Thank you, Chair and committee members.
I am Paul Fudge, representing Opportunities New Brunswick. We are the provincial crown corporation responsible for trade and export, investment attraction, and business development within the province.
Specifically this morning, I've been asked to speak on access to capital as it affects New Brunswick, Atlantic Canada, and rural areas. First I'll talk about two reports just four years apart that have some commonalities, and similar reports in the past that have not changed to today.
In 2012 the board of the FutureNB initiative, led by Francis McGuire, released its access to capital report. Four key observations from the report were as follows.
First, New Brunswick entrepreneurs prefer debt to equity. They prefer to retain full ownership of a company, but is debt the best option for early-stage companies?
Second, capital is available for good projects and companies, and seemingly more so for companies early in their life cycle. Statistics show that in New Brunswick, about 200 companies per annum are helped by assistance from different government agencies. However, having traversed the valley of debt, start-ups must still jump over the major hurdles of commercialization and growth to get that next $1 million once they have a proven product.
Third, rural firms face additional challenges no matter what the industry or type of product. To raise capital, they have three issues. They are remote from most financial centres and large banks or areas where decisions are made. The general types of business usually started in rural areas are quite different from those in urban areas and are harder to finance in some cases. Access to reliable infrastructure for businesses outside major centres is an issue as well.
Finally, the report indicated that entrepreneurs had an issue with providers, including investors and creditors, being financially understanding regarding key items when discussing capital issues. Investors would rather back a great management team with a good idea than a good management team with a great idea. How do you raise the quality of financial understanding in entrepreneurs, not only in New Brunswick but across Canada?
In January of this year, an access to capital opportunities summit was held in Fredericton, right here in New Brunswick. Four of the main items that came out of that conference were as follows.
First, again there was the issue of financial literacy. Business owners must better understand accounting, finance, cash flow, business plans, and accountability to shareholders and lenders in order to better understand and present their cases.
Second, the appetite for equity is low. Entrepreneurs usually lack personal funds to finance a start-up. They tend to prefer debt when equity is the correct financing tool, but they still want to retain control of their company.
Third, there is the financing of soft assets. New Brunswick in the past few years has seen dramatic growth in information technology start-ups. However, financial institutions find it very difficult to finance soft assets and intangibles. How do we step in and fill the gap?
Finally, as mentioned earlier, there is the matter of succession. The transfer of family businesses to the next generation can usually be achieved with internal family financing techniques. However with the baby boomer generation about to retire over the new few years, who will finance their equity portion as you move forward and how will that be taxed?
How do we increase access to capital for entrepreneurs in rural Canada, Atlantic Canada, and specifically New Brunswick? We would like to put forward the following five ideas for the committee.
First is a coordinated effort. All levels of government—federal, provincial, and municipal—need to work together with all types of capital providers to ensure coverage of all types of businesses in all areas. Joint funding programs or matching fund initiatives could be implemented to encourage lenders and investors to extend capital to businesses.
Second is financial literacy. Entrepreneurs need training, guidance, and mentorship regarding financial institutions. Understanding how to pitch a project to capital providers in the language of the capital provider is just as important as the project itself. How many great ideas and great entrepreneurs never had a chance because they were frightened by the financial side of their business, just as a lot of people are afraid to do their own taxes?
Third is owners' equity. How do we assist start-ups or succession planning with their portion of the equity infusion for business? As noted, entrepreneurs tend to prefer debt when equity is the correct choice for early stages of the business life cycle. Entrepreneurs tend to prefer debt because they do not want to sell any portion of their business and would like to retain control. Finally, most of them prefer debt, because they understand aspects of debt more so than equity. Most of them have bought a car or have a mortgage, and they understand the debt cycle.
Fourth, I want to turn to urban versus rural. Great ideas and projects come from all corners of Canada. Access to most elements of running a business are generally more accessible in urban areas. How do we bring the elements of running a business, like marketing, mentorship, training, and access to capital, to rural Canadians?
Fifth, let's look at limited private capital in Atlantic Canada. In larger urban areas, the concentration of businesses, government programs, and wealth is more prevalent. In Atlantic Canada, there is not the same distribution of successful entrepreneurs who become angel investors or small-capital providers. There is not the concentration of medium and large venture capital firms with staff searching for deal flow. Banks have regulators and shareholders to answer to in their investment portfolios. Government needs to fill the gap where angel investors, venture capital, and financial institutions cannot go, either directly or with programs to incent other capital providers to join in with the funds provided by government.
There is no easy answer, no one-size-fits-all approach. Unfortunately, for a lot of entrepreneurs, their ability to raise appropriate and sufficient capital is limited by their proximity to capital providers and their financial literacy. We believe a coordinated effort by all levels of government should help businesses, and this would increase the wealth of Canadians.
Thank you.