How Indigenous-owned firms finance their operations

Businesses that can’t easily access credit experience slower growth. Indigenous-owned firms are less likely than other firms in Canada to use conventional lending products—like loans or lines of credit from banks. We look at why Indigenous-owned businesses may face barriers to accessing credit.

Firms rely on credit and equity to fund expansions or finance their operations during periods of weak sales. Most Canadian businesses borrow from conventional financial institutions such as banks and credit unions.

But Indigenous-owned firms are much less likely to use those sources of financing.

We know this from a survey we conducted with the Canadian Council for Indigenous Business and Global Affairs Canada. In all, about 2,600 Indigenous-owned firms headquartered in Canada answered questions on business conditions. The survey, conducted in 2021, was and still is the largest of its kind.

The survey results are worth revisiting because they’re still relevant today. Our findings, among others, suggest that Indigenous-owned firms may face barriers to accessing financing and that the lack of credit is an obstacle to growth.

Compared with other firms, Indigenous-owned businesses rely less on conventional lenders to finance operations

Insight into how Indigenous-owned firms operate—especially where they obtain their funds—has been limited for many years. The 2021 survey aimed to fill some of this information gap.

The survey covered a range of topics, such as business objectives and general business conditions, as well as firms’ primary sources of financing. Participating firms were majority-owned (at least 51%) by an Indigenous person, community or economic development corporation.

When participants were asked about their primary sources of financing, only 8% reported using credit from conventional financial institutions or equity (Chart 1). For this 8%, the vast majority of that credit or equity is in the form of business loans.

Importantly, most businesses in our sample were small, meaning they had fewer than 100 employees. Our findings are consistent with other research showing that small businesses often face more barriers in accessing bank loans. Part of the reason is that small businesses tend to have unstable cash flows and limited credit histories, which makes it harder for lenders to assess risk.

The share of Indigenous-owned businesses using conventional institutions is far below the 31% of all small businesses in Canada reported in the Bank of Canada’s electronic Business Outlook Survey in 2018–19. And although small businesses in Canada also use earnings and savings to finance their operations, Indigenous-owned firms rely on these other sources more than their counterparts do. This is especially the case for government support, given that several federal agencies have dedicated funding programs for Indigenous-owned businesses.

Interestingly, the survey results show that just 6% of respondents rely on Indigenous lending agencies and authorities. This could suggest that Indigenous-owned businesses lack a strong preference for Indigenous-specific lenders, or that these lenders have limited capital and cannot fully meet demand.

And because most firms in our sample, as in Canada more generally, are small businesses, size alone cannot explain why Indigenous-owned firms are less likely than non-Indigenous-owned firms to rely on conventional financing. We must look elsewhere for possible explanations.

Indigenous-owned firms may be facing several barriers to accessing credit

One possible explanation could be geographic remoteness. For example, Inuit‑owned firms, which often operate in remote regions of the North, rely the least on conventional sources of financing (Chart 2). Being far from financial institutions raises transaction costs for both borrowers and lenders.

Institutional or structural factors could also be behind the difference. Previous research suggests that firms operating in some First Nations communities may face financing constraints due to restrictions of property rights under the Indian Act. For example, reserve land is generally held communally, which can make it difficult or nearly impossible for the land to be used as collateral for loans to individual Indigenous-owned businesses. Further, infrastructure gaps, socioeconomic inequities and access to financial literacy resources—all shaped by historical policies toward Indigenous Peoples—may influence how easily firms can access financing.

The bottom line is that multiple issues could be coming together to create barriers to financing. What is clear from our analysis is that more research is needed to better understand the barriers and challenges Indigenous-owned firms face in accessing credit.

Barriers to accessing credit may limit growth for Indigenous-owned exporting firms

The Indigenous economy is dynamic and growing at a faster pace than Canada’s economy overall. But businesses may have trouble maintaining this momentum if they face limited access to financing. Survey results suggest these barriers to financing have tangible implications for growth: Indigenous-owned exporting firms were almost twice as likely as small and medium-sized exporting businesses in Canada overall to report a lack of financing or cash flow as an obstacle to growing exports (Chart 3).

Access to credit for Indigenous-owned firms could affect monetary policy transmission

Learning about the conditions Indigenous-owned businesses face helps the Bank of Canada better understand monetary policy’s reach and the impact it has on all businesses.

Monetary policy affects inflation partly by influencing business lending conditions through changes to the policy interest rate. But changes in the policy rate may have less of an effect on the financing conditions and economic activity of Indigenous-owned firms since they rely less on conventional lenders.

Our findings highlight the need to better understand the barriers to credit faced by Indigenous-owned firms as well as the impacts on growth, trade and the transmission of monetary policy.

Find out more