The Competition Bureau of Canada will take a closer look at how small and medium-sized enterprises (SMEs) obtain financing, with an eye to identifying potential market barriers that may be impeding economic growth. Proposed terms of reference for an upcoming study have just been released for public comment.
The proposed study responds to both the sector’s prominent role in generating employment and gross domestic product (GDP) and evidence that it pays a heftier price for capital than large corporations. Investigators plan to focus primarily on loan conditions for SMEs and the associated availability and attitudes of loan providers. That will include issues related to the big banks’ predominant role in the financing market, barriers to alternative loan providers and/or penalties attached to switching loan providers.
“Small and medium-sized businesses are the backbone of the Canadian economy. Increasing competition in Canada’s financing sector would give these businesses better access to the funding they need, support greater productivity and boost innovation,” says Matthew Boswell, the Commissioner of Competition. “Our goal with this study is to provide policymakers with evidence and recommendations to make this a reality.”
More than 98 per cent of Canadian employers head up small or medium-sized firms, and nearly half of them sought external financing in 2023. However, lenders pulled back on loans to the sector during the second half of that year. New loans to small businesses fell by 19 per cent, while new loans to large firms increased by more than 14 per cent in the same period.
Canadian lenders also exact a greater differential from SME borrowers than do their peers in other member nations of the Organisation for Economic Co-operation and Development (OECD). In 2021 and 2021, Canadian SMEs typically paid term loan rates 1.64 to 2.1 percentage points higher than large firms, while the OECD-wide average differential was 0.9 to 0.93 per centage points in large borrowers’ favour. The Competition Bureau notes that the domestic big banks’ market share of loans to SMEs has remained steady for the past 15 years and concludes that could be illustrative of “a lack of vigorous competition among them”.
The Competition Bureau also stresses the imperativeness of access to capital for start-ups, business growth and remaining resilient in economic downturns. As well, investment in physical tools, technologies and human capital are all called crucial for driving productivity, and the ability to work smarter and more effectively.
“Improving productivity — i.e., how efficiently labour and capital combine to generate output — is central to raising living standards and sustaining long-term growth,” the Competition Bureau states. “Unfortunately, Canada’s investment in assets that are necessary for introducing and spreading new technologies lags behind its peers in the OECD.”
The public can submit comments on the proposed agenda for the market study until Oct. 3, 2025.
