ARCHIVED—Financing Profile: Young Entrepreneurs

January 2006

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Report Summary:
This profile provides a portrait of Canada's young entrepreneurs and examines the effect, if any, of the age of the owner on financing a small business.

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Christine Carrington, Industry Canada

Canada's population is aging and a substantial number of today's entrepreneurs will soon be heading into retirement. To maintain economic growth and prosperity, it will become increasingly important that Canada's youth fill the entrepreneurial void left by the retiring baby-boom generation. Drawing on the comprehensive database of the SME Financing Data Initiative, this article provides a portrait of Canada's young entrepreneurs and examines the effect, if any, of the age of the owner on financing a small business.

Summary of Key Findings: Young entrepreneurs are found in all sectors of the economy, with a particularly high presence in knowledge-based industries (KBIs). Although most youthowned businesses are considered small, as defined by the number of employees, there are relatively few youth involved in selfemployment. Businesses owned by youth are more likely to be high-growth and are, for the most part, financially viable. Young entrepreneurs are more likely to identify access to financing as an obstacle to business growth than older entrepreneurs and they appear to have higher request rates for financing. Youthowned small and medium-sized enterprises (SMEs) are also more likely to have their application refused, but face similar credit conditions as older entrepreneurs when financing is approved by lending institutions. This likely contributes to the higher than average usage of informal financing instruments, such as personal savings and love money, by young entrepreneurs.

Definitions
This analysis classifies young entrepreneurs as business owners between the ages of 25 and 34 years. Youth-owned small and medium-sized enterprises (SMEs) are defined as those with at least 50 percent ownership by a young entrepreneur in a commercial business (for profit) with fewer than 500 employees and less than $50 million in annual revenues.

For comparative purposes, the profile and financing activity of young entrepreneurs is examined against SME owners in the 45 to 64 year age bracket. For brevity, this age group will be referred to as older SME owners.

Canada's Aging Population

Canada's median age reached an all-time high of 38 years in 2001, representing the largest census-tocensus increase in over a century (Statistics Canada, 2002). Based on Canadian population projections (see Figure 1), the population aged 45 to 64 will continue to rise steadily over the next decade, reaching more than 9.8 million by 2016. Several factors are contributing to this trend: the large post–World War II baby-boom generation, the long-term decline in fertility rates and the longer life expectancy of Canadians.

This demographic shift is already having a noticeable effect on Canada's labour force. The working population is increasingly comprised of older individuals: between 1991 and 2001, the percentage of workers aged 45 to 64 rose by 36 percent (Statistics Canada, 2002). The Canadian Imperial Bank of Commerce (CIBC) reports that the number of firms run by entrepreneurs over the age of 55 (recently coined "seniorpreneurs") is the fastest growing segment in the small business sector, having risen by 140 000 firms, or 30 percent, from 2001 to 2004 (Small Business, 2004). The CIBC also reports that more than 500 000 Canadian entrepreneurs (20 percent) are heading into retirement within the next five years, followed by an additional 30 percent by 2020 (CIBC World Markets, 2005). This will likely cause skills shortages in several industries (Statistics Canada, 2003). Hardest hit will be Saskatchewan, Atlantic Canada and Alberta, with the highest projected rates of small business owners retiring.

Further complicating the problem for the small business sector is the apparent lack of succession planning by older entrepreneurs. The Canadian Federation of Independent Business (CFIB) recently found that only one third of SME owners are planning for their future succession (CFIB Research, 2005). Furthermore, the majority of these plans are informal and not communicated to intended successors, which risks compromising a successful transition in ownership.

Entering Into Entrepreneurship

It is widely recognized that small and medium-sized enterprises (SMEs) are engines of economic growth, productivity and job creation in Canada. Fostering entrepreneurial activity is therefore a priority of government. During a time when substantial numbers of entrepreneurs are exiting the market, encouraging Canada's youth to become the next generation of business owners is particularly important.

In 2000, 124 000 of the 1.4 million SMEs in Canada (9 percent) were owned by young entrepreneurs. These firms brought in approximately $44 billion in combined annual revenues during that year, accounting for 5 percent of the total revenue of all Canadian SMEs.

As illustrated in Figure 2, however, the proportion of youth-owned SMEs in Canada is lower than the proportion of youth in the overall population (9 percent versus 13 percent). This discrepancy is primarily due to the under-representation of young entrepreneurs in Ontario, where 39 percent of the population is under 35, but only 29 percent of SMEs are youth-owned. Throughout most other regions, the proportion of young entrepreneurs either matches or exceeds the population of youth.

This situation will likely change soon, however, as older business owners retire and younger business owners enter the market. In fact, since 1996, young entrepreneurs across Canada have been entering the SME marketplace at an average of approximately three times the rate per year of entrepreneurs over the age of 45. Figure 3 compares the two generations of SME owners based on the year their businesses first started selling products and/or services. Not surprisingly, SMEs owned by young entrepreneurs are far newer than businesses with older owners: 57 percent had been in operation for less than five years, compared with 18 percent of firms from the older cohort.

Perceived Obstacles to Growth

Starting and establishing a new business in the highly competitive small business marketplace is a challenge for entrepreneurs of all ages. Research has shown that younger business owners may face additional barriers arising from inexperience, lack of a credit history with a financial institution and more modest asset bases upon which to draw (Frazer-Harrison, 2004).

Figure 4 ranks obstacles to business growth identified by Canadian entrepreneurs. Finding qualified labour, access to financing and fluctuations in consumer demand are the top three barriers perceived by young entrepreneurs. Apart from the shortage of skilled labour, which appears to be a universal problem across Canada (McMullin, Cooke and Downie, 2004), older business owners identify different obstacles, ranking taxation levels and profitability among their three chief concerns.