Canada Small Business Financing Act: Capital Leasing Pilot Project Summative Review Report

3. Small Business Financing

Small businesses are the growth engine of the Canadian economy and are strong contributors to growth in gross domestic product (GDP) and in employment, but they face significant and unique challenges. Government, the private sector and other institutions need to collaborate on addressing the needs and priorities of small business, including the critical area of access to financing. Access to financing continues to be identified as a key barrier to innovation and productivity growth.²

Small businesses use various types of financing from a wide array of sources, with term lending remaining the most commonly used type of financing. The Canada Small Business Financing (CSBF) Program offers a loan-guarantee program to help small businesses access asset-based term lending, including equipment. Small businesses also turn to lease financing (most often through manufacturers' dealers financing) to acquire the equipment they need. In 2004, 3 percent of small businesses made a request for lease financing, down from 7 percent in 2001 (overall requests for financing declined during the same period), with an approval rate of 96 percent. There is little fluctuation in approval rates across size of business.³

Leasing is often an easier financing solution for a small business to obtain as a lessor's risk of loss is lower than it would be for a traditional lender as the lessor owns the asset. The evaluation of risk is also different. A lessor looks at a lessee's ability to generate cash flow to service the lease payments, whereas lenders focus on the firm's balance sheet or past credit history to assess ability to repay.

Feedback from leasing companies suggests that under the current strong economic conditions, leasing companies are pushing the boundaries of their risk tolerance as competition is strong for lease contracts.⁴ More sophisticated risk modelling and credit scoring techniques have assisted leasing companies in evaluating financing applications quickly and efficiently. Lessors interviewed for this review suggest that gaps remain for firms seeking higher-risk specialized equipment (e.g. medical equipment) or for firms seeking small financing amounts.

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² Canadian Federation of Independent Business. Harnessing Canada's Competitive Advantage: Small Business Has Big Plans. September 2006.

³ SME Financing Data Initiative, Statistics Canada. Survey on Financing of Small and Medium Enterprises. 2001, 004.

⁴ Intrepid Partners. Industry Canada Capital Leasing Pilot Project Lessor Survey. September 2006.