Financing SMEs in Canada: Barriers Faced by Women, Youth, Aboriginal and Minority Entrepreneurs in Accessing Capital — Phase 1: Literature Review

This report presents a review of existing literature pertaining to access to financing by Canadian SMEs thatspecifically evaluates barriers that may exist as a result of business owner characteristics. These are the results ofPhase 1 of a project whose overall objective is an examination of obstacles to small business financing for variousprofiles of business owners in Canada, with particular emphasis on discrepancies attributed to gender, youth,aboriginal, visible minority, and language minority business ownership.The existing research is compiled and categorized in terms of business owner profile, stage, type, and source offinancing (seed, start-up etc./equity or debt/angel, venture capital, bank etc.). If indicated in the particular studies,the region for which the study pertains, economic sector, business age or sector maturity are also discussed.There are very few statistically-based empirical studies that examine barriers to financing based on ownercharacteristics in the published literature. As a result, a portion of the information reviewed in this report isanecdotal in nature, and conflicting opinions exist within this information as to the presence or absence of biasesbased on owner characteristics. The findings of Phase 1 indicate that the specific barriers faced by each group vary depending on factors such asoverall risk associated with the venture, stage and type of financing, and industry, rather than a generalisation offinancing biases and barriers based on such factors as gender, age or minority status. In general any ownership biasis less for later stage financing. For these stages, the business is mature enough that the risks are lower, and theinvestment truly is being made on the basis of the strength of the existing business rather that the characteristicsof the founder. For earlier stage financing, where the business is less mature and the risks higher, the investmentis being made as much in the owner/founder as the business proposition itself.Networking opportunities, mentoring programs, training programs for inexperienced entrepreneurs, and early stagefinancial support through microloans for those owners with limited credit histories are essential programs tomitigate financing barriers faced by SME owners regardless of minority status. All of the groups reviewed tended to have a large majority of new or microbusinesses in traditional, low growthindustries (service and retail). As a result, the financing data summarised for each group based on ownercharacteristics may mask other factors affecting access to financing for SMEs in general. The data suggests thatSMEs competing in non-traditional and high growth industries face similar barriers to any other company in thatindustry; small and young companies face similar barriers regardless of ownership characteristics; and access toequity financing is very difficult if the SME owner lacks established networks. The data demonstrates this to bethe case for women entrepreneurs, and although no data was found examining other groups, it is possible that thesefindings may be generalised to other owner profiles such as youth and minorities. Based on the information compiled and categorized in this review, a comprehensive gap analysis will be presentedfor Phase 2 of the project. The primary focus of this project is to evaluate information regarding barriers to SMEfinancing encountered by particular profiles of business owners (women, youth, Aboriginals and ethnic andlanguage minorities) and to provide a gap analysis of existing information in order to facilitate future research anddata collection in this area. Examination of existing, available data indicates that while each of these profile groups may face particular barriersto financing, there are also significant barriers to financing encountered by certain profiles of SMEs in general.For example, size of SME, industry sector, geographic location, and stage of business development all appear tohave an effect on financing available to individual SMEs. As such, while the focus of this project remains onevaluating financing barriers faced by various business owner profiles, it is helpful to contextualize these findingsby situating them within the broader context of SME financing. EXECUTIVE SUMMARY

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