Executive summary
Many studies have found that the overall creation and success of a business is influenced by access to financial capital, independent of the owner’s background. In its major 2010 review of immigrant entrepreneurship, the Organisation for Economic Co‑operation and Development (OECD/Bobeva) argued that "credit constraints are one of the main reasons why migrant enterprises fail" (OECD/Bobeva 2010, p. 305). Using data from the 2011 and 2014 Survey on Financing and Growth of Small and Medium Enterprises, this paper examines access to financing by immigrant‑owned small and medium‑sized enterprises (SMEs). It documents the main financing sources of immigrant‑owned firms and compares them with the main financing sources of businesses with Canadian‑born owners. The study also asks whether immigrant‑owned firms have more difficulty accessing financial capital than firms with Canadian‑born owners.
Overall, immigrant‑owned SMEs sought ongoing financing for expansion, capital acquisition and operating capital less often than Canadian‑born entrepreneurs, and looked to formal financial institutions less often when they did so. Adjusting for differences in observed owner and firm characteristics, the survey shows that immigrants who arrived in Canada 20 or more years before the survey year (in contrast with more recent immigrants) are less likely to seek any type of financing than Canadian‑born owners. Both immigrant and Canadian‑born entrepreneurs are more likely to seek debt financing than any other type of financing: 22% of firms owned by immigrants and 28% of firms with Canadian‑born owners. Only a few owners applied for government loans. Canadian‑born owners tended to seek somewhat larger amounts of financing than their immigrant counterparts; this is likely because Canadian‑owned firms tend to be larger.
To uncover issues surrounding access to financing, this study considers approval rates for financing applications and notes that such rates are similarly high for both immigrant and Canadian‑born individuals. Adjusting for differences between the characteristics of immigrant owners and firms, the study finds no statistically significant difference in the probability of SMEs with immigrant owners and SMEs with Canadian‑born owners having an application for debt or government financing fully approved.
Further evidence regarding access to financial capital comes from survey responses to the question "Which of the following are obstacles to the growth of your business?" (Statistics Canada n.d.b, Question I3). Seven potential obstacles were listed in the two surveys. In both surveys, the most commonly listed obstacles were the rising costs of inputs, increasing competition, and fluctuations in product demand. Access to financing was the least important of the seven listed obstacles for both SMEs owned by immigrants and SMEs with Canadian‑born owners. Immigrant SME owners saw this obstacle as only marginally more challenging to growth than did Canadian‑born SME owners.
Analysis of start‑up financing is complicated by the retrospective nature of the data. Information on start‑up financing is available only for businesses that had survived up to the survey year. To the extent that the type of financing used has an effect on firm survival, this may introduce bias with respect to the estimated shares of businesses using each type of financing at start‑up. The results should therefore be interpreted as showing firms that are "successful" start‑ups, or start‑ups that survived up to the survey year. The study finds that immigrant and Canadian‑born entrepreneurs in the sample used roughly the same financing sources when their companies were established. Personal financing was the most common source of financing for both immigrant and Canadian‑born entrepreneurs. However, there were two key exceptions. Recent immigrants (immigrants in Canada less than 10 years at the time of start‑up) were much less likely to turn to a formal financial institution, such as a bank, and were less likely to receive government‑based financing. Twenty percent of start‑ups by recent immigrants used a formal financial institution, while 37% of start‑ups by immigrants in Canada for more than 10 years and 45% of start‑ups by Canadian‑born entrepreneurs did so.
Finally, the study looks at start‑ups in knowledge‑based industries (KBIs). Debt financing from formal financial institutions was used less often by KBI start‑ups, particularly those owned by immigrants. Personal financing was the most common source of financing in KBI firms. In addition, 6% of KBI start‑ups turned to angel investors or venture capital financing (about the same rate for both start‑ups with immigrant owners and start‑ups with Canadian‑born owners), while this rate was 3% among non‑KBI start‑ups.