There are two alarming facts about small and medium-sized enterprises (SMEs) in Canada.
One gets a lot of attention, for which we know there are no easy solutions; the other gets little attention, and as a result we haven’t spent much time looking for solutions.
The first alarming fact is productivity growth (output per employee), which in Canada lags far behind other Organization for Economic Co-operation and Development (OECD) countries. This results in increased inequality and low-wage employment and a lower standard of living for all Canadians.
It’s an alarming SME fact because that’s where most private sector employees in Canada work.
There are no easy solutions because there are so many enterprises with different business models across a wide range of industries.
The other alarming fact is Canadian SMEs get less financing and what they do get is more expensive than their SME counterparts and competitors in other OECD countries.
According to a summary of financing conditions for SMEs from 2010 to 2017 that the CD Howe Institute compiled in October 2019, Canada ranked last of 11 OECD countries.
The average share of total business loans made to SMEs in Canada was half the share made to SMEs in the other countries (15% versus 30%).
According to the OECD’s annual “Financing SMEs and Entrepreneurs: An OECD Scoreboard” survey, the share fell further to 11% in 2019.
The CD Howe report also pointed out that the interest rate for loans to SMEs in Canada was 2% higher than the rate for large corporations while the average differential in the other countries was 1%.
The 2019 survey showed interest rates for SMEs in the U.S. and China were one-quarter of a per cent less than rates paid by large corporations.
SMEs in Canada are conditioned to believe that financing is difficult to get and must be sole-sourced from one bank.
It is hard for SMEs to raise equity, so the range of options to increase productivity is practically hard-fenced by what they believe can be financed. Those beliefs have become hard-wired by long experience with the limited range of options and the difficulty in doing business with Canada’s supply-managed financial services sector.
The difference between what SMEs in Canada believe can be financed compared with those of SMEs in other OECD countries is a major contributor to Canada’s lagging productivity.
Financing SMEs and entrepreneurs is critical to solving Canada’s productivity challenge and ensuring that its businesses are competitive in a global marketplace. If it is a competition, the OECD scoreboard points out that, by an increasing margin, Canada is in last place.
If this were hockey, a losing streak this long would get the whole country’s attention. No effort would be spared getting to the root of the problem and fixing it. The economic future of the country is at least as important. •
Guy Heywood is a CPA and former banker who assists companies with banking and finance challenges.
