2009 SME Check-up – Surviving the Crisis

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Cash flow and sales revenue are identified as being hardest hit. (Scotiabank, June 2009)  And it is not over. Even now many businesses continue to experience worsening conditions.  Nearly half (47%) indicate that they are performing worse than they were just three months earlier.  (CFIB, June 2009)

The economic crisis is pervasive, not only affecting businesses but investors as well.  Business performance has been especially limited by the current climate for investment.  This is in marked contrast to the top business barrier cited by entrepreneurs in 2008: energy costs. 

Top Barriers Identified to Business Growth
 

Without investment or clients it is no surprise that SME employment growth has stalled.  Typically, Canadian small and medium sized businesses account for half of the net new jobs created in Canada.  By the end of 2008 the sector barely accounted for 1 in 5 jobs created.  Particularly hard hit were medium-sized businesses in the 100 to 499 employee-size range as well as small businesses in the 50 to 99 employee-size range.  

% Contribution to Total Net Change (Number of Employees)
 

Without the employment engine of the SME sector, unemployment rates in Canada have risen rapidly over the last year. As is often the case however, higher unemployment rates have actually spurred entrepreneurial activity.  Self-employment has reached new heights with nearly 2.7 million Canadians now identifying themselves as being their own boss.  It is true that many of these new business owners were forced into entrepreneurship but this should not be considered a flood of weak ventures. According to a CIBC study "forced" entrepreneurs are just as likely to succeed and grow as those who voluntarily launched their own business.  This rise in self-employment is a much-needed surge of new energy and innovation.

While the SME sector has been battered, it is definitely not beaten. Canadian SMEs are determined to survive the current economic crisis.  Insolvency statistics for the Q4 2008 and Q1 2009 are lower than they were at the beginning of 2008 and 2007.  For most, regardless of the severity of the economy, bankruptcy is not an option they want to consider.

 COPING WITH THE CRISIS

The strength of Canadian entrepreneurs lies in their confidence in their own abilities.  Little heed is paid to media hyperbole.  In an October 2008 AMEX Ipsos Reid survey, 64% felt 'wary and cautious' about current economic conditions, yet more than three quarters (77%) still said they planned to "stay the course" during these uncertain times. Few planned dramatic changes in how they ran their business.  In fact only 16% worried about short-term viability.

Canadian entrepreneurs are so confident in their businesses that they willingly make what they consider to be short-term personal sacrifices to survive.  According to the American Express Small Business Monitor (April, 2009) nearly half (48%) have cut back on personal spending to create additional cash flow flexibility. One in four have stopped taking a salary and a third (34%) have relied on their personal assets to support the business.

These personal sacrifices have been made to spare hardship for both their employees and their customers.  Only 15% have laid off staff and only 17% have increased prices to offset losses.  In fact, 30% are continuing the practice of giving out bonus cheques to deserving employees, and 28% are authorizing pay raises to those who deserve it.   For Canadian entrepreneurs the wellbeing of their employees and customers come first.  They understand that when the economy turns, these resources will propel future growth.

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(Desjardin Financial Security, April 2009)  Overall, two-thirds (67%) indicate they have been stressed out by the state of the economy in particular. Seven in ten are worried specifically about pension and retirement finances.  (AMEX, April 2009)  

Time is also a resource Canadian entrepreneurs especially women entrepreneurs are willing to sacrifice to beat the current challenges.  Eight out of ten women entrepreneurs said that "committing extra time" in their business is the most important way of coping with difficulties and challenges. (Angus Reid, Dec 2008)

Some entrepreneurs have also sacrificed their retirement or at least postponed it. 37% of Canadian boomers who plan on retiring in the next five years and who have their own business, plan on delaying their retirement due to current economic conditions.  Of course entrepreneurship is not just a job.  It is a lifestyle.  One-third (32%) of retiring boomer business owners, say they will never fully retire recession or not!   (RBC February 18, 2009)

While many might consider these sacrifices severe, and therefore key reasons for not wanting to start one’s own business, entrepreneurs consider all these actions to be short-term pain. Nearly all small business owners (91%) still believe the rewards and opportunities of running their own business outweigh the risks and challenges.  When asked if they would do it all over again, 93% said YES!  (AMEX, April 2009)

SME CREDIT CRISIS

SMEs have consistently  identified "tightening credit" as the top factor that might negatively affect business growth in the near future (next 12 months).  As the recession has deepened, there is a debate on whether or not financial institutions have squeezed off credit flow to SMEs.  Access to credit is vital to the success of the sector.  One quarter of respondents (25%) acknowledge that their company will have serious problems in the near future if they don’t have access to credit or loans for their day-to-day needs.  (Amex, Nov 2008). Credit is also required to fund expansion plans (42%) (BDC, May 2009).

The most common type of financing sought is an operating line of credit (71%), followed by a term loan (28%).

SMEs seek credit primarily for working capital/operating capital such as inventory or paying suppliers (45%).  This is followed by credit for funding to business growth  (36%) and for funding "other machinery and equipment" purchases (32%).

Traditional financial institutions remain the top source for SME.  This is likely due more to convenience than anything else. Most businesses are not very aggressive in searching for credit.  Many simply use their current financial institution without consulting other sources.  In fact business owners typically only approach one lending source when seeking credit.  Only 11% actually shop around comparing three or more lenders. 

The top finance tools used to keep businesses in operation are commercial or personal loans from financial institutions, retained savings and personal savings of the business owner.

Canadian SMEs have a different point of view.  A BDC survey in May 2009 found that 39% of businesses had directly experienced a tightening of credit since the beginning of the current economic crisis and 17% of businesses already identify access to credit as an obstacle to business growth.  Of the 46% that recently sought financing for their business, only one third obtained the funding.

SME OUTLOOK

Beyond the next three months, SMEs are starting to show signs of cautious optimism.  In a separate survey by Angus Reid Strategies (June 2009) the majority (58%) described themselves as moderately optimistic about the second half of 2009. 

The bleeding is expected to stop, especially in the areas of sales revenue and profit margin.  In the first half of 2009 nearly a third of SMEs experienced a drop in these areas.  Yet less than 20% expect negative performance for the remainder of the year.

The majority of businesses expect performance in all areas to stay the same for the next 6 months. The worst of the storm appears to be over and for now SMEs are content to "hold steady to the course".

The current crisis is testing the mettle of Canadian entrepreneurs.  The long-term effect will be debated for years and full recovery to pre-crisis performance levels will be a slow process.  For now though SMEs are focused on surviving to the next quarter without compromising their future.