Small Business Credit Condition Trends 2009–2018

June 2019

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 managed various surveys on the borrowing activities of Canadian small 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

External Financing Needs

In 2018, 34 percent of small businesses requested external financing (debt, lease, equity, trade credit, and government financing), corresponding to the same rate observed in 2016 (Figure 1).

About 27 percent of small businesses requested debt financing (mortgages, term loans, lines of credit, and/or credit cards), a slight increase from 2017 (Figure 2).

Figure 1: Request rates for external financing return to 2016 levels

Bar chart representing the Request rates for external financing return to 2016 levels

Sources:

  • * ISED, Credit Condition Survey, 2009, 2010, 2012, 2013, 2015, 2016 and 2018;
  • ** Statistics Canada, Survey on Financing and Growth of Small and Medium Enterprises (SFGSME), 2011, 2014 and 2017.

Note: *** Due to a change to clarify the trade credit question in the 2014 and 2017 surveys, the request rates for external financing in 2014 and 2017 are not comparable with those in the other years./p>

Figure 2: Small business demand for debt, lease and equity financing was stable in 2018

Figure 2: Small business demand for debt, lease and equity financing was stable in 2018

Sources:

  • * ISED, Credit Conditions Survey, 2009, 2010, 2012, 2013, 2015, 2016 and 2018;
  • ** Statistics Canada, Survey on Financing and Growth of Small and Medium Enterprises, 2011, 2014 and 2017.
  • Note: *** Due to a change to clarify the trade credit question in the 2014 and 2017 surveys, the request rates for trade credits are not entirely comparable with prior years.

Reasons for Seeking/Not Seeking Financing

Most small businesses that requested financing in 2018 intended to use it to support day-to-day working and operational capital expenditures (51 percent) or to purchase fixed assets (32 percent) (Figure 3).

Similar to 2016, 7 percent of the small businesses that requested financing in 2018 intended to use it to consolidate debt, 4 percent to enter a new market, and 1 percent to support research and development (R&D).

Figure 3: The main reasons small businesses requested financing in 2018 were for working capital and to purchase fixed assets

Figure 3: The main reasons small businesses requested financing in 2018 were for working capital and to purchase fixed assets

Source: ISED, Credit Conditions Survey, 2013, 2015, 2016 and 2018.

Description of Figure 3
The main reasons small businesses requested financing in 2018 were for working capital and to purchase fixed assets
Reason 2013 2015 2016 2018
Fixed Asset 40% 45% 32% 32%
Working/Operating Capital 49% 41% 49% 51%
Research and Development 2% 2% 2% 1%
Debt Consolidations 5% 6% 7% 7%
Enter a new market 3% 3% 4% 4%
Other use 2% 3% 6% 6%

In 2018, 85 percent of small businesses that did not seek financing did not need financing (Table 1). Roughly 5 percent of non-seeking small businesses did not request financing because they considered the cost to be too high. This is the highest share observed in recent years.

Table 1: The main reason small businesses did not request financing was that it was not needed
Reason 2010Footnote *
(%)
2011Footnote **
(%)
2012Footnote *
(%)
2013Footnote *
(%)
2014Footnote **
(%)
2015Footnote *
(%)
2016Footnote *
(%)
2017Footnote **
(%)
2018Footnote *
(%)
Financing not needed 89 88 86 86 88 89 85 91 85
Thought request would be turned down 3 3 4 3 2 3 4 1 4
Applying for financing too difficult 3 2 5 2 2 2 4 2 4
Cost of financing too high 2 1 2 2 1 2 2 1 5

Access to Debt Financing

In general, credit conditions for small businesses remained favourable in 2018 (Table 2).

The ratio of total funds authorized-to-requested was 88 percent in 2018, consistent with recent years and well above the 2009 recessionary levels (72 percent).

Table 2: Access to debt financing remained stable for small businesses in 2018 as measured by the amount authorized-to-requested ratio
Year Request Rate (%) Approval Rate (%) Authorized-to-Requested Ratio (%)
2009Footnote * 14 79 72
2010Footnote * 18 88 88
2011Footnote ** 25 88 90
2012Footnote * 26 89 90
2013Footnote * 30 85 89
2014Footnote ** 28 81 83
2015Footnote * 23 88 93
2016Footnote * 26 82 86
2017Footnote ** 26 87 93
2018Footnote * 27 83 88

Interest Rates

Price conditions for debt financing eased in 2018.

The average interest rate on debt financing increased 0.3 percentage point to reach 5.7 percent in 2018 (Table 3). Over the same period, the business prime rate increased 0.7 percentage point to reach 3.6 percent. As a result, the risk premium, a measure of lenders' risk perception, decreased by 0.4 percentage point to reach 2.1 percent, the lowest level since 2009.

Table 3: Average interest rate on debt financing increased less in 2018 as compared to the prime rate
Collateral Rate 2009Footnote *
(%)
2010Footnote *
(%)
2011Footnote **
(%)
2012Footnote *
(%)
2013Footnote *
(%)
2014Footnote **
(%)
2015Footnote *
(%)
2016Footnote *
(%)
2017Footnote **
(%)
2018Footnote *
(%)
Interest Rate Average 6.2 5.8 5.3 5.4 5.6 5.2 5.1 5.3 5.4 5.7
Interest Rate, Business PrimeFootnote *** 3.1 2.6 3.0 3.0 3.0 3.0 2.8 2.7 2.9 3.6
Risk Premium 3.1 3.2 2.3 2.4 2.6 2.2 2.3 2.6 2.5 2.1

Collateral Rates

Lenders required collateral on fewer loans. About 55 percent of small businesses were required to pledge collateral in 2018, a drop from 64 percent in 2017 (Figure 4).

The decrease in collateral requirements signaled an easing of non-price conditions for borrowing, and consistent with findings from the Bank of Canada.Footnote 3

Figure 4: Collateral rates for debt financing decreased in 2018

Figure 4: Bar chart representing Collateral rates for debt financing decreased in 2018

Sources:

  • * ISED, Credit Conditions Survey, 2009, 2010, 2012, 2013, 2015, 2016 and 2018;
  • ** Statistics Canada, Survey on Financing and Growth of Small and Medium Enterprises, 2011, 2014 and 2017.

Access to Debt Financing by Type of Business

Debt financing request rates positively correlate to size of business (Table 4). In 2018, 23 percent of businesses with 1–4 employees requested debt financing compared to 29 percent of businesses with 5–19 employees and 36 percent of businesses with 20–99 employees. This is similar to previous years.

Approval rates were highest among businesses with 5–19 employees in 2018. About 89 percent of business debtfinancing requests with 5–19 employees were approved. Micro-businesses (those with 1–4 employees) continued to face greater difficulties in accessing financing.

Access to debt financing improved for Canadian start-ups (2 years old or younger) in 2018. The average approval rate for start-ups (90 percent) increased 8 percentage points from 2017 (82 percent).

Small business exporters and innovators were more likely to request financing than non-exporters (32 percent versus 28 percent) and non-innovators (32 percent versus 23 percent) in 2018. However, there is no evidence that exporters or innovators were better able to access financing. The approval rate for exporters was 73 percent, compared to 84 percent for non-exporters. Approval rates for innovators (76 percent) were lower than for non-innovators (90 percent).

Table 4: Access to Debt Financing by Business Characteristics
2018 Request Rate (%) Approval Rate (%)
Source: ISED, Credit Condition Survey, 2018.
All Small Businesses (1–99 employees) 27 83
Employment Size
1–4 employees 23 78
5–19 employees 29 89
20–99 employees 36 78
Export
Exporter 32 73
Non-exporter 28 84
Age of Business
2 years old or younger 43 90
3 to 10 years old 31 77
11 to 20 years old 29 86
more than 20 years old 26 83
Innovation Activities Developed or Introduced
Innovator 32 76
Non-Innovator (none of the above) 23 90

Financial glossary of credit condition survey

Approval Rate
The ratio between the number of firms approved for financing and the number of firms that requested financing.
Authorized-to-Requested Rate
The ratio between total amount of loans authorized by lenders and total amount of loans requested by borrowers.
Business risk premium
The business risk premium is the difference between the average small business interest rate and the business prime rate (the rate charged to the most credit worthy borrowers).
Collateral
An asset pledged by a borrower to a lender, usually in return for a loan. The lender has the right to seize the collateral if the borrower defaults on the obligation.
Collateral Rate
The percentage of firms required to provide collateral to secure their loans.
Debt Financing
A type of financing used to collect funds through the form of borrowing debt such as mortgages, term loans, lines of credit, and/or credit cards.
Equity Financing
A type of financing used to collect funds by selling equity such as shares/ownership of the business entities.
External Financing
The phase of financing used to describe funds that business entities obtain from outside their business; the funds can be obtained through various forms/sources such as debt, lease, equity, trade credit.
Financing
The act of providing or raising funds for business activities, making purchases or investing.
Lease Financing
A type of financing used to collect funds through the form of lease.
Line of Credit
An arrangement that a financial institution extends an amount of credit to a business entity.
Mortgage
A debt instrument secured by the collateral of specified real estate property that the borrower is obliged to pay back with a predetermined set of payments.
Pricing Condition and Non-Pricing Condition
A financing condition measured by the pricing factors such as loan rates, mortgage rates, and credit card rates; and, a financing condition measured by the non-pricing factors such as collateral rates, leasing terms, and trade credit payment and discount days.
Term Loan
A monetary loan that is repaid following a specific repayment schedule and a fixed or floating interest rate.
Trade Credit
An agreement where a business entity can obtain and/or consume goods and services in advance, and pay the suppliers at a later date.
Request Rate
The ratio between the number of firms that requested financing and the total number of firms.

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.

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