Characteristics of a SME Seeking Financing

In April of 1996, the Canadian Bankers Association commissioned a study to measure Canadian small and medium-sized businesses' access to financing. 2,615 telephone interviews were conducted nationally with a sample of small and medium-sized business owners and managers.

Because we felt that it should be fairly representative of the SMEs, we decided to incorporate herewith some of the information contained in that report. The title of the report is: "Small and Medium-sized Businesses in Canada: Their perspective of financial institutions and access to financing". You can obtain a copy of the full report by contacting the local office of the CBA.

Industry Make-up:

It is notable that 38% of all SMEs are service businesses, the highest per cent of all SME categories used in the survey.

Age of Business:

57% of SME' s have been in business for more than 10 years; 74% more than five years. 45% of the existing businesses with annual sales of less that $250,000.00, have been in business for 10 years or more.

Number of Employees:

72% of SMEs employ fewer than five people and 30% are sole practitioners; only 2% of SMEs have a full-time staff complement of 50 or more.

Sales Revenues:

35% have annual revenues of less than $250,000.00; 67% have annual revenues of less than $500,000.00.

Ownership:

48% are incorporated and 40% are sole proprietorships; only 7% are franchised operations and these tend to be larger.

Age of the Owner:

51% are in the 35 years of age to 49 years of age bracket, with the average age being 44.

Financial Institutions Dealt With:

No one individual institution dominates the market; the average financial institution relationship is 10.8 years, for small as well as larger SMEs; prevalence of financial institution financing increases with the size of the company.

Sources of Financing:

The percentage of SMEs who advised that they use a particular source of funds are as follows:

• 51% of SMEs use financial institutions
• 44% use credit cards
• 40% use retained earnings
• 39% use personal savings
• 38% use supplier credit
• 28% use personal loans
• 15% use government loans or grants
• 12% use loans from friends or relatives
• 4% use private loans from non-related individuals
• 1% use public equity
• 1% use export finance
• 1% use venture capital
• 9% use no financing at all.

Credit Facilities at Financial Institutions: 

For SMEs who currently finance their companies at least partially through loans from banks or other financial institutions (51% of the population): 75% report that an operating line of credit is the facility utilised most frequently; 50% have an overdraft facility; operating lines of credit are most common among owners of companies with annual sales of one million dollars or more (89%); 44% have total business debt from financial institutions of less than $ 50,000.

Average Borrowing Based on Sales Volume:

• Sales of less than $250,000 = $50,000 in borrowings;
• Sale of $250,000 to $500,000 = $110,000 in average borrowings;
• Sales of $500,000 to $1,000,000 = $170,000 in average borrowings;
• 74% of outstanding debt to financial institutions is held by banks;
• 85% of the SMEs who have not approached a financial institution for financing in the past year say it is because of a lack of need - only 5% say it is because of a fear of turn down;
• 75% of SMEs approach only one financial institution.

Amount Requested: 

• Of these seeking financing in 1995, 47% report seeking less than $25,000;
• 70% report requesting less than $100,000;
• the older the business, the greater the number of employees and higher the annual sales revenues, the greater the average amount requested.

Documentation: 

Documentation presented to major banks by SMEs is relatively consistent across loan type except that new loan requests or requests for increased/expansion are more likely to be accompanied with a business plan.

Approval:

Key factors for obtaining approval for loans are:

• ability to service debt;
• sufficiency of collateral;
• credibility of debt/service projections;
• net worth and debt equity levels;
• management strength and depth;
• relevant business experience;
• age of the business;
• the type of business (industry).