Trading in the SME sector: Why transparency is key

November 29, 2023

There are 1.2 million small and medium-sized enterprises (SMEs) in Canada, or about 98% of all Canadian companies. Together, they generate about 55% of Canada's GDP—yet companies wanting to trade with them are basically jumping into the deal blindfolded.

SMEs may be the backbone of the Canadian economy, but they can be just as reliant on trade credit—or purchasing goods and services without paying upfront—as large corporations. However, because the vast majority of SMEs do not make financial information public, assessing their credit risk can be virtually impossible.  

Why Transparency is Key

Data is the bread and butter of assessing credit risk. It can be anything from financial statements to information on bank balances and credit or payment history, which companies usually receive form clients, banks, or the companies themselves. But the SME sector happens to be the one with the least amount of transparency. This makes it much riskier for our clients to trade with them.

For example, say your company, a clothing manufacturer, wants to conduct a sale of pants to a small Canadian retailer. Your credit department researches the company’s financial profile online, but because a private company is not obliged to disclose financial information to the public in Canada, they come up with nothing. You know that the retail sector is under pressure, especially in the pandemic context, but without any details of the company’s cash flow or payment history, there is no way for you to estimate whether your customer is likely to pay for the pants.

If we take a step back and imagine this scenario unfolding across all the 1.2 million SMEs in Canada, it’s not hard to see how a lack of transparency could inhibit trade and even cause the collapse of certain sectors. Fortunately, there are credit insurers to support ongoing trade. But we, too, could use more transparency in the market.

An Ecosystem of Financial Information

One of the greatest strengths of Allianz Trade in Canada is that we have access to an ecosystem of financial information that most other insurers don’t. As part of our grading methodology we procure a wealth of proprietary data. Our biggest source of information is our clients: they share claim filings, collection filings and past-due report that we put together with financial statements to provide a very clear picture of how a business is doing.

And for the SME segement, which is largely opaque on financials, we often don’t have complete information from our client base, and have to dig deeper. One way in which we do this through our partnership with the Small Business Financial Exchange, or SBFE. As a trade association that aims to advocate for and grow small businesses, it shares insights into the sector with us. As a result, we can help our clients trade with SMEs.

This partnership gives us insight to how companies are paying their bank. For example: Are they paying their credit card late? What’s their balance? What is the maximum high credit? This information is absolutely critical for the SME part of our portfolio, which is over 200,000 businesses.

Working Towards Financial Openness

Our partnership with the SBFE has improved our grading models tremendously and helped us obtain a complete picture of more than 85% of our portfolio of SMEs.

Considering the substantial role that SMEs play in the economy, especially in Canada, there is a clear need for more transparency. And Allianz Trade in Canada is dedicated to championing an even higher availability of financial data in this segment.

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