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The evolving landscape of small business financing in Canada

The evolving landscape of small business financing in Canada

By Taylor Matchett , Senior Research Analyst at the Canadian Federation of Independent Business (CFIB)

Small businesses play a crucial role in sustaining the Canadian economy. They are known drivers of innovation, they supply the greatest number of private sector jobs, and they are celebrated for adding that something special to their local communities. Despite this massive contribution, however, competitive banking options and access to affordable financing has long been a hurdle for small businesses. 

Small businesses continue to rely on banks as their primary source of financing. Also, there has been a clear development when it comes to the share of businesses that have sought out financing in the last decade. In 2012, just over a third of small business owners (35%) reported seeking financing, according to CFIB research. In 2015, the number had grown to half of small business owners, and in recent years it climbed to 58%. This general increase in the demand for financing likely reflects the more challenging economic and business conditions in recent years. It also suggests that fewer businesses can fund their operations through cash reserves or other internal means. 

However, obtaining traditional loans from banks is increasingly difficult and expensive for small businesses. Banks often accept more loan applications and provide better loans (i.e., more affordable with better terms) to larger firms, while smaller businesses face a bigger challenge in securing the financing they need. For example, as of 2022, nearly all traditional financing applications were accepted from mid-sized firms, while just three in four were accepted from micro-businesses. 

The evolving landscape of small business financing in Canada

Banks Assessing for Risk

Risk assessment is a critical factor in determining loan acceptance, terms and pricing for small businesses. Banks consider factors like credit history, collateral, the past and current performance of a business, and the risks associated with a particular sector when evaluating and determining the terms of a loan. Entrepreneurs operating in higher-risk sectors with tight profit margins may face higher interest rates or be denied financing altogether. Further, banks tend to charge higher interest rates and have a greater requirement for personal collateral for borrowers they perceive as riskier, i.e., smaller businesses. In some cases, this requires those entrepreneurs to provide a personal guarantee (54% among small businesses with 5-49 employees as of 2022, according to CFIB data), while others may even have to pledge their personal property as collateral. 

Rise in the Availability of Alternative Lending

The availability of alternative lending options has gained prominence in response to challenges in accessing traditional financing, particularly in recent years of economic difficulty as a result of COVID-19. Small businesses have an increased awareness of alternative lenders, such as online platforms and crowdfunding networks that offer more flexible terms and faster approvals. Despite this, the actual use of alternative lenders by small businesses remains low (3% overall), often because they do not understand how it works or how to get started. Alternative lenders have an opportunity to better explain their offering in this sense, and to expand the number of small business clients they service. In the meantime, when they require additional financing beyond what they can access through traditional means, small entrepreneurs still tend to rely on their own funds or assets and credit cards.

Governments Support of Small Business Financing

Recognizing the vital role of small businesses in the economy, governments across Canada have introduced various initiatives to facilitate small business financing, such as the Canada Small Business Financing Program, and regional grants and loan programs. In the last three years, however, such support from governments was needed more than ever to help businesses make it through the impacts of the pandemic. 

Many businesses experienced major restrictions and closures during this period. Entrepreneurs were forced to seek financial assistance to survive, though many of them had no choice but to close their doors (see  CFIB’s report on Small Business Insolvency ). Government relief programs such as the Canada Emergency Business Account (CEBA) and the Canada Emergency Wage Subsidy (CEWS) provided financial relief to struggling businesses, and account for the exponential increase in the share of businesses that relied on loans from the federal and/or provincial governments as an additional source of financing in the last three years. Moving forward, governments’ focus should be on rebuilding and resilience, while recalling that they still have the ability to provide critical support needed by business owners right now (e.g., by extending the current deadline to repay the CEBA loan).

The small business banking landscape is diverse in many ways. Navigating the best financing options for their business can be extremely difficult for small entrepreneurs that juggle many hats in any given day. While having access to reliable and high-quality banking services is important to small businesses and their bottom line, there are also benefits to be reaped by banks and other lenders themselves if they develop a strategy that is inclusive of small businesses. Although traditional financing options remain the most relevant, the current post-pandemic period serves to highlight a focus on recovery and resilience, giving alternative lenders an opportunity to gain traction by offering increased flexibility and access to small business clients. 

CFIB always encourages small businesses to do their research about different banking and financing options to reap the greatest results for their business. That is why we continue to study these key issues through our  Financing Main Street research series  to bring this information front and centre. For business owners that are interested in which banks are most popular among their peers, see our recent report on  SME Market Share Among Major Banks . For those that are interested in learning more about financing trends and which banks provide the best customer service – stay tuned to learn more from our latest data in the coming weeks. 

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