Small Business Credit Condition Trends 2009–2015

June 2016

About the survey

Innovation Science and Economic Development Canada (ISED) maintains close contact with the small business community as part of its monitoring and data collection activities. Since 2009, ISED has conducted various surveys on the borrowing activities of small Canadian businesses. Two in particular include the Credit Conditions Survey (CCS)Footnote 1 and the larger Survey on Financing of Growth of Small and Medium Enterprises (SFGSME)Footnote 2 which is conducted every three years and also surveys medium-sized businesses. The CCS is implemented in years when the SFGSME is not conducted. These surveys monitor small and medium-sized enterprises (SMEs) access to financing to provide key information on small-business-lending conditions to the business community, lenders, policy makers and academics.

Overview

  • This analysis highlights the changes and developments in small business credit conditions between 2009 and 2015, and aims to facilitate understanding of credit-market trends for small businesses.
  • In general, credit conditions for small businesses remained good in 2015 with approval rates for debt financing at 88 percent.
  • Request rates for external financing decreased due to fewer requests for debt financing and trade credit.
  • The pricing conditions for debt financing eased, while non-pricing conditions tightened slightly.
  • Start-ups and smaller businesses continued to face relatively greater difficulties accessing financing.

External Financing Need

In 2015, 31 percent of small businesses requested external financing (debt, lease, equity, trade credit, or from government), which is higher than the rates in 2009 and 2010 but sharply lower than the request rates recorded from 2011 to 2014 (Figure 1).

Figure 1: Request rates for external financing were down in 2015

Figure 1: Request rates for external financing were down in 2015
Sources: * ISED, Credit Conditions Survey, 2009, 2010, 2012, 2013 and 2015; and ** Statistics Canada, Survey on Financing and Growth of Small and Medium Enterprises, 2011 and 2014.
Description of Figure 1
Figure 1: Request rates for external financing were down in 2015
2009* 16%
2010* 21%
2011** 36%
2012* 34%
2013* 40%
2014** 51%
2015* 31%

About 23 percent of small businesses requested debt financing (mortgages, term loans, lines of credit, and/or credit cards), representing a 5 percentage point decrease from 2014 (Figure 2).

Figure 2: Small businesses requested less of debt financing and trade credit

Figure 2: Small businesses requested less of debt financing and trade credit
Sources: * ISED, Credit Conditions Survey, 2009, 2010, 2012, 2013 and 2015; and ** Statistics Canada, Survey on Financing and Growth of Small and Medium Enterprises, 2011 and 2014.
Note: *** Due to a change to clarify the Trade credit question in the 2014 survey, this data is not entirely comparable with prior years.
Description of Figure 2
Figure 2: Small businesses requested less of debt financing and trade credit
Type of financing 2009* 2010* 2011** 2012* 2013* 2014** 2015*
Debt Financing 14% 18% 25% 26% 30% 28% 23%
Leasing 1% 2% 7% 8% 11% 8% 8%
Trade credit*** 1% 1% 8% 8% 10% 28% 6%
Equity 1% 1% 2% 4% 4% 1% 2%

Reasons for Seeking/Not Seeking Financing

Most small businesses that requested financing in 2015 intended to use it to purchase fixed assets (45 percent) and to support day-to-day working and operational capital expenditures (41 percent) (Figure 3).

Figure 3: The main reasons small businesses requested financing in 2015 were for working capital and fixed assets

Figure 3: The main reasons small businesses requested financing in 2015 were for working capital and fixed assets
Source: ISED, Credit Conditions Survey, 2013 and 2015.
Description of Figure 3
Figure 3: The main reasons small businesses requested financing in 2015 were for working capital and fixed assets
Reason 2015 2013
Fixed Asset 45% 40%
Working/Operating Capital 41% 49%
Research and Development 2% 2%
Debt Consolidations 6% 5%
Enter a new market 3% 3%
Other use 3% 2%

Similar to 2013, 2 percent of the small businesses that requested financing in 2015 intended to use it to support research and development (R&D), 3 percent to enter a new market, and 6 percent to consolidate the debt.

In 2015, 89 percent of small businesses did not seek financing because it was not needed (Table 1).

Table 1: The main reason small businesses did not request financing was that it was not needed
Reason 2010* 2011** 2012* 2013* 2014** 2015*
Sources: * ISED, Credit Conditions Survey, 2010, 2012, 2013 and 2015; and ** Statistics Canada, Survey on Financing of Growth of Small and Medium Enterprises, 2011 and 2014.
Financing not needed 89% 88% 86% 86% 88% 89%
Thought request would be turned down 3% 3% 4% 3% 2% 3%
Applying for financing too difficult 3% 2% 5% 2% 2% 2%
Cost of financing too high 2% 1% 2% 2% 1% 2%

Access to Debt Financing

In general, small businesses had good access to debt financing in 2015 (Table 2).

Table 2: Access to debt financing remained stable for small businesses in 2015 as measured by the amount authorized-to-requested ratio
Year Request Rate Approval Rate Authorized-to-Requested Ratio
Sources: * ISED, Credit Conditions Survey, 2009, 2010, 2012, 2013 and 2015; and ** Statistics Canada, Survey on Financing of Growth of Small and Medium Enterprises, 2011 and 2014.
2009* 14% 79% 72%
2010* 18% 88% 88%
2011** 25% 88% 90%
2012* 26% 89% 90%
2013* 30% 85% 89%
2014** 28% 81% 83%
2015* 23% 88% 93%

The ratio of funds authorized-to-requested was 90 percent in 2015, consistent with recent years and well above the 2009 recessionary level (72 percent).

Interest Rates

Average interest rates on loans and non-residential mortgages decreased slightly to 5.1 percent, representing a continued ease in pricing conditions for borrowing in 2015 (Table 3). Lenders' risk perception has continually improved since the last recession. The business risk premiumFootnote 3 remained stable since 2011 varying between 2.2 percent and 2.6 percent.

Table 3: Average interest rate on debt financing slightly decreased in 2015
Collateral Rate 2009* 2010* 2011** 2012* 2013* 2014** 2015*
Sources: * ISED, Credit Conditions Survey, 2009, 2010, 2012, 2013 and 2015; ** Statistics Canada, Survey on Financing and Growth of Small and Medium Enterprises, 2011 and 2014; and *** Bank of Canada.
Interest Rate Average 6.2% 5.8% 5.3% 5.4% 5.6% 5.2% 5.1%
Interest Rate, Business Prime*** 3.1% 2.6% 3.0% 3.0% 3.0% 3.0% 2.8%
Risk Premium 3.1% 3.2% 2.3% 2.4% 2.6% 2.2% 2.3%

Collateral Rates

Lenders required more collateral to secure their loans. About 82 percent of small businesses were required to pledge collateral in 2015, the highest collateral rate since 2009 (Figure 4).

Figure 4: Collateral rates for debt financing significantly increased in 2015

Figure 4: Collateral rates for debt financing significantly increased in 2015
Sources: * ISED, Credit Conditions Survey, 2009, 2010, 2012, 2013 and 2015; **Statistics Canada, Survey on Financing of Growth of Small and Medium Enterprises, 2011 and 2014.
Description of Figure 4
Figure 4: Collateral rates for debt financing significantly increased in 2015
2009* 56%
2010* 67%
2011** 64%
2012* 76%
2013* 60%
2014** 65%
2015* 82%

The increase of collateral requirements signaled a tightening of non-pricing conditions for borrowing, and was consistent with findings from the Bank of Canada.Footnote 4

Access to Debt Financing by Type of Business

Debt financing request rates were positively related to the size of the business (Table 4). In 2015, 21 percent of businesses with 1–4 employees requested debt financing compared to 23 percent of businesses with 5–19 employees and 33 percent of businesses with 20–99 employees. A similar pattern was recorded in previous years.

Table 4: Smaller and younger businesses faced greater difficulties accessing financing in 2015
Request Rate Approval Rate
Source: ISED, Credit Conditions Survey, 2015.
All Small Businesses (1–99 employees) 23% 88%
Employment Size
1–4 employees 21% 83%
5–19 employees 23% 89%
20–99 employees 33% 97%
Export
Exporter 27% 90%
Non-exporter 23% 87%
Age of Business
2 years old or younger 33% 80%
3 to 10 years old 26% 82%
11 to 20 years old 23% 88%
more than 20 years old 21% 94%
Innovation Activities Developed or Introduced
Innovator 29% 85%
Non-Innovator (none of the above) 17% 93%
Region
Atlantic 21% 94%
Quebec 28% 86%
Ontario 19% 89%
Manitoba-Saskatchewan 24% 97%
Alberta 26% 81%
British Columbia and Territories 22% 91%
Industry
Accommodation and Food 16% 79%
Construction 23% 96%
Manufacturing 24% 83%
Primary 24% 85%
Professional Services 23% 93%
Transportation/Warehousing 26% 89%
Retail and Wholesale 24% 85%

Approval rates were also positively related to business size in 2015, increasing from 83 percent for the businesses with 1–4 employees to 89 percent for the businesses with 5–19 employees, and 97 percent for the businesses with 20–99 employees. The lack of credit history, managerial experience and assets to pledge for collateral were the main reasons for why smaller businesses experienced greater difficulties accessing financing.

A similar pattern was observed for the age of businesses in 2015. Roughly one third of start-ups (2 years old or younger) requested financing, significantly higher than the older and more established businesses. However, the financing approval rates for start-ups (80 percent) were lower than other businesses. This is likely because start-ups have minimal earnings, shorter credit histories, and less collateral to pledge as security.

Consistent with most past years, small business exporters and innovators were more likely to request financing than non-exporters (27 percent versus 23 percent) and non-innovators (29 percent versus 17 percent) in 2015. Exporters have the approval rates at 90 percent for their financing requests compared to non-exporters at 87 percent. Approval rates for innovators (85 percent) were significantly lower than non-innovators (93 percent).

Financing request rates were the highest in Quebec (28 percent), followed by western Canada (26 percent in Alberta, and 24 percent in Manitoba and Saskatchewan, and 22 percent in BC and Territories). The lowest financing approval rate was observed in Alberta which experienced tightening lending conditions due to a slump of global energy prices.

In addition, financing request rates were similar among industrial sectors. The approval rate was the highest in the construction sector (96 percent), while the lowest in the accommodation and food sector (79 percent).

This analysis was prepared by the Small Business Branch.

If you have questions or comments about the content of this analysis, please email SBB-DGPE.

Date modified: