Financing Profile: Small and Medium-Sized Enterprises in Tourism Industries

December 2011

Andrea Pierce, Small Business Branch, Industry Canada

Summary:

This profile provides a descriptive overview of SMEs in tourism industries and examines their differences compared with SMEs in non-tourism industries in terms of business and owner characteristics, access to financing, financing terms and conditions and obstacles to business growth.

Highlights

  • Small and medium-sized enterprises (SMEs) operating in tourism industries accounted for 8 percent of SMEs in Canada in 2007.
  • On average SMEs in tourism industries were younger (i.e., fewer years in operation) and more growth-oriented than their non-tourism counterparts.
  • Majority business owners in tourism industries were significantly more likely to be female or be a visible minority compared with owners in other industries.
  • Compared with SMEs in non-tourism industries, those in tourism industries were less likely to request external financing (15 percent versus 18 percent in 2007) and less likely to be approved for external financing (93 percent versus 96 percent in 2007).
  • Debt financing was the most common type of external financing sought. In 2007, SMEs in tourism industries typically received smaller average amounts of debt financing compared to other SMEs ($239 000 versus $264 000).
  • Of the main tourism industries, SMEs in the accommodation industry required the most capital but had the most difficulty obtaining financing.
  • SMEs in tourism industries faced similar pricing loan conditions (interest rates) but unfavourable non-pricing loan conditions compared to other SMEs.
  • The average tourism SME generated less revenue, less profit and had less retained earnings than its non-tourism counterpart.

Introduction

Tourism activities play an important role in the Canadian economy, accounting for approximately 2 percent of Canada's overall gross domestic product and having as much economic impact as the fisheries, forestry and agriculture sectors combined. In 2010, tourism activities provided over 594 500 jobs and represented 3.5 percent of employment in Canada (Statistics Canada, 2011). Small businesses (fewer than 100 employees) are of critical importance to tourism in Canada as they account for close to 98 percent of businesses in the sector. Though there has been substantial research on small and medium-sized enterprises (SMEs) in tourism, information on their financing needs and obstacles is limited.

Access to financing is one of the most critical factors for growth for SMEs; however, in many cases they have difficulties obtaining the financing they need. Obtaining financing can be particularly difficult for SMEs in tourism because they are often viewed by financial institutions as relatively risky compared to SMEs in other industries (Council of Tourism Associations of British Columbia, 2006). According to consultations with tourism business owners in Ontario, one of the most significant impediments to improving, modernizing and/or expanding operations for businesses in tourism industries—particularly for SMEs—is the availability of financing (Ontario Tourism Competitiveness Study, 2009).

Given the importance of financing to the success and growth of a business, this report was produced to investigate the financing activities of SMEs in tourism industries and identify, if any, the unique financing needs and obstacles of this group. Using data from Statistics Canada Survey on Financing of Small and Medium Enterprises, this report provides an overview of the business characteristics and recent financing activity of Canadian SMEs in tourism industries in comparison with Canadian SMEs in non-tourism industries.

Data and definitions

This report uses the comprehensive database of the Survey on Financing of Small and Medium Enterprises, which was first released in 2000. The Statistics Canada survey, generally conducted every three years, measures the demand for, and sources of, financing for Canadian SMEs. The database includes information on the financing application process, firm profiles and demographic characteristics of SME ownership. This report is based on the 2004 and 2007 survey results. The representative samples consist of 13 042 respondents in 2004 and 15 808 respondents in 2007.

For the purpose of this report, an SME is defined as a business with fewer than 500 employees and less than $50 million in annual revenues. Excluded from this target population are non-profit and government organizations, schools, hospitals, subsidiaries, co-operatives and, financing and leasing companies.

A tourism SME is defined as a business that meets the above SME criteria and operates in a tourism industry. A list of tourism industry groups was outlined based on the Canadian Tourism Satellite Account (CTSA). According to CTSA, a tourism industry is one that "would cease or continue to exist only at a significantly reduced level of activity as a direct result of an absence of tourism" (Statistics Canada, 2010a). The Appendix provides the complete list of the NAICS codes included in the tourism grouping. It should be noted that for the purpose of this report, all small and medium-sized businesses operating in these tourism industries were considered SMEs in tourism industries.

In 2004, the unweighted sample consisted of 1689 respondents in tourism industries and 10 788 respondents in non-tourism industries and in 2007 it included 1732 respondents in tourism industries and 14 069 in non-tourism industries. These observations were weighted to represent the whole economy.

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