SME Profile: Tourism Industries in Canada (March 2015)

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Pierre-Olivier Bédard-Maltais
Research and Analysis Directorate, Small Business Branch
Industry Canada

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Aussi offert en français sous le titre Profil des PME : les industries touristiques au Canada, mars 2015.

Summary:

Using post-recession data, this update of the SME profile, first published in 2011, provides a descriptive overview of SMEs in tourism industries and examines their similarities and differences when compared with SMEs in other industries in terms of business and owner characteristics, access to financing, financing terms and conditions and obstacles to business growth.

Acknowledgements

This report was produced in collaboration with the Tourism Branch of Industry Canada. The author wishes to thank Richard Archambault, Lucie Béland-O’Keefe, Derek Gowan and Laura Morin for their helpful comments and suggestions.


Executive Summary

This report is an update of Financing Profiles: Small and Medium-Sized Enterprises in Tourism Industries (Pierce, 2011). It provides an overview of business characteristics, owner characteristics and recent financing activities of Canadian small and medium-sized enterprises in tourism industries (tourism SMEs) in comparison with SMEs in other industries (other SMEs). It accomplishes this by comparing two points in time: pre-recession credit conditions—using 2007 data—and post-recession conditions—using 2011 data. As such, it is the first report on financing of tourism SMEs to be published using post-recession data.

The report highlights the importance of tourism SMEs to the Canadian economy—they account for 99.9 percent of businesses in tourism industries. A detailed analysis of recent financing activities, innovation activities and financial performance follows.

The report reveals that:

  • Tourism SMEs tend to be younger and larger businesses that are more growth oriented than other SMEs. There are also relatively more female, immigrant and visible minority entrepreneurs operating in tourism industries.
  • Principal challenges faced by tourism SME owners include the rising cost of inputs, increasing competition and fluctuations in demand.
  • Personal financing; credit from financial institutions, such as domestic chartered banks; and leasing remain the three main sources of financing used to start up tourism SMEs.
  • Debt financing is the most common type of financing sought by both tourism and other SMEs. However, both groups experience more difficulty obtaining this type of financing than other types of financing that are less risky.
  • Tourism SMEs are more likely to introduce product innovation than other SMEs. They are also more likely to benefit from increased sales and reduced costs as a result of their innovations.
  • On average, small businesses in tourism industries have higher total revenues than small businesses in other industries, but they also have lower average profits due to higher total expenses.

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1. Introduction

Tourism Industries in Canada

Every year, Canada welcomes over 25 million same-day and overnight visitors, with travellers from the United States accounting for close to 80 percent of total international visits to Canada. In recent years, Canadian tourists have fuelled growth in Canadian tourism industries. Domestic demand from Canadian visitors accounts for approximately 80 cents of every dollar spent on tourism goods and services in Canada.Footnote 1

Tourism plays a vital role in Canada's economy, accounting for over $33 billion—or close to 2 percent—of Canada's gross domestic product and representing almost 19 percent of total service exports in 2013. Tourism drives key service industries such as accommodations, food and beverage services, passenger transportation, recreation and entertainment, and travel services. In 2013, tourism activities provided over 1.6 million jobs to Canadians. Small and medium-sized enterprises (SMEs) constitute the backbone of tourism in Canada, accounting for 99.9 percent of businesses in tourism industries.

Access to financing is one of the most critical factors affecting growth of SMEs. In many cases, SMEs experience difficulty obtaining the financing they need to acquire assets, pay day-to-day expenses or expand into new markets. Obtaining financing can be particularly difficult for SMEs in tourism industries (tourism SMEs) because financial institutions may view them as relatively risky compared with SMEs in other industries (other SMEs).

Given the importance of financing to the success and growth of a business, this report investigates the financing activities of tourism SMEs and identifies the financing needs and obstacles they face. This report is an update of Financing Profiles: Small and Medium-Sized Enterprises in Tourism Industries (Pierce, 2011). It provides an overview of business characteristics, owner characteristics and recent financing activities of Canadian tourism SMEs in comparison with other SMEs. It uses data from Statistics Canada's Survey on Financing of Small and Medium Enterprises, 2007, and Survey on Financing and Growth of Small and Medium Enterprises, 2011. The focus is on results from the 2011 survey and comparisons are made with the 2007 survey results when possible.

Data and Definitions

This report uses the comprehensive database of the Survey on Financing of Small and Medium Enterprises, 2007, and Survey on Financing and Growth of Small and Medium Enterprises, 2011. The Statistics Canada survey, generally conducted every three years, measures the demand for, and sources of, financing for Canadian SMEs. The database includes information on requests for financing, firm characteristics and demographic characteristics of SME owners. The representative samples consist of 10,218 respondents in 2007 and 9,976 respondents in 2011.

For the purpose of this report, an SME is defined as a business with 1 to 499 paid employees and less than $50 million in annual revenues. Non-employer businesses and the self-employed are excluded. Also excluded from this population are non-profit and government organizations, schools, hospitals, subsidiaries, co-operatives, and financing and leasing companies.

A tourism SME is defined as a business that meets the above criteria and operates within tourism industries. The appendix provides a list of North American Industry Classification System (NAICS) codes included in tourism industries based on the methodology developed for Statistics Canada's Canadian Tourism Satellite Account (CTSA). According to the CTSA, a tourism industry "would cease or continue to exist only at a significantly reduced level of activity as a direct result of an absence of tourism."Footnote 2 This implies that a tourism business may serve both tourists and local customers, as is the case with restaurants and hotel facilities. It should be noted that due to difficulty in measuring the share of economic activity attributable to tourism, this report considers all SMEs operating in these tourism industries as tourism SMEs unless otherwise specified.

In 2007, the unweighted sample consisted of 1,229 respondents in tourism industries and 8,989 respondents in other industries. In 2011, the sample included 698 respondents in tourism industries and 9,278 respondents in other industries. These observations were weighted to represent the whole economy.


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2. Distribution by Industry

In 2013, 9 percent of the estimated 1.2 million SME employers in Canada operated in tourism industries. The majority of tourism SMEs operated in the food and beverage services industry (63 percent), followed by recreation and entertainment (16 percent), accommodations (10 percent), transportation (7 percent) and travel services (4 percent) (Figure 1).

Figure 1: Distribution of Tourism SMEs by Industry, 2013

Figure 1: Distribution of Tourism SMEs by Industry, 2013 (the long description is located below the image)
Source: Statistics Canada, 2013. Business Register.
Description of Figure 1
Figure 1: Distribution of Tourism SMEs by Industry, 2013
Food and Beverage Services 63%
Recreation and Entertainment 16%
Accommodations 10%
Transportation 7%
Travel Services 4%

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3. Distribution by Geography

Tourism SMEs operate in every province and territory in Canada and their geographical distribution is roughly proportional to the distribution of other SMEs (Figure 2). Tourism SMEs are concentrated in Quebec (24 percent) and Ontario (34 percent). In British Columbia and Quebec, the concentration of SMEs in tourism industries surpasses the concentration of SMEs in other industries. Ontario is the only province in which the share of the Canadian population exceeds the share of tourism and other businesses.

Figure 2: Regional Distribution of Tourism SMEs, 2013

Figure 2: Regional Distribution of Tourism SMEs, 2013 (the long description is located below the image)
Sources: Statistics Canada, 2013. Business Register; and Statistics Canada, Canada at a Glance 2013.
Description of Figure 2
Figure 2: Regional Distribution of Tourism SMEs, 2013
Region Tourism Other Population
Northwest Territories, Yukon and Nunavut 0.5% 0.3% 0.4%
Bristish Columbia 16.8% 15.2% 13.5%
Alberta 11.1% 14.3% 10.9%
Saskatchewan 3.0% 3.6% 3.1%
Manitoba 3.3% 3.3% 3.1%
Ontario 34.2% 35.4% 38.4%
Quebec 23.9% 21.2% 23.6%
Atlantic 7.1% 6.8% 7.0%

The food and beverage services industry has the highest representation of tourism SMEs in Canada (63.4 percent), ranging from 54.9 percent in Atlantic Canada to 68.0 percent in Ontario (Table 1). Recreation and entertainment has the second-highest representation of tourism SMEs at 15.8 percent, ranging from 14.0 percent in Alberta to 18.2 percent in Atlantic Canada. In general, travel services has the lowest share of tourism SMEs in every province and territory, except for Ontario where transportation is slightly lower.

Table 1: Distribution of Tourism SMEs by Region and Industry, 2013
Transportation
(%)
Accommodations
(%)
Food and Beverage Services
(%)
Recreation and Entertainment
(%)
Travel Services
(%)
Note * In the territories, SMEs operating in tourism industries are more focused on serving local customers than tourists due to low population density and large distances between communities. As a result, statistics on the territories are not comparable with other regions and are presented for information purposes only.
Source: Statistics Canada, 2013. Business Register
Canada 6.4 10.1 63.4 15.8 4.3
Atlantic 5.9 17.9 54.9 18.2 3.1
Quebec 7.9 8.8 63.0 16.6 3.6
Ontario 4.4 7.5 68.0 15.2 4.9
Manitoba 11.2 13.2 55.5 16.9 3.2
Saskatchewan 5.0 18.5 57.5 16.0 3.0
Alberta 5.0 10.9 66.4 14.0 3.7
British Columbia 8.5 10.6 59.8 15.8 5.3
Northwest Territories, Yukon and NunavutNote * referrer 19.3 33.2 27.4 15.2 4.9

Tourism SMEs are more likely to operate in rural areas than other SMEs, with one in four tourism SMEs operating in rural areas compared with one in five SMEs in other industries (Figure 3). This is not surprising as many Canadian tourist destinations and activities lie outside urban areas (e.g., national parks, nature and theme parks, ski resorts, golf courses, spas, fishing and hunting camps, campgrounds, etc.).Footnote 3

Figure 3: Rural and Urban Distribution of Tourism SMEs, 2011

Figure 3: Rural and Urban Distribution of Tourism SMEs, 2011 (the long description is located below the image)
Note: Bold values denote statistically significant difference at 5 percent.
Source: Statistics Canada, Survey on Financing and Growth of Small and Medium Enterprises, 2011.
Description of Figure 3
Figure 3: Rural and Urban Distribution of Tourism SMEs, 2011
Tourism Other
Urban 73.4% 79.7%
Rural 26.6% 20.3%

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4. Employment

The Provincial-Territorial Human Resource Module of the Tourism Satellite Account captures data on employment in tourism industries and complements Statistics Canada's 2007 and 2011 surveys. It should be noted that data from that module include all jobs in businesses of all sizes within tourism industries, not just those in SMEs that depend upon tourism activities.

Tourism industries employed over 1.6 million Canadians in 2012,Footnote 4 a 4.8-percent increase over 2007 (Table 2). Despite this increase, the share of tourism in total employment remained flat at roughly 9.0 percent during the period. Overall, tourism industries outperformed all other industries over the 2007–12 period. The 2008 economic recession hit the rest of the economy harder (employment decreased by 1.9 percent) than tourism industries (employment down 0.3 percent). Moreover, tourism industries recovered more rapidly than the rest of the economy, with tourism jobs increasing by 4.7 percent between 2009 and 2012 compared with 4.5 percent for all other industries.

Table 2: Jobs in Tourism Industries and the Total Economy (thousands),Note 1 referrer 2007–12
2007 2008 2009 2010 2011 2012 Percentage ChangeNote 2 referrer
Recession
2008–09
Recovery
2009–12
Overall
2007–12
Note 1: Figures may not add up due to rounding.
Note 2: The percentage change is based on non-rounded numbers.
Sources: Statistics Canada, Supplementary tables from the Provincial–Territorial Human Resource Module of the Tourism Satellite Account, 2012; and Industry Canada calculations.
Tourism industries 1,544 1,551 1,547 1,573 1,595 1,619 −0.3 4.7 4.8
Other industries 15,555 15,827 15,534 15,812 16,087 16,232 −1.9 4.5 4.4
Total economy 17,099 17,378 17,080 17,385 17,683 17,851 −1.7 4.5 4.4
Share of tourism in total (%) 9.0 8.9 9.1 9.0 9.0 9.1
Tourism Industries
Transportation 229 228 223 244 251 255 −2.0 14.4 11.5
Accommodations 189 195 185 194 198 198 −5.5 7.4 4.9
Food and Beverage Services 801 800 804 812 822 843 0.6 4.8 5.3
Recreation and Entertainment 274 275 283 270 268 268 2.9 −5.2 −2.2
Travel Services 52 53 52 53 55 54 −2.4 5.1 5.3

Looking by industry, transportation experienced the fastest growth in employment (up 11.5 percent) over the 2007–12 period, followed by travel services and food and beverage services (both up 5.3 percent). Jobs in accommodations grew 4.9 percent and employment in recreation and entertainment decreased 2.2 percent.


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5. Business Characteristics

Business Size

The majority of SMEs in tourism industries (98 percent) are considered small, with fewer than 100 employees.Footnote 5 The distribution of these businesses differs from that in other industries. A majority of tourism SMEs have between 5 and 99 employees, whereas the majority of other SMEs have fewer than five employees (Figure 4).

Figure 4: Distribution of Tourism SMEs by Size (number of employees), 2013

Figure 4: Distribution of Tourism SMEs by Size (number of employees), 2013 (the long description is located below the image)
Source: Statistics Canada, 2013. Business Register.
Description of Figure 4
Figure 4: Distribution of Tourism SMEs by Size (number of employees), 2013
Number of Employees Tourism Other
1 to 4 31.5% 57.8%
5 to 19 43.3% 30.7%
20 to 99 23.2% 9.9%
100 to 499 2.0% 1.7%

There are also differences across tourism industries in the concentration of businesses of different sizes. A large share of SMEs in the transportation and travel services industries are micro businesses that employ fewer than five workers (Table 3). More than three quarters of food and beverage services businesses (75.1 percent) fall within the 5–19 and 20–99 employee categories. The transportation industry has the largest share (4.4 percent) of medium-sized businesses (100–499 employees).

Table 3: Distribution of Tourism SMEs by Industry and Size (number of employees), 2013
Transportation
(%)
Accommodations
(%)
Food and Beverage Services
(%)
Recreation and Entertainment
(%)
Travel Services
(%)
Source: Statistics Canada, 2013. Business Register.
1–4 employees 51.5 35.9 23.7 45.1 56.5
5–19 employees 29.4 36.6 48.6 33.8 36.0
20–99 employees 14.6 23.2 26.5 18.0 6.3
100–499 employees 4.4 4.2 1.2 3.2 1.2

Business Age

In Statistics Canada's Survey on Financing and Growth of Small and Medium Enterprises, 2011, tourism SMEs were younger, on average, than other SMEs (Figure 5), with twice as many tourism SMEs (9.2 percent) starting operations soon after the recession compared with other SMEs (4.4 percent). Of note, there were significantly fewer tourism SMEs between 11 and 20 years of age (16 percent) compared with other SMEs (25.4 percent).

Figure 5: Distribution of Tourism SMEs by Age, 2011

Figure 5: Distribution of Tourism SMEs by Age, 2011 (the long description is located below the image)
Note: Bold values denote statistically significant difference at 5 percent.
Source: Statistics Canada, Survey on Financing and Growth of Small and Medium Enterprises, 2011.
Description of Figure 5
Figure 5: Distribution of Tourism SMEs by Age, 2011
Age Tourism Other
>20 years 48.4% 43.1%
11 to 20 years 16.0% 25.4%
3 to 10 years 26.5% 27.1%
2 years or less 9.2% 4.4%

Method of Possession

Significantly more owners of tourism SMEs (48.2 percent) bought or acquired their businesses than other SME owners (24.6 percent) (Figure 6). This figure is driven by SME owners in accommodations and food services, where 51.4 percent of owners acquired their business. This may suggest that once established, tourism SMEs change ownership more often than other SMEs. It could also mean that it is easier to acquire such businesses than to start them from scratch.

Figure 6: Distribution of Tourism SMEs by Method of Possession, 2011

Figure 6: Distribution of Tourism SMEs by Method of Possession, 2011 (the long description is located below the image)
Note: Bold values denote statistically significant difference at 5 percent.
Source: Statistics Canada, Survey on Financing and Growth of Small and Medium Enterprises, 2011.
Description of Figure 6
Figure 6: Distribution of Tourism SMEs by Method of Possession, 2011
Tourism Other
Started from scratch 50.0% 73.7%
Bought or acquired 48.2% 24.6%
Other 1.8% 1.7%

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6. Owner Characteristics

Statistics Canada's 2007 and 2011 surveys reveal notable differences in demographic characteristics between tourism and other entrepreneurs.

Women entrepreneurs were more involved in tourism SMEs than in other SMEs, in 2007 and 2011, even though both tourism and other SMEs continue to be predominantly majority male-owned (Table 4). In 2007, twice as many women held a majority ownership of their businesses in tourism industries (30.0 percent) compared with their businesses in other industries (13.5 percent). In 2011, the ratio was lower, with 21.3 percent of tourism SMEs majority owned by women entrepreneurs versus 14.9 percent for SMEs.

Table 4: Owner Characteristics, 2007 and 2011
Owner Characteristics 2007 2011
Tourism SMEs
(%)
Other SMEs
(%)
Tourism SMEs
(%)
Other SMEs
(%)
Notes: Bold values denote statistically significant difference at 5 percent. "n/a" indicates that data are not available for specific reference period.
Sources: Statistics Canada, Survey on Financing of Small and Medium Enterprises, 2007; and Statistics Canada, Survey on Financing and Growth of Small and Medium Enterprises, 2011.
Gender
Majority male-owned 49.3 69.2 59.1 67.2
Majority female-owned 30.0 13.5 21.3 14.9
Owned equally by men and women 20.7 17.3 19.6 17.9
Background
Recent immigrant (within the last 5 years) 4.2 2.2 n/a n/a
Immigrant (born outside of Canada) n/a n/a 32.0 20.5
Visible minority 20.3 8.4 14.3 9.2
Aboriginal 3.2 2.4 0.3 1.7
Age
Less than 40 years 17.1 13.7 15.2 11.8
Education and Managerial Experience
Post-secondary education n/a n/a 61.8 67.2
More than 10 years of managerial experience 61.3 74.0 69.7 78.2

Immigrant ownersFootnote 6 were also more concentrated in tourism industries in 2011, as were visible minority owners in both 2007 and 2011. On the other hand, tourism SMEs were less likely to have Aboriginal owners in 2011, representing only 0.3 percent for tourism SMEs versus 1.7 percent for other SMEs.

The majority of SME owners were 40 years of age or older, independent of the business group or the year of the survey. A majority of SME owners surveyed in 2011 also had post-secondary education. Despite being similar in age and level of education to other SME owners, tourism SME owners had less managerial experience than other SME owners. In 2007, almost three quarters (74 percent) of other SME owners had more than 10 years of managerial experience compared with only 61.3 percent of tourism SME owners. A similar difference was observed in 2011 (78.2 percent of other SME owners had more than 10 years of managerial experience compared with 69.7 percent of tourism SME owners).


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7. Growth

Tourism SMEs have experienced better growth patterns than other SMEs. In 2011, significantly fewer tourism SMEs (17.2 percent) reported having "no growth" than other SMEs (22.6 percent), and more tourism SMEs reported growing between 1 and 10 percent over the previous three years than other SMEs (Table 5). Tourism SMEs also appeared to be more optimistic about future growth, with fewer anticipating negative growth (3.4 percent) than other SMEs (7.0 percent), and more expecting growth in the 1 to 10 percent range (64.2 percent) than other SMEs (55.2 percent). Both groups have comparable results concerning owners with high-growth expectations.

Table 5: Actual and Projected Revenue Growth, 2011
Tourism SMEs
(%)
Other SMEs
(%)
Note: Bold values denote statistically significant difference at 5 percent.
Source: Statistics Canada, Survey on Financing and Growth of Small and Medium Enterprises, 2011.
Over the last three years (2009–11)
Negative growth 14.4 16.3
No growth 17.2 22.6
Between 1 and 10% 51.6 42.7
Between 11 and 20% 8.9 10.7
More than 20% 7.9 7.7
Over the next three years (2012–15)
Negative growth 3.4 7.0
No growth 15.4 17.9
Between 1 and 10% 64.2 55.2
Between 11 and 20% 9.9 12.3
More than 20% 7.1 7.5

Perceived Obstacles to Growth

Tourism industries operate in a challenging environment, having to adapt to changing demographics, fluctuating economic conditions and evolving tourist tastes, and compete over new offerings in a growing number of domestic and international destinations.

SMEs in both tourism and other industries identified the "rising cost of inputs" as the most frequent external obstacle to growth (81.2 percent for tourism SMEs versus 61.1 percent for other SMEs), followed by "increasing competition" and "fluctuations in demand" (Table 6). Interestingly, fluctuations in demand was the only obstacle that was reported more often by SMEs in other industries (53.0 percent) than tourism SMEs (45.1 percent). In all other cases, tourism SMEs perceived an obstacle to be more of a challenge to their business than other SMEs. Shortage of labour, and recruiting and retaining employees are often-reported barriers to growth for tourism industries, especially in the hotel and food and beverage services industries.Footnote 7

Table 6: Perceived Obstacles to Growth, 2011
Obstacle Tourism SMEs
(%)
Other SMEs
(%)
Note: Bold values denote statistically significant difference at 5 percent.
Sources: Statistics Canada, Survey on Financing and Growth of Small and Medium Enterprises, 2011.
External Shortage of labour 43.6 31.8
Fluctuations in demand 45.1 53.0
Obtaining financing 21.8 16.2
Government regulations 44.9 32.1
Rising cost of inputs 81.2 61.1
Increasing competition 54.0 47.1
Other external obstacles 26.4 21.6
Internal Managing debt level 27.7 17.1
Maintaining sufficient cash flow 39.7 36.9
Lack of monitoring 18.8 16.0
Lack of knowledge about competitors or market trends 14.3 13.1
Devoting too much time to day-to-day operations 47.7 37.3
Recruiting and retaining employees 53.9 37.2
Other internal obstacles 9.9 9.3

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8. Capital Structure

Financing plays an important role in the growth and development of a business. Statistics Canada's 2007 survey coincided with the end of a growth phase that began in 1992–93 and was characterized by a favourable credit environment. Statistics Canada's 2011 survey, however, took place during a period when the credit environment had returned to conditions similar to those existing before the recession, but lenders remained more cautious when granting loans to small businesses. It is important to keep in mind this change when analyzing the surveys' results.

The top three sources of financing used by all SME owners to start their business were personal financing, credit from financial institutions and leasing, both in 2007 and in 2011 (Figures 7 and 8). Compared with other SME owners, significantly more tourism SME owners used personal financing and leasing in 2007. They were also significantly more likely to use credit from financial institutions, leasing, and government credit or grants in 2011.

Figure 7: Top Seven Sources of Financing Used During Start-Up, 2007

Figure 7: Top Seven Sources of Financing Used During Start-Up, 2007 (the long description is located below the image)
Note: Bold values denote statistically significant difference at 5 percent.
Source: Statistics Canada, Survey on Financing of Small and Medium Enterprises, 2007.
Description of Figure 7
Figure 7: Top Seven Sources of Financing Used During Start-Up, 2007
Sources of Financing Tourism Other
Personal financing 80.4% 69.4%
Financial institutions 58.6% 55.1%
Leasing 22.5% 9.4%
Trade credit 20.2% 13.2%
Retained earnings 12.4% 14.7%
Loans from friends 8.9% 8.2%
Government credit or grant 7.2% 4.3%

Figure 8: Top Seven Sources of Financing Used During Start-Up, 2011

Figure 8: Top Seven Sources of Financing Used During Start-Up, 2011 (the long description is located below the image)
Note: Bold values denote statistically significant difference at 5 percent.
Source: Statistics Canada, Survey on Financing and Growth of Small and Medium Enterprises, 2011.
Description of Figure 8
Figure 8: Top Seven Sources of Financing Used During Start-Up, 2011
Sources of Financing Tourism Other
Personal financing 80.3% 79.4%
Financial institutions 52.6% 39.9%
Leasing 24.0% 14.1%
Trade credit 19.9% 18.4%
Retained earnings 10.0% 13.2%
Loans from friends 20.1% 14.0%
Government credit or grant 10.9% 6.0%

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9. Financing Activities

When looking at the amount of financing authorized, debt financing is by far the most important source of financing for small businesses. In 2011, only one quarter of SMEs requested debt financing, but debt financing accounted for two thirds (66 percent) of the total amount of all external financing authorized to SMEs (Figure 9 and Table 7).

Figure 9: Share of Financing Instruments in Total Financing Authorized to SMEs, 2011

Figure 9: Share of Financing Instruments in Total Financing Authorized to SMEs, 2011 (the long description is located below the image)
Source: Statistics Canada, Survey on Financing and Growth of Small and Medium Enterprises, 2011.
Description of Figure 9
Figure 9: Share of Financing Instruments in Total Financing Authorized to SMEs, 2011
Debt 66%
Trade Credit 11%
Equity 9%
Leasing 7%
Government 7%
Table 7: Types of Financing Requested and Approved, 2007 and 2011
Type of Financing 2007 2011
Tourism SMEs
(%)
Other SMEs
(%)
Tourism SMEs
(%)
Other SMEs
(%)
Notes: Bold values denote statistically significant difference at 5 percent. Unreliable data on equity and government financing were not published and are indicated by "–" in the table.
Sources: Statistics Canada, Survey on Financing of Small and Medium Enterprises, 2007; and Statistics Canada, Survey on Financing and Growth of Small and Medium Enterprises, 2011.
Request rate Debt financing 12.2 16.7 24.5 25.6
Lease financing 16.3 20.5 6.8 6.9
Trade credit 25.8 31.9 6.2 8.3
Equity financing 4.8 3.1 3.0 2.2
Government financing 10.7 9.3 3.8 3.6
Approval rate Debt financing 93.5 95.4 86.1 88.5
Lease financing 95.0 94.9 100.0 97.1
Trade credit 99.6 99.0 100.0 98.4
Equity financing 80.6 77.7
Government financing 79.6 99.9 81.8

SMEs in both tourism and other industries use similar types of financing. One quarter of SMEs requesting debt financing in 2011 (Table 7), up from 2007. Requests for other types of financing declined from 2007 to 2011, with trade credit and lease financing declining the most.

While more requests were made for debt financing in 2011, SMEs found it hard to gain approval for financing. On average, in 2011, tourism SMEs were fully approved for lease financing, trade credit and government financing,Footnote 8 whereas only 86.1 percent of requests for debt financing were approved. SMEs in other industries faced similar approval rates.

One factor affecting approval rates for financing is the level of risk associated with each type of financing (see Box 1).

Box 1: Different types of external financing have different levels of risk

Compared with debt or equity financing, trade credit and lease financing involve less risk for the lender. Trade credit is commonly used by businesses as a source of short-term financing where the borrower agrees to buy now and pay the lender within the next 30 to 60 days. Risk is minimized because the lender bases this type of credit on his/her experience with the borrower. Risk is also lower for lease financing. In case of non-payment, the lender can seize his/her property as the lender continues to be the owner of the asset.

Main Provider of External Financing

Domestic chartered banks (43.8 percent for tourism SMEs and 56.7 percent for other SMEs) and credit unions are the main providers of external financing for SMEs in both tourism and other industries (Figure 10). Significantly fewer tourism SMEs used domestic chartered banks and "other" providers of financing as their main provider of financing. At the same time, tourism SMEs were more likely to use government institutions (16.3 percent for tourism SMEs versus 5.3 percent for other SMEs) as a provider of financing and were more likely to be approved for financing (99.9 percent) than other SMEs (81.8 percent) (Table 7).

Figure 10: Main Provider of External Financing, 2011

Figure 10: Main Provider of External Financing, 2011 (the long description is located below the image)
Notes: Bold values denote statistically significant difference at 5 percent. Data for venture capitalists and foreign banks or subsidiaries of foreign banks were unavailable.
Source: Statistics Canada, Survey on Financing and Growth of Small and Medium Enterprises, 2011.
Description of Figure 10
Figure 10: Main Provider of External Financing, 2011
Provider Tourism Other
Domestic chartered bank 43.8% 56.7%
Credit union 20.0% 15.8%
Government 16.3% 5.3%
Other 9.1% 15.5%
Leasing company 8.2% 3.1%
Friends or family 2.2% 2.2%

Tourism SMEs may rely more heavily on government financing because they conduct business in riskier industries and, therefore, may fail to obtain financing from domestic chartered banks more often. In fact, risk is the main reason credit providers hesitate to lend to SMEs in accommodations and food services.Footnote 9 Footnote 10 Thus, tourism SMEs may turn to government institutions, for example, the Business Development Bank of Canada (see Box 2), to obtain external financing or access loan guarantees, for example, under the Canada Small Business Financing Program (see Box 3).

Box 2: Business Development Bank of Canada

The Business Development Bank of Canada (BDC) has a mission to help create and develop Canadian business through financing, venture capital and consulting services, with a focus on SMEs.

BDC's financing aims to help entrepreneurs innovate, grow their businesses in Canada and around the world, increase their productivity and sharpen their competitive edge. It serves a range of purposes, including realty, refinancing, change of ownership, working capital, equipment, and information and communications technology adoption.

For Fiscal Year 2013–14, which ended in March 2014, the BDC had 3,353 tourism-related clients for an outstanding financing commitment of $2.6 billion, or approximately 13 percent of BDC's total loans and guarantees portfolio in 2014.

Source: Business Development Bank of Canada, BDC at a Glance, 4th Quarter F2014.

Box 3: Canada Small Business Financing Program

The Canada Small Business Financing Program (CSBFP) helps small businesses with their financing needs. Under the program, the Government of Canada makes it easier for small businesses to obtain loans from financial institutions by sharing the risk with lenders.

Small businesses or start-ups may access up to a maximum of $500,000Note * referrer for any one borrower, of which no more than $350,000 can be used for leasehold improvements or the purchase or improvement of new or used equipment.

For Fiscal Year 2012–13, financial institutions registered CSBFP loans worth $300.3 million (33 percent of the total value of CSBFP loans) to 1,546 small businesses in accommodations and food services, the largest user of the program.Note ** referrer

Note * On January 22, 2015, the Prime Minister announced changes to the program that will increase the maximum loan amount to $1 million for borrowers seeking to acquire real property.
Note ** Accommodations and food services represent 73.5 percent of all tourism SMEs in Canada.
Source: Industry Canada, Canada Small Business Financing Act, Annual Report 2012–13.

Financing Terms and Conditions

When a business is perceived as being more risky, it is not unusual for a lender to provide less favourable loan terms and conditions. In 2007, more tourism SMEs were required to pledge collateral to obtain the credit requested, but SMEs in both tourism and other industries were offered similar interest rates (Table 8).

Table 8: Debt Financing Terms and Conditions, 2007 and 2011
2007 2011
Tourism Other Tourism Other
Notes: Bold values denote statistically significant difference at 5 percent. Unreliable data were not published and are indicated by "—" in the table.
Sources: Statistics Canada, Survey on Financing of Small and Medium Enterprises, 2007; and Statistics Canada, Survey on Financing and Growth of Small and Medium Enterprises, 2011.
Average interest rate (%) 7.3 7.3 6.3 6.8
Collateral requested (%) 56.8 47.9 45.3 67.3
Average financing requested $351,106 $136,589 $189,285
Average financing authorized $323,060 $116,100 $179,393
Total financing authorized-to-requested ratio (%) 92.0 85.0 94.8

The availability of credit dropped significantly during the 2008 economic recession and terms and conditions remained tight for several years. Financial institutions managed risk by extending less financing to SMEs in general. However, terms and conditions improved for tourism SMEs in 2011. Fewer tourism SMEs (45.3 percent) were required to pledge collateral in 2011 compared with other SMEs (67.3 percent). In addition, SMEs in both tourism and other industries were offered lower interest rates in 2011.

Tourism SMEs requested less financing, on average, and received less than what they requested in 2011. This can be seen by calculating the ratio of the total amount of financing approved to the total amount of financing requested. Tourism SMEs had a lower total financing authorized-to-requested ratio than other SMEs in 2011, with 85.0 percent of all financing requested being approved compared with 94.8 percent for other SMEs. This suggests that tourism SMEs had more difficulty obtaining debt financing than other SMEs.


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10. Innovation

Statistics Canada's 2011 survey introduced a series of questions on SMEs' innovation practices. Innovation is a key accelerator for business growth and increasing productivity. It constitutes a competitive asset for SMEs and is particularly important for attracting new or repeat customers in the context of very competitive tourism industries.

In 2011, about four in ten SMEs (39.5 percent of tourism SMEs versus 37.6 percent of other SMEs) reported introducing one of the following innovations within the previous three years (2009–11):

  • New or significantly improved good or service (product innovation);
  • New way of selling goods or services (marketing innovation);
  • New organizational method associated with business practices, workplace organization or external relations (organizational innovation); or
  • New or significantly improved production process or method (process innovation).

Innovators in SMEs in both tourism and other industries mainly developed or introduced new goods or services (product innovation) (Figure 11), and significantly more tourism SMEs (29.2 percent) introduced new goods or services than other SMEs (23.1 percent). The second most common type of innovation was marketing innovation. Marketing plays an important role in tourism as attracting visitors to Canada fuels the success of the industry. Acknowledging the importance of marketing to these industries, the Canadian Tourism Commission offers tool kits aimed at helping tourism SMEs promote their products and leverage market opportunities (see Box 4).

Figure 11: Innovation Developed or Introduced between 2009 and 2011

Figure 11: Innovation Developed or Introduced between 2009 and 2011 (the long description is located below the image)
Note: Bold values denote statistically significant difference at 5 percent.
Source: Statistics Canada, Survey on Financing and Growth of Small and Medium Enterprises, 2011.
Description of Figure 11
Figure 11: Innovation Developed or Introduced between 2009 and 2011
Tourism Other
Product 29.2% 23.1%
Marketing 17.0% 16.6%
Organizational 13.8% 15.0%
Process 13.0% 14.7%

Box 4: Great Canadian Innovation in Tourism Industries

The Canadian Tourism Commission has tool kits designed to help Canadian tourism businesses fully leverage market opportunities.

Of note, the EQ Tool Kit (Explorer Quotient) is the most useful and innovative tool kit available to small tourism businesses. It helps businesses understand segmentation of their markets by geography and provides key demographic and socio-cultural indicators of their current and prospective customers. Businesses can use the tool kit to develop better targeted and evidence-based marketing strategies.

A majority of innovators reported benefiting from increased market share in their respective markets. However, a percentage of these innovators did not see any improvements that could be attributed to their innovations (7.8 percent of tourism SMEs and 8.8 percent of other SMEs), while around one third of innovators (30.1 percent of tourism SMEs and 34.1 percent of other SMEs) had not yet realized any results from the innovations (Figure 12). A significantly larger proportion of tourism SMEs reported increased sales and decreased costs resulting from their innovations compared with other SMEs.

Figure 12: Results of Introducing One or More Innovations, 2009 to 2011

Figure 12: Results of Introducing One or More Innovations, 2009 to 2011 (the long description is located below the image)
Note: Bold values denote statistically significant difference at 5 percent.
Source: Statistics Canada, Survey on Financing and Growth of Small and Medium Enterprises, 2011.
Description of Figure 12
Figure 12: Results of Introducing One or More Innovations, 2009 to 2011
Tourism Other
Increased sales 81.8% 68.5%
Captured larger market share 64.0% 60.1%
Decreased costs 44.6% 34.3%
Entered into new market 36.5% 38.3%
Not yet realized 30.1% 34.1%
Other 16.0% 15.3%
None 7.8% 8.8%

Of those businesses that did not innovate between 2009 and 2011, seven in ten tourism SMEs (71.2 percent) believed it was unnecessary for their business or their market (Figure 13). Past tourism SME innovators accounted for nearly one in ten non-innovators (9.8 percent) and a few tourism SMEs (7.0 percent) wanted to innovate, but struggled with insufficient funds or a lack of trained staff to carry out innovation. SMEs in other industries provided similar reasons for not innovating.

Figure 13: Reasons Enterprises did not Innovate, 2011

Figure 13: Reasons Enterprises did not Innovate, 2011 (the long description is located below the image)
Source: Statistics Canada, Survey on Financing and Growth of Small and Medium Enterprises, 2011.
Description of Figure 13
Figure 13: Reasons Enterprises did not Innovate, 2011
Tourism Other
No need to innovate / not part of business plan 43.2% 50.4%
Market doesn't require new product or process 28.0% 24.7%
Other reason 12.0% 12.3%
Innovations carried out prior to 2009 9.8% 6.9%
Lack of funds or trained staff to carry out innovation 7.0% 5.7%

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11. Financial Performance

This section of the profile examines the financial performance of Canadian businesses with an annual revenue between $30,000 and $5,000,000 using complete data for the most recent year available. Note that this section uses a definition of small business based upon annual gross revenue, as opposed to the definition based upon the number of employees used elsewhere in the profile, because financial information is only available through Statistics Canada's Small Business Profiles.Footnote 11 Thus, the number of small businesses involved in tourism using the revenue approach (132,502) is greater than the number of small businesses involved in tourism using the number of employees approach (103,200).Footnote 12

On average, small businesses in tourism industries had higher total revenues than small businesses in all other industries, but they had lower average profits due to higher total expenses.

In 2011, the average revenue of small businesses in tourism industries was $418,900 compared with $367,200 for small businesses in other industries (Table 9). However, the average net profit was only $22,800 for small businesses in tourism industries compared with $48,600, on average, for small businesses in other industries. A larger proportion of small businesses in other industries (82 percent) turned a profit in 2011 than small businesses in tourism industries (75 percent). Furthermore, the average net profit was higher than that of small businesses in tourism industries ($79,600 for small businesses in other industries compared with $45,700 for small businesses in tourism industries). On the other hand, non-profitable small businesses in tourism industries reported a net loss of $44,300, on average, in 2011 compared with an average net loss of $89,700 for small businesses in other industries.

Table 9: Profitable and Non-Profitable Small Businesses,Note 1 referrer of Table 9 2011
Tourism Other
Note 1 of Table 9: Canadian businesses with annual revenues between $30,000 and $5,000,000. Figures may not add up due to rounding.
Note 2 of Table 9: The number of small businesses is based upon the revenue definition and differs from figures used elsewhere in the profile based upon the employment definition.
Sources: Statistics Canada, Small Business Profiles, 2011; and Industry Canada calculations.
All businesses Number of businessesNote 2 referrer of Table 9 132,502 1,710,955
Average total revenue $418,900 $367,200
Average total expenses $396,200 $318,700
Average net profit $22,800 $48,600
Profitable businesses Percentage 75 82
Average total revenue $407,400 $353,600
Average total expenses $361,800 $274,000
Average net profit $45,700 $79,600
Non-profitable businesses Percentage 25 18
Average total revenue $452,700 $427,500
Average total expenses $517,200 $515,200
Average net loss −$44,300 −$89,700

Among small businesses in tourism industries, those engaged in travel services and recreation and entertainment industries had the highest average net profit in 2011 at $28,500 and $27,800 respectively (Table 10). Nine in ten small businesses were profitable in the transportation industry (92 percent, the highest percentage of all tourism industries), but they generated the lowest average net profit ($29,900). In comparison, only two in three small businesses in the accommodations industry generated a profit (66 percent), but they had the highest average net profit among small businesses in tourism industries ($70,500).

Table 10: Profitable and Non-Profitable Small Businesses by Tourism Industry,Note 1 referrer of Table 10 2011
Transportation Travel Services Recreation and Entertainment Accommodations Food and Beverage Services
Note 1 of Table 10: Canadian businesses with annual revenues between $30,000 and $5,000,000. Figures may not add up due to rounding.
Note 2 of Table 10: The number of small businesses is based upon the revenue definition and differs from figures used elsewhere in the profile based upon the employment definition.
Sources: Statistics Canada, Small Business Profiles, 2011; and Industry Canada calculations.
All businesses Number of businessesNote 2 referrer of Table 10 25,663 6,224 35,004 12,860 52,751
Average total revenue $160,300 $567,600 $246,900 $490,400 $623,900
Average total expenses $138,500 $539,000 $219,000 $467,400 $604,900
Average net profit $21,900 $28,500 $27,800 $23,100 $19,000
Profitable businesses Percentage 92 78 80 66 64
Average total revenue $140,200 $517,800 $222,600 $523,700 $702,200
Average total expenses $110,400 $469,600 $175,700 $453,100 $653,200
Average net profit $29,900 $48,300 $46,900 $70,500 $49,100
Non-profitable businesses Percentage 8 22 20 34 36
Average total revenue $388,900 $744,400 $344,700 $425,500 $484,600
Average total expenses $458,100 $786,000 $393,600 $495,000 $518,900
Average net profit −$69,200 −$41,600 −$48,900 −$69,500 −$34,300

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12. Conclusions

Tourism industries account for close to 2 percent of Canada's gross domestic product and provided jobs to over 1.6 million Canadians in 2013. SMEs are the backbone of tourism industries: 99.9 percent of tourism businesses are SMEs and approximately 9 percent of all Canadian SMEs are engaged in tourism industries. These industries outperformed the rest of the economy during the last recession, and have shown strong signs of recovery in recent years, with employment growing more rapidly in tourism industries than in all other industries. As of 2011—the most recent year for which data are available—three quarters of small businesses in tourism industries turned a profit and close to 70 percent of tourism SME owners reported growing their business in the three previous years.

Credit providers view tourism SMEs as relatively risky compared with other SMEs. Compared with other SMEs, tourism SMEs found it harder to obtain debt financing. They were also less likely to use domestic chartered banks and more likely to use a government institution as their main provider of external financing.

In terms of innovation, relatively more tourism SMEs introduced new goods or services to the marketplace than other SMEs. A greater proportion of tourism SMEs benefited from increased sales and reduced costs as a result of their innovations.

Statistics Canada's Survey on Financing and Growth of Small and Medium Enterprises will be conducted again in 2015 and will provide up-to-date insights into tourism industries. In particular, it will be interesting to see if the uptake of new technologies and the growth of the co-operative economy (e.g., Airbnb, Uber) lead to the creation of more enterprises or increased innovation. In addition, the expected increase in tourism demand associated with the lead up to Canada's 150th anniversary may translate into growth in demand for financing.


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References


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Appendix

Table A: North American Industry Classification System (NAICS) Codes Included in Tourism Industries
NAICS Description
Air Transportation
4811 Scheduled Air Transport
4812 Non-Scheduled Air Transport
Rail Transportation
4821 Rail Transportation
Water Transportation
4831 Deep Sea, Coastal and Great Lakes Water Transportation
4832 Inland Water Transportation
Bus Transportation
4851 Urban Transit Systems
4852 Interurban and Rural Bus Transportation
4854 School and Employee Bus Transportation
4855 Charter Bus Industry
4859 Other Transit and Group Passenger Transportation
Scenic and Sightseeing Transportation
4871 Scenic and Sightseeing Transportation, Land
4872 Scenic and Sightseeing Transportation, Water
4879 Scenic and Sightseeing Transportation, Other
Taxicabs
4853 Taxi and Limousine Service
Travel Services
5615 Travel Arrangement and Reservation Services
Recreation and Entertainment
51213 Motion Picture and Video Exhibition
7111 Performing Arts Companies
7112 Spectator Sports
7115 Independent Artists, Writers and Performers
7121 Heritage Institutions
7131 Amusement Parks and Arcades
7132 Gambling Industries
7139 Other Amusement and Recreation Industries
Hotels
7211 Traveller Accommodation (except 721114-Motels)
Motels
721114 Motels
Camping
721211 RV (Recreational Vehicle) Parks and Campgrounds
Other Accommodations
721212 Hunting and Fishing Camps
721213 Recreational (except Hunting and Fishing) and Vacation Camps
721198 All Other Traveller Accommodation
Food and Beverage Services
7221 Full-Service Restaurants
7222 Limited-Service Eating Places
7224 Drinking Places (Alcoholic Beverages)
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