The Smaller The SME, The Higher The Interest Rate

Small and medium-sized enterprises are known for facing tough hurdles in their search for financing, with SMEs considered high-risk among lenders. But a new report from CFIB finds that the smaller the company, the more difficult it is for them to access bank financing, forcing them into dangerous cash flow waters.

An announcement on Tuesday (Oct. 4) said the CFIB’s report found that Canadian small firms that are having trouble accessing bank financing often turn towards personal funds to boost their businesses. What’s more, analysts concluded, crowdfunding and alternative finance have yet to offer a viable alternative to the smallest of businesses that need help.

“Small businesses face considerable barriers based on their size when they apply for bank financing,” said CFIB President Dan Kelly in a statement. “While there has been much buzz about FinTech and online lending in general, what small business owners want most from their bank is a personal relationship based on mutual understanding.”

The size of the company is directly related to the difficulty of accessing bank financing. Businesses with fewer than five employees were found to be nearly six times more likely to be rejected by a bank than mid-size firms with between 50 and 499 workers, the report found.

Meanwhile, the CFIB found that only 0.1 percent of SMEs surveyed said they have relied on crowdfunding to finance their business. Nearly half of SMEs surveyed said they have relied on personal equity, while 30 percent turned to credit cards, to finance their companies.

Smaller companies also face higher interest rates from banks once approved for a loan, with the small businesses paying 2 percent more, on average, above prime interest rates. The smallest companies pay 2.28 percent more, researchers found.

Kelly pointed to Canada’s Small Business Banking Code of Conduct, which requires that banks offer alternatives to financing when they reject small business loan applicants.