This report of the Task Force on Access to Capital of the Canadian Labour Market and Productivity Centre (now the Canadian Labour and Business Centre) discusses and makes recommendations concerning financing barriers relevant to small and medium-sized enterprises in Canada. The work of the Task Force builds on recommendations made by the CLMPC's Economic Restructuring Committee in their 1993 report, Canada: Meeting the Challenge of Change.

Over the past decade, small and medium-sized firms have made major contributions to net job creation. Despite this fact, it is these companies, and especially the youngest among them, that encounter significant difficulties seeking external capital. The Task Force feels, further, that issues related to debt capital have tended to overshadow discussion of equity sources.

A central message of the Task Force is that equity capital should be given heightened emphasis in Canadian investment and financing, especially for small and medium-sized enterprises (SME's).

Within the equity capital framework, there is a further need to explore in more detail the role and contributions of the relatively new labour-sponsored investment funds.

Both debt and equity capital are essential to the long-term financial health of a business, and the optimum balance of debt and equity is always a crucial question. While not a panacea, equity capital, however, plays an important strategic role in supporting the growth and development of small firms. Equity brings "patient" capital, as well as the knowledge, advice and networks of investors. Equity also provides a firm an ability to leverage debt.

Although it was not possible within the scope of the project to deal with all financing issues, the Task Force has developed recommendations of practical significance in those areas of debt and equity financing which it did address.

The Task Force believes that it is essential to promote the use of equity capital among SME's, and that private decision-makers and public policymakers have a key role to play in this regard. Of central importance in this regard is the need to foster and enhance the management expertise of small business, as well as to increase the amount of information available to small business concerning financing options and opportunities.

For their part, financial institutions must continue to place more emphasis on understanding the industrial context of small businesses, and its implications for their capital needs. This is particularly the case in high-technology sectors characterized by intangible assets. For firms such as these, financial institutions must continue to develop more sophisticated valuation and risk assessment techniques.

The Task Force believes there is significant innovation taking place in Canada in a variety of financing areas, including new approaches to directing capital to small-dollar projects, and new hybrid debt-equity instruments for small business financing. In both areas, however, there is room for continued growth and development. Innovations are also occurring in the area of small business networks which allow small businesses to pool resources for financing and other purposes, and these need to be promoted and extended.

In the view of the Task Force, there is also room for improvements to a number of aspects of provincial securities regulations. Efforts are needed to harmonize these across jurisdictions, as well as to ensure that their application within jurisdictions respects the limited financial resources, and consequent cost sensitivity, of small businesses. Regulations should also not unnecessarily obstruct the development of regional dealers and brokers. In this connection, the Task Force recognizes that the diverse network of financial means and structures developed in Quebec has had positive impacts on access to capital, and deserves study to identify transferable approaches.

With regard to the labour-sponsored investment funds, since these are a new financing vehicle and each fund has its own objectives, the Task Force identifies certain key characteristics which the funds should possess, and on which their performance should be assessed. The Task Force also recommends that these funds be recognized as a tool for localized venture financing.

Based on Task Force discussions, there is a need for the federal government to review, evaluate, and compare all tax incentives and other mechanisms (grants, loans, etc.) which affect risk capital supply, in terms of their impact on capital supply.

The Task Force recognized that lending institutions have made progress in addressing a number of small business difficulties, including the disruptive effects of high staff turnover and related aspects of customer service. Codes of conduct, alternative dispute resolution mechanisms, and similar initiatives are clearly positive developments. There is a need, in the view of the Task Force, for the institutions to better promote and communicate these initiatives to their clients, and explore ways of enhancing some of the practices themselves.

Improving financing for women entrepreneurs was also researched and addressed by the Task Force. While a small business survey conducted for the Task Force did not isolate bias against women on the part of financing sources, other surveys have presented evidence of such bias. In the view of the Task Force, financial institutions should continue to be vigilant regarding their policies and practices to ensure the equal treatment of women in small business. Initiatives, such as mentoring programs, which support the needs of women businesspersons, also require continuing support.

In summary, the Task Force believes that the increased use of equity capital sources, combined with the Task Force's recommendations on both debt and equity matters, will contribute to improved terms and conditions for financing small entrepreneurs and enterprises overall. It concludes that by guaranteeing increased capital supply through new means and structures, developed and supported in both the private sector and government, a crucial step will have been taken in moving Canada towards a new economy.

Recommendation 1

We recommend that Canadian private sector decision-makers and public policy-makers give increased priority to the role of equity financing in assisting new and developing small business.

Recommendation 2

We recommend that small business, assisted by its representatives in national organizations, give more attention to equity in financing demand needs in a new Canadian economy. For example, business associations, on their own initiative or supported by Industry Canada, should develop information packages or seminars to encourage small businesses to actively consider equity financing.

Recommendation 3

We recommend that all private and public sector participants in Canadian financing relationships act to foster the knowledge and skills needed by small business to access external sources of capital. Such actions could include: direct assistance in the preparation of business plans; seminars or literature on how to prepare to approach a funding source; education programs on budget preparation.

Recommendation 4

We recommend that financial institutions, governments, and professionals active in small business financing give increased priority to communicating to small business information about capital supply options and programs to lower barriers more widely. Actions could include: more active promotion or distribution of literature already developed; enhancing the knowledge of financial institution staff concerning capital supply options, so they can pass this on to clients; seminars conducted by accountants for their clients, providing information on capital supply sources.

Recommendation 5

We recommend that financial institutions devote more resources to developing specialized expertise about the equity needs of knowledge-intensive and technology-intensive firms. Actions by institutions in this regard could include: appointing senior managers responsible for ensuring that staff receive training in the needs of knowledge-intensive firms; recruiting individuals with knowledge of the needs of high-technology firms; accessing, as needed, specialized external advice on the needs of high-technology firms.

Recommendation 6

We recommend that venture capitalists, other financial institutions, and government work in partnership to develop new mechanisms for directing capital to small dollar projects. Such a partnership might begin through collaboration between the Business Development Bank of Canada, venture capital firms, and financial institutions to organize a conference on ways to support small dollar projects.

Recommendation 7

We recommend that business, finance and government collaborate on new efforts to promote information-sharing and networking between "angels" (wealthy individuals or families who will make direct investments) and small entrepreneurs. Actions in this regard may include: a new attempt at a centralized matchmaking service; greater use of electronic communications systems such as the Internet; an increased role for lending institutions as clearinghouses of information; a greater information role for professionals in this field, such as accountants or lawyers.

Recommendation 8

We recommend that traditional debt lenders develop and implement hybrid debt-equity instruments for small business financing using existing private sector and government models for reference.

Recommendation 9

We recommend that financial institutions develop more sophisticated techniques for risk assessment, especially for soft asset lending, that can lead to revised security criteria.

Recommendation 10

We recommend that the Small Business Loans Act be reviewed to assess the feasibility of expanding the range of capital needs beyond the purchase of fixed assets to include financing needs such as working capital and research and development.

Recommendation 11

We recommend that the Quebec financial model be assessed by business, labour and government to identify approaches which may be transferable to other Canadian provinces and regions. As a specific example, Industry Canada might establish a review, with other business, labour and government participants, of aspects of the Quebec model including: the Caisse de dépôts et de placements; the Quebec Stock Savings Plan; and specialized and localized equity pools formed by co-investors.

Recommendation 12

We recommend that securities regulators act to ensure that standards are not unnecessarily obstructing regional dealers and brokers.

Recommendation 13

We recommend that the federal government review, evaluate and compare all government programs and initiatives which affect risk equity supply in terms of their impact on capital supply. These would include, but would not be restricted to, tax incentives, grants, loan guarantees, interest-free loans, etc.

Recommendation 14

We recommend that provincial securities commissions review and amend regulations for cost sensitivity to small business financing and initial public offerings. Specific regulations which might be reviewed include those relating to information disclosure and prospectus requirements, and related application fees.

Recommendation 15

We recommend that the Canadian Securities Administrators review Canada's system of securities regulation and enforcement to encourage simplification and harmonization.

Recommendation 16

We recommend that government reviews of labour-sponsored funds take into account the specific objectives of individual funds and gather evidence as to whether these are being met.

Recommendation 17

We recommend that control and direction by a legitimate labour body, which is stipulated in the legislation governing the funds, be recognized as a requirement for ongoing tax support of labour- sponsored funds.

Recommendation 18

We recommend that general national criteria be established regarding labour-sponsored funds, in addition to basic concerns regarding return on investment and accountability to investors. These could include:

job creation and protection;
a full role for unions and workers in directing investment decisions;
a commitment to increased participation in investment by working people;
promotion of business-labour co-operation;
assistance to small and medium-sized firms;
support for regional/community economic development;
encouragement of high performance workplaces;
effective support of national venture financing;
delivery of economic and financial training.

Recommendation 19

We recommend that labour-sponsored funds be recognized as a tool for advancing localized venture financing, where this is appropriate.

Recommendation 20

We recommend that business, finance and government support new and continuing initiatives to promote the use of small business networks in Canada. Specifically, Industry Canada should work with business associations to expand the number and scope of these networks.

Recommendation 21

We recommend that lending institutions continue to develop means for preventing high staff turnover where it affects quality working relationships with small proprietors. For example, independent surveys of customer satisfaction levels could be a useful tool for lending institutions in monitoring the effects of changing staff turnover levels on relationships with clients.

Recommendation 22

We recommend that lending institutions: better communicate policies and practices to their small business customers through newly developed codes of conduct and complaint handling initiatives, and increase the effectiveness of small business ombudsmen by ensuring that they are directed independent of the institutions themselves.

Recommendation 23

We recommend that all financial institutions continue to be vigilant regarding their policies and practices to ensure the equal treatment of women in small business.

Recommendation 24

We recommend that business, finance, labour and government lend support to financing value- added programs for women, such as mentoring programs.