixed rates paid by innovative SMEs be 2.3 percent and 0.7 percent points lower. For term loans, it is not statistically significant that innovative SMEs paid higher fixed rates than non-innovative ones.

Table 9b shows the linear regression results on variable interest rates charged by the financial institution for six different financing instruments. The seventh financing instrument on variable rates for new credit card and increase in the credit limit of current credit cards were excluded from the analysis due to low response rates. For new line of credit and increase in credit limit of current lines of credits, compared to the variable rates paid by non-innovative SMEs, we would expect the variable rates paid by innovative SMEs be 0.1 percent and 0.9 percent points higher, holding all the other independent variables constant. However, for mortgage loans, we would expect the variable rates paid by innovative SMEs be 0.7 percent points lower. For term loans, it is not statistically significant that innovative SMEs paid higher variable rates than non-innovative SMEs.

VI. Summary and Conclusions

Innovation has been recognised as an essential component of the economic growth process. There is much research on the various underlying aspects of innovation, but there is little on its financing, even though it is recognised as a key determinant. It is generally accepted that it is more difficult for innovative SMEs to access financing, but such claims are usually not substantiated. Using data from the Statistics Canada Survey on Financing of Small and Medium Enterprises, 2004, this paper has profiled innovative SMEs along a range of characteristics and examined whether they differ from non-innovative SMEs in terms of access to financing and financing terms and conditions.

The findings of this study have shown that innovative SMEs, which account for 4.2 percent of SMEs in Canada, have different financing activities and experiences than non-innovative SMEs. Innovative SMEs had greater financing needs than non-innovative SMEs, but were less successful in obtaining the financing requested. This paper shows that financing terms and conditions for innovative SMEs are consistent with their perceived higher risk by financial institutions.

Innovative SMEs were about four times more likely to request equity financing than non-innovative SMEs. Equity financing is important to innovative SMEs as it represented 44.3 percent of the total financing received compared with only 8.7 percent for non-innovative SMEs. Moreover, innovative SMEs were three times more likely to request equity financing from a venture capital firm than non-innovative SMEs. It was also shown that innovative SMEs were about six times more likely to use the debt financing requested for research and development.

Canadian innovative SMEs face more constraining financing terms and conditions than non-innovative SMEs. For example, innovative SMEs paid higher interest rates and got shorter loan terms. This is consistent with the fact that financial institutions consider innovative SMEs more risky than non-innovative SMEs as innovation often involves the continuous development of new products and use of new processes in untested markets.

A couple of important limitations are noted. Since the sample size of innovative SMEs is small, several estimates have a higher coefficient of variation and margin of error. These estimates may not be very reliable, and therefore should be used with caution.

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Appendix