Banks in Canada Helping our Small and Medium-sized Enterprises Grow and Succeed

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1 Banks in Canada Helping our Small and Medium-sized Enterprises Grow and Succeed October 2013 Overview Small and medium sized enterprises (SMEs 1 ) are a vital part of the Canadian economy and, as a result, make up the majority of bank business customers. The stability and profitability of Canada s banks play an essential role in the successful operation of SMEs, providing financing and non-credit financial products and services to help them grow and succeed. This report highlights the growth in banks overall authorized and outstanding credit 2 to SMEs (businesses with loan authorizations of less than $5 million), as well as a Canada-U.S. comparison of small business (businesses with loan authorizations of less than $1 million) lending. It also reports on non-credit financial products and services that banks offer to SMEs. Banks are a Reliable Source of SME Financing Banks compete with each other and many other non-bank lenders to finance SMEs. According to an Industry Canada survey, domestic and foreign banks were the main providers of external financing to 56% of SMEs 3 in The stability and strength of banks makes them an attractive source of financing for SMEs. Index = Bank SME Lending More Stable than Economic Growth (Graph 1) 95 Credit Authourized Credit Outstanding Nominal GDP 07Q4 08Q1 08Q2 08Q3 08Q4 09Q1 09Q2 09Q3 09Q4 10Q1 10Q2 10Q3 10Q4 11Q1 11Q2 11Q3 11Q4 12Q1 12Q2 12Q3 12Q4 13Q1 13Q During the recent global financial crisis and the following recession, Canada s banks remained strong and sound and were able to continue 1 The CBA has defined a small and medium-sized enterprise (SME) as having a loan authorization of less than $5 million and a small business as having a loan authorization of less than $1 million. This is the same definition used in Industry Canada s Biannual Survey of Suppliers of Business Financing, Data Analysis. 2 Credit authorized is the total amount of money made available by banks to business customers. Credit outstanding is the amount of money which a customer has actually borrowed from the amount of credit authorized by the bank. The CBA defines business lending as the credit extended to the banks' business customers located in Canada. The statistics include all credit facilities including direct loans, bankers acceptances, credit cards, commercial mortgages, US$ foreign currency loans to Canadian clients, letters of credit and letters of guarantee, leasing, securitized assets and amounts outstanding via overdraft. Data was collected and aggregated from Bank of Montreal, CIBC, Canadian Western Bank, HSBC Bank Canada, Laurentian Bank, National Bank, RBC, Scotiabank and TD Bank Group. 3 Industry Canada, Survey on Financing and Growth of Small and Medium Enterprises, 2011 (Data tables), Released February 18, 2013, Table 2. Combined numbers for domestic chartered bank, foreign bank and foreign bank subsidiary.

2 lending to businesses and consumers. In late 2008 and early 2009, when the Canadian economy declined by 7.1% 4, banks continued to make credit available to SMEs. Credit authorized has increased 20% and, similarly, SMEs increased their borrowing, with credit outstanding climbing by 21.2% between the end of 2007 and mid-2013 (Graph 1). Because of the increasing supply of credit, SMEs are able to take advantage of opportunities and access credit when needed to grow daily operations. The room to access even more credit is significant. Unused credit available the difference between credit authorized and credit outstanding to SMEs increased from $61.1 billion in 2007 to $72.3 billion in June By mid-2013, banks had authorized $191.3 billion in credit to SMEs, of which $119.0 billion had been used (Graph 2) Bank Lending to SMEs (Graph 2) The increases in both authorized and outstanding credit for SMEs support conclusions from the Bank of Canada s most recent Senior Loans Officer Survey (SLOS) 5 and Business Outlook Survey (BOS) 6. The SLOS highlighted that, in the third quarter, both price and non-price conditions eased for small business borrowers. This is in line with the almost uninterrupted trend in easing since late 2009 in overall business lending conditions. Similarly, most firms reported in the BOS that credit is currently easy or relatively easy to access. SMEs have come to rely on available credit to help meet their business needs. A 2011 Industry Canada survey shows that, of those SMEs seeking external debt financing, 90% stated that their request was fully or partially approved 7. Consistent with that high approval rate, SMEs ranked obtaining finance as the least problematic external obstacle to growth (Graph 3). 0 Source: CBA 70% 60% 50% 40% 30% 20% 10% 0% External Obstacles to Growth for SMEs (Graph 3) 16.8% Obtaining Financing 22.2% Other 33.1% 33.5% Shortgage of Government labour Regulations 47.9% Source: Industry Canada, Survey on Financing and Growth of Small and Medium Enterprises, 2011 (Data tables), Released February 18, 2013, Table % Increasing Fluctuations competition in demand for your products and services 63.2% Rising costs of inputs 4 According to Statistics Canada data, nominal GDP declined by 7.1% between the third quarter of 2008 and the third quarter of During this same period, real GDP declined by 3.8%. 5 Bank of Canada, Senior Loans Officer Survey (SLOS) on Business Lending Practices in Canada, Results of the Third Quarter 2013 Survey, Vol. 6.3, October 11, Bank of Canada, Business Outlook Survey (BOS), Results of the Autumn 2013 Survey, Vol. 10.3, October 11, Industry Canada, 2013, Table 3. Close to 85% of SMEs stated that the full amount of their debt financing request was authorized, with an additional 5% stating that a partial amount of their debt financing request was authorized. Only 7.7% of SMEs stated their debt financing request was rejected. 2

3 Sound, Stable and Profitable Banks Key to Growing Small Business Lending Canadian small businesses, a subset of SMEs with loan authorizations of less than $1 million, benefitted from sound, stable and profitable banks. Access to credit for small businesses in Canada stands in sharp contrast to the situation in the United States. The American banking system was hard hit by the global financial crisis, which impacted lending to small business customers. While Canadian banks steadily increased lending to small businesses by 9%, Index = Small Business Lending (Canada vs. U.S.) (Graph 4) Canada United States Source: CBA; FDIC, Office of Advocacy, US Small Business Administration Note: Canada - Total Small Business Lending for Outstanding, using $1 million and under Authourization Band; US - Total Small Business Loans Outstanding by Depository Lenders, using $1million and under Outstanding Band. loans outstanding to small businesses in the United States declined 14% between 2007 and 2012 (Graph 4). Similarly, while 88% of the smallest businesses who sought external financing surveyed by Industry Canada stated that they had their debt financing request fully or partially approved in , a Biz2Credit report 9 indicates that the small business approval rate by large banks in the U.S. ranged between 9 to 13% during the same year. Focus on Sectors- Bank Lending to SMEs Increasing Canada s national banking system is an integral part of the nation s economy, enabling funds to move to areas of the country and sectors where they are needed. Knowledge Based Industries (KBI) Since the end of 2010, there has been an upswing in the financing activity of SMEs in KBI. Credit authorized has increased 31% to $5.1 billion. As a result, there is now $2.5 billion in unused credit available to these innovative science and technology-based SMEs (Graph 5). Only 19% of SMEs in KBI cite obtaining finance as an external obstacle to growth, far behind barriers such as demand for products and services and increasing competition 10. $ Billions Source: CBA 8 Ibid, Table 3. Smallest businesses defined as those SMEs with 1-4 employees. 9 Biz2Credit Small Business Index December 2011, 10 Industry Canada, 2013, Table Bank Lending to SMEs in Knowledge Based Industries (Graph 5)

4 Agriculture, Fishing and Forestry Industries such as agriculture, fishing and forestry provide employment and an economic base to some of Canada s most remote communities and rural towns. And SMEs underpin the economies in these towns and communities. Consequently, over 70% of banks total lending to these industries is devoted to SMEs. $ Billions Bank Lending to SMEs in Agriculture, Fishing and Forestry (Graph 6) Real GDP of the Industries Despite the financial crisis, credit authorized to SMEs in these industries increased each and every year since There is now $9.6 billion of unused credit as of June 2013, up from $7.2 billion at the end 2007 (Graph 6) Almost 97% of SMEs surveyed stated their debt financing request was approved in 2011 the largest approval rate of all industries surveyed 11. Manufacturing Over the last couple years, Canadian manufacturing SMEs have faced a variety of challenges, including a strong Canadian dollar, stronger foreign competition, attracting and retaining labour and the cost of raw materials. According to Industry Canada s 2011 Survey on Financing and Growth of Small and Medium Enterprises, obtaining financing ranked as the least problematic Bank Lending to SMEs in Manufacturing (Graph 7) external obstacle to business growth Credit made available to manufacturing SMEs was more stable than was output in the industry (Graph 7). Despite the cyclicality of output in the sector, close to 94% of SME manufacturers surveyed in 2011 stated that their debt financing request was approved 13. This is a very high approval rate (LHS) (LHS) Real GDP of the Industries (RHS) 11 Industry Canada, Table 3. The Survey on Financing and Growth of Small and Medium Enterprises groups the categories of agriculture, forestry, fishing and hunting with mining and oil and gas extraction. 12 Industry Canada, 2013, Table Industry Canada, Table 3. 4

5 Banks: More than Just Lending to SMEs While lending is an important part of a bank s relationship with its SME customers, they are demanding more than just credit to help grow their businesses. To meet this demand, banks provide a variety of banking products and services such as: Business chequing and savings accounts, in both Canadian and foreign dollar denominations; Tax payment services; Cash management tools; Foreign exchange services; Succession and investment planning; Electronic fund transfers; On-line and telephone banking; Debit and credit card processing; Payroll and filing services; and, Coaching podcasts, booklets and seminars. SMEs can access these products and services through the channels that work best for them branch, telephone, automated bank machine, Internet and mobile device. Succession planning is an example of the type of non-credit services that banks provide to SMEs. A succession plan clearly outlines an owner s intentions and goals when transitioning away from a business, often to a family member. The bank advisor will explore with the SME owner the range of different options and develop a unique and personalized succession plan to address important strategic, legal, tax and family issues. Once developed, the bank advisor and SME owner implement, monitor and regularly review the succession plan to track timing, deliverables and any changing business or personal circumstances. The Bottom Line SMEs are important to the economy of Canada and communities across the country and the strong relationship between banks and their SME customers helps these businesses grow and prosper. 5