Canadian Small Business Exporters - June 2011

Part 2: Financing Profile of Small and Medium-Sized Enterprise Exporters

This section provides a profile of Canadian small and medium-sized enterprises (SMEs) that exported in 2007. Using data from Statistics Canada's Survey on Financing of Small and Medium Enterprises (2004 and 2007), the report measures export propensity (percentage of firms that export) and export intensity (percentage of revenues from exports) of SMEs. The report also compares business characteristics, owner characteristics, obstacles to growth, and demand for and access to financing among SME exporters and non-exporters.

1. SME Export Activity

In 2007, only a small portion (9 percent) of Canadian SMEs exported goods and services. As seen in Figure 2.1, the propensity to export increased with the size of the enterprise in terms of the number of employees. Among non-employer businesses (zero employees), 7 percent reported exporting. This figure increased to 9 percent for businesses with 1 to 4 employees, 11 percent for businesses with 5 to19 employees, 23 percent for businesses with 20 to 99 employees and 33 percent for businesses with 100 to 499 employees.

In 2007, export propensity also increased with the size of the enterprise in terms of revenues. As shown in Figure 2.2, of those SMEs with annual revenues of $0 to $99 thousand, 6 percent exported goods and services. This figure increased to 8 percent for SMEs with annual revenues of $100 to $499 thousand, 12 percent for SMEs with annual revenues of $500 thousand to $1.9 million, 20 percent for SMEs with annual revenues of $2 to $9.9 million and 36 percent for SMEs with annual revenues of $10 to $49 million.

While the likelihood of exporting increased with business size, export intensity (percentage of revenues from exports) did not. Previous export data identified firms by the size of their exports (in terms of value), not by the number of employees. Thus, the assumption was that small firms were not very active in the export market. Figure 2.3 illustrates that in 2007 a significant portion of exporters total revenues were derived from export sales (average of 47 percent). Moreover, export intensity was relatively similar across all size groups, indicating that SMEs can be actively engaged in exporting activities regardless of business size (in terms of the number of employees).

In 2007, export intensity was also relatively similar across all revenue sizes. As Figure 2.4 illustrates, the smallest average export intensity was 39 percent for SMEs with annual revenues of $500 thousand to $1.9 million and the largest average export intensity was 53 percent for SMEs with annual revenues of $10 to $49 million. These findings further illustrate that business size does not necessarily determine export intensity.

SME exporters are found across all industries within the Canadian economy, yet it is commonly known that exporting is relatively more prevalent within the manufacturing industry. In 2007, manufacturing had the highest concentration of SME exporters at 28 percent (Figure 2.5). Other prominent export industries in 2007 included knowledge-based industries,^{Footnote 11} in which 17 percent of SMEs exported.

In 2007, the majority of Canadian SME export sales were to the United States. As Figure 2.6 illustrates, an average of 34.3 percent of total revenues (73.6 percent of total export revenue) came from exports to the United States. This is not surprising given Canada's proximity to the United States and the existence of trade agreements (e.g., North American Free Trade Agreement) between Canada and the United States.

Figure 2.7 compares the distribution of SME exporters by region with the distribution of all SMEs in Canada by region. As seen in Figure 2.7, exporters are distributed across all of Canada, but are mostly concentrated in Ontario (39 percent). In the Atlantic region and in the Territories, the proportion of SME exporters is much higher than their proportion of all SMEs in Canada. Specifically, 12 percent of SME exporters were located in the Atlantic region, whereas only 6 percent of all SMEs in Canada are located in the Atlantic region. Likewise, 1.8 percent of SME exporters were located in the Territories, which has only 0.2 percent of all SMEs in Canada.

2. Profile of SME Exporters

Table 2.1 presents a comparison of firm and owner attributes between SME exporters and SME non-exporters. As seen in the table, exporters, on average, are more innovative, have greater growth intentions and have been in operation for a longer period of time.

Table 2.1: Profile of SME Exporters and SME Non-Exporters, 2007

Characteristics	SME Exporters (%)	SME Non-Exporters (%)
Source: Statistics Canada, Survey on Financing of Small and Medium Enterprises, 2007.
Year Firm Started Selling Goods and Services
2005 to 2007 (1 to 2 years old)	11	16
2002 to 2004 (3 to 5 years old)	13	17
Prior to 2002 (6+ years old)	75	68
Growth Intentions
Intend to expand business in next 2 years	59	39
R&D Expenditure
Over 20 of total expenditures on R&D	11	4
Owner Gender
Majority male ownership	65	65
Majority female ownership	18	16
Equal ownership	18	19
Owner Background
Aboriginal	2	2
Visible minority (other than Aboriginal)	8	10
Disabled	2	2
Recent immigrant (within last 5 years)	4	2
Mother Tongue of Owner
English	69	67
French	15	19
Other	16	14
Age of Owner
Under 40 years	13	15
Managerial Experience of Owner
Over 10 years	75	71

Once an SME decides to export, innovative activity is crucial to its competitiveness and survival in the global market. It is no surprise, therefore, that exporters were more likely to invest in research and development (R&D) and, thereby, be considered innovative. In 2007, the percentage of SME exporters classified as innovative (spending more than 20 percent of total expenditures on R&D)^{Footnote 12} was more than double that of SME non-exporters (11 percent versus 4 percent).

In 2007, exporters were also more likely to have intentions to grow their business than non-exporters. More than half (59 percent) of SME exporters had intentions to expand the size or scope of their business in the next 2 years compared with only 39 percent of non-exporters.

Table 2.1 also illustrates that exporters were more likely to be established than non-exporters. In 2007, 75 percent of SME exporters had been selling goods and services for more than 6 years compared with 68 percent of non-exporters. In 2007 it was also found that compared with start-up SMEs, established SMEs were more likely to export. Among SMEs that had been selling goods and services for 1 to 2 years (during the start-up phase), 6 percent exported goods and services. This figure increases to 7 percent for SMEs that had been selling goods and services for 3 to 5 years and to 10 percent for SMEs that had been selling goods and services for more than 6 years.^{Footnote 13} This suggests that although many SMEs need time to accumulate resources, knowledge and networks before they can penetrate the international market, some SMEs export from the time of their inception.^{Footnote 14}

3. Perceived Obstacles to Growth for SME Exporters

Given the increased costs, risks and uncertainty associated with export activity, it is common for exporters to encounter many obstacles. In 2007, the most frequently cited obstacle to business growth for SME exporters was the same as that for non-exporters — rising business costs — with 56 percent of owners in both groups identifying this as an obstacle (Table 2.2). However, many other obstacles were identified more frequently by exporters than non-exporters, including finding qualified labour, increasing competition, instability of consumer demand, insurance premiums and obtaining financing. Nevertheless, it is expected that exporters would have greater challenges with increased competition and increased variety in consumer preferences as they are consequences of opening up to international markets.

Table 2.2: Perceived Obstacles to Business Growth, 2007

Obstacles		SME Exporters (%)	SME Non-Exporters (%)
Source: Statistics Canada, Survey on Financing of Small and Medium Enterprises, 2007.
External to the Firm	Finding Qualified Labour	50	40
	Instability of Consumer Demand	40	32
	Government Regulations	28	28
	Environmental Regulations/Compliance	9	12
	Increasing Competition	47	39
Internal to the Firm	Obtaining Financing	21	17
	Management Capacity	13	11
	Rising Business Costs	56	56
	Insurance Premiums	40	34

Previous studies have shown that among exporters, a lack of financing has been identified as a major challenge.^{Footnote 15} In 2007, obtaining financing was cited as an obstacle more frequently among exporters than non-exporters; however, with only 21 percent of exporters expressing this as a challenge, it was not one of the top-ranked obstacles to business growth.

Figure 2.8 presents obstacles for Canadian enterprises when exporting. The data, taken from the Survey of Innovation and Business Strategy (SIBS), 2009, reveal that meeting cost requirements of customers was the most frequently reported obstacle to exporting for firms of all sizes. Access to financing did not rank as one of the most important obstacles to exporting for Canadian SMEs. This result is consistent with those found in the Survey on Financing of Small and Medium Enterprises, 2007, i.e., both surveys suggest that access to financing may not be a major challenge for exporters compared with other major obstacles. Caution should be used when comparing the results from these two surveys, however, as the survey question, methodology, target population and sample are significantly different.^{Footnote 16} Moreover, from these results we cannot conclude whether or not exporters have unique challenges when it comes to access to financing.

4. Financing Activity

Given the importance of financing to the growth and survival of a business, it is critical to investigate the actual financing activity of SME exporters and non-exporters to determine any unique challenges. Figures 2.9 and 2.10 present important sources of financing for SMEs during the start-up phase of the business and for ongoing operations respectively. For both exporters and non-exporters, the most common type of financing used during business start-up was personal savings of the owner, particularly among exporters (85 percent versus 72 percent) (Figure 2.9). The most common type of financing used by both exporters and non-exporters for ongoing operations was commercial or personal loans (Figure 2.10). It is interesting to note that in 2007, SME exporters were more likely to use each source of financing, except micro-credit, than non-exporters during the start-up phase and for ongoing operations.

5. Request and Approval Rates

Due to additional costs associated with exporting, including, but not limited to, tariffs, duties, custom fees, currency fluctuation, transaction costs and transportation costs, it is common for exporters to have greater financing needs than their non-exporter counterparts. To cover these costs and to stimulate growth, exporters may seek some kind of external financing. Table 2.3 presents request rates for both SME exporters and non-exporters for 2000, 2004, 2007 and 2009. The table indicates that for years that data are available, SME exporters were more likely to seek external financing than non-exporters (with the exception of trade credit in 2009). Moreover, in 2007, only 36 percent of SME exporters reported they had never sought external financing, compared with 47 percent of SME non-exporters.^{Footnote 17} These findings highlight the importance of obtaining external financing for SME exporters.

Table 2.3: SME Request Rates (Percent) by Financing Type

Type of Financing	2000		2004		2007		2009*
	Exporter	Non-Exporter	Exporter	Non-Exporter	Exporter	Non-Exporter	Exporter	Non-Exporter
Source: Statistics Canada, Survey on Financing of Small and Medium Enterprises, 2000, 2004 and 2007. *Based on Industry Canada, Credit Condition Survey, 2009. Note: These rates are Industry Canada calculations based on financing requests made within the last 12 months.
Any External Financing	—	—	36	23	27	17	20	15
Debt Financing	37	22	28	18	21	12	18	14
Lease Financing	—	—	5	3	7	5	1.2	1.0
Equity Financing	—	—	3	1	2	1	1.9	1.2
Government Loan or Grant	—	—	6	3	6	3	—	—
Trade Credit	—	—	18	11	16	8	0.8	1.2

Debt financing was the most common form of financing sought by both SME exporters and non-exporters in all years. Another common source of financing for exporters was trade credit, with 18 percent seeking this type of financing in 2004 and 16 percent in 2007.

Table 2.4 presents, where available, approval rates for both SME exporters and non-exporters for 2000, 2004, 2007 and 2009. In 2004, SME exporters were less likely to be approved for external financing than non-exporters (86 percent versus 91 percent), but in 2007 and 2009 the opposite was true. A similar pattern is observed for debt financing, with SME exporters having lower approval rates in 2000 and 2004 and higher approval rates in 2007 and 2009.

Table 2.4: SME Approval Rates (Percent) by Financing Type

Type of Financing	2000		2004		2007		2009*
	Exporter	Non-Exporter	Exporter	Non-Exporter	Exporter	Non-Exporter	Exporter	Non-Exporter
Source: Statistics Canada, Survey on Financing of Small and Medium Enterprises, 2000, 2004 and 2007. *Based on Industry Canada, Credit Condition Survey, 2009. Note: Approval rates for debt financing are Industry Canada calculations that exclude loans that were withdrawn or are still under review.
Any External Financing	—	—	86	91	97	96	85	79
Debt Financing	79	82	80	88	95	94	84	78
Lease Financing	—	—	98	96	92	93	—	72
Equity Financing	—	—	60	42	68	71	—	86
Government Loan or Grant	—	—	67	71	75	81	—	—
Trade Credit	—	—	90	90	99	99	—	82

Exporters and non-exporters had similar approval rates for lease financing and trade credit in 2004 and 2007. In 2004, exporters had higher approval rates for equity financing than non-exporters, but the opposite was true in 2007. In both 2004 and 2007, approval rates for government loan or grant financing were lower for SME exporters than for non-exporters.

It should be noted that these approval rates do not distinguish between full or partial approvals. Moreover, these approval rates do not consider the dollar amount of financing that was approved.

Table 2.5 presents approved debt financing amounts for 2004 and 2007. In both years, the average amount of debt approved was higher for SME exporters than non-exporters. This was true for both long-term and short-term debt financing. To measure access to financing while accounting for scale effects and partial approvals, the ratio of total debt financing approved to total debt financing requested is considered. According to this ratio, SME exporters had slightly more difficulty accessing financing than non-exporters in 2004. In 2007, exporters had slightly less difficulty accessing financing than non-exporters.

Table 2.5: SME Approved Debt Financing Amounts,* 2004 and 2007

	2004		2007
	Exporters	Non-Exporters	Exporters	Non-Exporters
Source: Statistics Canada, Survey on Financing of Small and Medium Enterprises, 2004 and 2007. *Figures are Industry Canada calculations based on responses that contained values for both requested amounts and approved amounts. **Average total amount approved in 2004 excludes "other financial instruments" that were not specified as long-term or short-term debt.
Average Long-Term Amount Approved	$224 000	$193 000	$474 000	$246 000
Average Short-Term Amount Approved	$190 000	$69 000	$342 000	$158 000
Average Total Amount Approved	$210 000**	$138 000**	$461 000	$232 000
Total Debt Financing Approved/Requested	95	97	93	90

Table 2.6 breaks down the ratio of total amount of financing approved to total amount of financing requested by size of business in terms of number of employees. In both 2004 and 2007, exporters with 1 to 4 employees were less likely to obtain their requested financing than non-exporters. On the other hand, exporters with 20 to 99 employees were more likely to obtain their requested financing than non-exporters. Table 2.6 also shows that the ratios of amount approved to amount requested were highest for medium-sized enterprises (100 to 499 employees). In 2004 and 2007, both exporters and non-exporters in this size group received nearly the full amount they requested.

Table 2.6: Ratio (Percent) of Total Debt Financing Approved to Total Debt Financing Requested, by Number of Employees

Number of Employees	2004		2007
	SME Exporters	SME Non-Exporters	SME Exporters	SME Non-Exporters
Source: Statistics Canada, Survey on Financing of Small and Medium Enterprises, 2004 and 2007.
0	65	89	98	95
1 to 4	74	88	56	81
5 to 19	91	95	94	95
20 to 99	88	78	97	84
100 to 499	98	99	99	98

Table 2.7 presents the ratio of total debt financing approved to total debt financing requested by size of business in terms of revenue. In both 2004 and 2007, this ratio was highest among SMEs with annual revenues of $10 to $49 million for both exporters and non-exporters. These ratios indicate that SMEs with annual revenues higher than $10 million have less difficulty obtaining requested financing than those with revenues less than $10 million.

Table 2.7: Ratio (Percent) of Total Debt Financing Approved to Total Debt Financing Requested, by Revenue Size

Revenue	2004		2007
	SME Exporters	SME Non-Exporters	SME Exporters	SME Non-Exporters
Source: Statistics Canada, Survey on Financing of Small and Medium Enterprises, 2004 and 2007.
$0–$99 thousand	70	91	99	95
$100–$499 thousand	62	82	93	78
$500 thousand–$1 million	76	93	62	79
$2–$9.9 million	81	83	97	96
$10–$49 million	92	100	100	99

6. Distribution of Approved Financing

The distribution of approved financing in 2007 was similar for SME exporters and non-exporters. As shown in Table 2.8, debt financing was the most common type of external financing obtained in 2007, with slightly more exporters being approved than non-exporters. Table 2.8 also shows that exporters were less likely to obtain lease financing than non-exporters (16 percent versus 20 percent).

Table 2.8: Distribution (Percent) of Financing Instruments Used (Based on Approved Amounts), 2007

	SME Exporters	SME Non-Exporters
Source: Statistics Canada, Survey on Financing of Small and Medium Enterprises, 2007.
Debt	73	69
Lease	16	20
Equity	1	1
Government Loan or Grant	8	7
Trade Credit	2	3
Total	100	100

7. Intended Use of Debt Financing

In 2007, SME exporters and non-exporters had varying intended uses for their debt financing. As shown in Figure 2.11, the most common intended use for debt financing for both exporters and non-exporters was to provide working capital, particularly for exporters (55 percent versus 44 percent). SME exporters were more than twice as likely to use their debt financing for research and development (11 percent versus 5 percent). Exporters were also more likely to use debt financing to grow their business than non-exporters (44 percent versus 35 percent) and slightly more likely to use debt financing to purchase computer equipment. These figures reflect the growth-oriented and innovative nature of exporters that was highlighted previously.

Conclusion

In 2007, the likelihood of exporting increased with business size, both in terms of employees and revenues; however, among SME exporters, the percentage of total sales derived from exports was similar across all size groups. These findings suggest that firm size is correlated with export propensity, but does not determine export intensity.

This report also highlighted that SME exporters are marked by different characteristics than their non-exporter counterparts. On average, exporters were more innovative (investing more in R&D), growth oriented and established than non-exporters. Exporter SMEs were more likely to make a request for financing and, on average, requested higher amounts of debt financing than their non-exporter counterparts. Additionally, exporters were more likely to cite obtaining external financing as an obstacle to business growth. When it came to determining whether exporters had unique financing challenges, results were inconclusive. Exporters experienced greater difficulty obtaining approval for external financing in 2004 (measured by approval rates and the ratio of amount of debt financing approved to amount of debt financing requested), but had a slightly easier time in 2007 compared with non-exporters.

Footnotes

Footnote 11

Knowledge-based industries are a regrouping of Statistics Canada's standard industry categories and include a number of technology sectors, such as telecommunications carriers, video production and computer services.

Return to footnote 11 referrer

Footnote 12

This definition of innovative is used by Industry Canada.

Return to footnote 12 referrer

Footnote 13

Source: Statistics Canada, Survey on Financing of Small and Medium Enterprises, 2007, Table 22.

Return to footnote 13 referrer

Footnote 14

SMEs that operate internationally from or near the time of their inception are also known as "born global" establishments. For more information on the born global phenomenon, see Knight, G.A. and Cavusgil, S.T., 1996. "The Born Global Firm: A Challenge to Traditional Internationalization Theory." Advances in International Marketing, 8, pp. 11–26, and Orser, B., Spence, M., Riding, A. and Carrington, C., 2008. Canadian SME Exporters, Industry Canada.

Return to footnote 14 referrer

Footnote 15

Source: Organisation for Economic Co-operation and Development (OECD), Removing Barriers to SME Access to International Markets, Paris, 2006.

Return to footnote 15 referrer

Footnote 16

See "Data Sources and Methodology" for information on the methodology, target population and sample of the two questions. The Survey on Financing of Small and Medium Enterprises question regarding obstacles was "Which of the following obstacles are serious problems for the growth of your business?" The Survey of Innovation and Business Strategy question regarding obstacles was "Please rate the importance o f the following obstacles to your enterprise exporting or attempting to export goods and services to an enterprise outside of Canada during the three years 2007 to 2009."

Return to footnote 16 referrer

Footnote 17

Source: Statistics Canada, Survey on Financing of Small and Medium Enterprises, 2007, Table 2.

Return to footnote 17 referrer