Small Business Growth Hits Level Not Seen in Almost a Decade

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While self-employment has risen noticeably slower than paid-employment since the beginning of the decade, Canadian small- and medium-sized enterprises (SMEs) have been creating a more significant share of jobs since 2010, finds a new report by CIBC Capital Markets.

Between 2010 and 2016, 42% of new jobs were created by businesses with less than 100 employees, up from 30% between 2000 and 2010.

“Beyond the threshold of five employees, there is a clear positive correlation between size and growth, with larger firms within the SME spectrum seeing progressively stronger growth recently,” says Benjamin Tal, Deputy Chief Economist, CIBC, who co-authored the report, Canadian SMEs: Strength Beneath the Surface, with Senior Economist Royce Mendes.

“What’s more, the share of larger SMEs has risen to a level not seen in almost a decade,” Mr. Tal says, noting the trend is particularly strong west of Quebec. “Each province from Ontario to B.C. has exhibited a growth rate of more than nine% in the number of companies with employees.”

In 2016, more than 350,000 businesses were created and just under 300,000 exited, with the entry rate (the ratio of business creation to total businesses) on the decline since 2004 while the exit rate has been more stable, despite the impact of the fall in oil prices a couple of years ago.

“Small business optimism has been grinding higher since bottoming out early last year and appears headed back to levels seen prior to the oil price shock,” Mr. Tal says. “With the Canadian economy in recovery mode, the environment for small businesses remains constructive.”

And while the World Bank ranks Canada as one of the best places to start a new business due to access to capital and a favourable tax regime, the report highlights several gaps, including access to financing for certain business.

“From companies with high growth rates to those with young owners, some SMEs do face more acute issues finding financing,” Mr. Tal says.

The report also highlights that women remain an untapped resource in the SME space.

“Female participation in the workforce has made significant progress over the past few decades, but entrepreneurship remains an area that could see improvement,” Mr. Tal says. “Female majority ownership in the SME space represents less than 20% of all businesses, and recent progress has been slow in coming.”

Another gap is youth entrepreneurship. Canadians between the ages of 25 and 39 comprise more than 25% of the population, yet represent less than 15% of small business owners and less than 10% of medium-sized business owners.

Canadians aged 50 to 64 years, by comparison, also represent about 25% of the population but this group represents 47% of small business owners and 51% of medium business owners.

“One reason for this discrepancy could be related to their access to financing. Remember that companies with younger owners face much more difficulty when trying to externally fund their business,” Mr. Tal says. “It will be important to watch this segment of the population as Canada tries to compete with other countries in the tech landscape, which is more tilted toward younger business owners than other industries.”

Canadian SMEs have also been slow to expand revenue sources outside of Canada and North America.

“SME revenue continues to be geographically concentrated in North America, creating risk,” Mr. Tal says. “Currently only 10% of SMEs are involved in any sort of exporting at all, and roughly 90% of those companies are sending their wares to the U.S. In the current political environment, it has become a risky proposition to focus solely on the U.S. market.”

The report notes that there is room to increase the ratio of Canadian goods and services being exported to Asia and Latin America.

“The age of digital connection has made it much easier to send Canada’s high-end service exports all over the world, something many SMEs could benefit from,” Mr. Tal says.

(Source: CIBC)

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