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ARCHIVED—Small Business Quarterly - November 2011, vol. 13, no. 3
Feature Story
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Encouraging Signs from the Credit Market: Results of the 2010 Credit Conditions Survey
The importance of the credit market was arguably never more evident than during the recent financial crisis, when tightened credit conditions threatened national economies around the world. Canada was not immune to the financial crisis as Canadian small businesses encountered greater difficulties in accessing financing between August 2008 and September 2009. Without adequate access to financing, many firms faced the possibility of not having enough resources to operate or expand their businesses, thereby stifling economic growth and risking business failure. However, a recent survey of Canadian small businesses provides encouraging signs that a recovery in the lending market is under way.
Survey Background
Conducted in May and June 2011 by Leger Marketing on behalf of Industry Canada, the 2010 Credit Conditions Survey was completed by 3573 employer small businesses (1 to 99 employees), representing firms across major industries and regions. This survey was intended to complement the 2009 Credit Conditions Survey, which was also administered by Industry Canada, as well as Statistics Canada's Survey on Financing of Small and Medium Enterprises.
Access to Financing
Survey results reveal that the debt financing market was noticeably more active in 2010 compared with the year before. In 2010, 18 percent of small businesses in Canada sought debt financing, increasing from 14 percent in 2009. Importantly, growth in debt financing requests was accompanied by an increase in approval rates. Jumping from 79 percent in 2009, the percentage of debt financing requests fully or partly approved was 88 percent in 2010, which is comparable with pre-financial crisis approval rates in 2004 and 2007 (83 percent and 94 percent respectively) (Figure 1). Furthermore, the estimated average amount of approved debt financing increased from $238 000 in 2009 to $360 000 in 2010, providing further evidence of enhanced access to debt financing.
[Description of Figure 1]Source: Statistics Canada, Survey on Financing of Small and Medium Enterprises, 2004 and 2007. Industry Canada, Credit Conditions Survey, 2009 and 2010.
Certain categories of small businesses saw notable gains in access to debt financing. Small businesses in the retail and wholesale trade sector posted an 18 percentage point increase in approval rate, rising from 70 percent to 88 percent, in 2010 (Table 1). Firms with 20 to 100 employees also saw a significant increase in approval rate, jumping from 79 percent in 2009 to 97 percent in 2010. However, access to financing did not improve significantly for some sectors, such as accommodation and food, and transportation/warehousing. Among the regions, small businesses in Quebec were the most active in requesting debt financing in 2010 (25 percent request rate). In addition, Alberta posted a large improvement in approval rate, increasing from 71 percent in 2009 to 90 percent in 2010.
Cost of Financing and Non-Pricing Conditions
The survey results also show that the average interest rate charged for non-residential mortgage and term loans decreased from 5.5 percent in 2009 to 5.4 percent in 2010. On the other hand, the average Bank of Canada prime business rate fell from 3.1 percent to 2.6 percent over the same period, meaning that the risk premium (the difference between the interest rate charged to businesses and the Bank of Canada rate) imposed on small businesses actually increased. Moreover, the percentage of small businesses being asked for collateral to secure term debt financing increased from 57 percent in 2009 to 62 percent in 2010, meaning that non-pricing debt lending conditions have actually tightened further since the financial crisis. So while the higher approval rate and the higher average amount of approved debt financing represent a significant easing of credit conditions in 2010, there remains some evidence of more stringent credit conditions compared with conditions prior to the financial crisis.
Recovery in the Leasing Market
Encouraging signs also extend to the capital leasing market. The leasing request rate increased slightly from 1 percent in 2009 to 2 percent in 2010; however, the leasing approval rate jumped from 76 percent to 97 percent over the same period, demonstrating a strong recovery in the leasing market.
Visit the 2010 Credit Conditions Survey for more information.
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