November 2007, vol. 9, no. 3 - Feature Story

SME Perspective: Canadian Rural-Based Entrepreneurs

Rural-based entrepreneurs play a significant role in the development and support of local communities. A recent analysis uses the 2004 Survey on Financing of Small and Medium Enterprises from Statistics Canada to illustrate the distribution of rural-based entrepreneurs in Canada, and contrast issues facing rural and urban entrepreneurs.

In 2004, rural-based small and medium-sized enterprises (SMEs) represented 28 percent of the estimated 1.4 million SMEs in Canada, somewhat higher than rural Canada's proportion of the overall population (20 percent in rural areas versus 80 percent in urban areas). This suggests that Canadians residing in rural areas were more likely to be entrepreneurs than those living in urban centres. This is corroborated by the fact that 6 percent of rural-based Canadians owned an SME compared with 4 percent of urban residents. The Prairie provinces had the highest share of rural-based SMEs (36 percent), followed by Quebec (24 percent), Ontario (21 percent), the Atlantic provinces (11 percent) and British Columbia (8 percent).

The characteristics of SMEs in rural Canada reflect the industrial composition of rural regions. In 2004, nearly one third of rural-based SMEs operated in agricultural and primary industries, such as mining, fisheries and forestry. Consequently, the Prairie and Atlantic provinces, where these industries are mainly located, have the highest ratios of rural-based SMEs (51 percent and 46 percent respectively). Generally, SMEs located in rural areas are more established than their urban counterparts: 77 percent of rural-based SMEs started selling products and services prior to 1999 compared with 67 percent of urban-based SMEs. In addition, rural-based SMEs have fewer employees (86 percent of rural-based firms are micro-businesses, employing fewer than five employees, compared with 83 percent of urban-based firms) and are more likely to be self-employed operations.

Rural-based entrepreneurs, and particularly those in remote areas, are likely to face impediments such as increased distance to markets and business services, and higher transportation costs. A comparison of the obstacles to business growth identified by both urbanand rural-based SMEs indicates that rural-based SMEs were more concerned than urban-based SMEs about the following obstacles to their business growth: insurance rates, government regulations, low profitability, levels of taxation and finding qualified labour.

Financial performance of rural-based SMEs is weaker than businesses based in urban centres. On average, SMEs owned by rural-based entrepreneurs:

• have lower profitability ratios compared with urban-based entrepreneurs (26 percent versus 29 percent respectively);
• have weaker ability to meet their short-term financial obligations than urban-based entrepreneurs (average ratio between assets and liabilities for rural-based SMEs is 1.4 compared with 1.7 for urban-based SMEs); and
• have comparable long-term solvency ratios (average debt and debt-to-equity ratios of rural-based SMEs were 0.52 and 1.1, respectively, compared with 0.53 and 1.14, respectively, for urban-based SMEs).

Compared with their urban counterparts, rural-based SMEs are more likely to request formal sources of financing such as commercial credit, leasing and government funding, and are more likely to be approved. More importantly, and a major characteristic of rural-based SMEs, is their likelihood to approach credit unions/Caisses populaires for financing. More than one third of rural-based SMEs do their day-to-day banking with credit unions and Caisses populaires compared with only 15 percent of urban-based SMEs.

Rural-based SMEs are more likely to deal with one financial institution for longer periods of time than urban-based SMEs. Forty-three percent of rural-based SMEs have been dealing with the same financial institution for more than 10 years compared with 33 percent of urban-based SMEs. This may reflect the fact that fewer financial institutions are present in rural areas.

A comparison of key characteristics of rural-based and urban-based entrepreneurs is presented in Table 1. The full profile will be posted on the SME FDI website at www.sme-fdi.gc.ca in the near future.

Table 1: Profile of Entrepreneurs – Comparison between Rural- and Urban-Based Entrepreneurs, 2004

Rural-Based Entrepreneurs	Characteristics	Urban-Based Entrepreneurs
Source: SME Financing Data Initiative, Statistics Canada, Survey on Financing of Small and Medium Enterprises, 2004.
12 percent owned by women, 46 percent owned by men and 27 percent equal partnerships	Gender	16 percent owned by women, 55 percent owned by men and 18 percent equal partnerships
14 percent are under 40 years of age	Age	20 percent are under 40 years of age
70 percent speak English, 24 percent speak French and 6 percent speak a non-official language	Language	66 percent speak English, 17 percent speak French and 17 percent speak a non-official language
1 percent visible minority, 2 percent Aboriginal and 6 percent disabled	Minority Status	10 percent visible minority, 1 percent Aboriginal and 3 percent disabled
81 percent have more than 10 years	Managerial Experience	65 percent have more than 10 years
6 percent of businesses had revenue from exports	Export Activity	9 percent of businesses had revenue from exports
64 percent started from scratch and 22 percent acquired from family member	Avenue Used to Become Owner	80 percent started from scratch and 5 percent acquired from family member

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